## This Reference Note introduces guidance on preferential trade agreements (PTAs) ## Source details **Canonical URL:** [This Reference Note introduces guidance on preferential trade agreements (PTAs)](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2010/_093010.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2010/_093010.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2010/_093010.pdf.json) --- ### Introduction and scope - Introduced in response to a request by the Executive Board in the context of the Independent Evaluation Office (IEO) Evaluation of IMF Involvement in Trade Policy Issues. - Sectional foundations: - Section II draws on the 2009 IEO Evaluation, the 2005 Review of Fund Work on Trade, and related Executive Board discussions. - Section III reflects issues from Preferential Trade Agreements—Issues for the Fund (informal Board seminar, December 2006). - Remainder consolidates and updates existing guidance in other trade-related areas consistent with the Fund’s mandate and applicable Fund policies: - Section IV: Fund guidance on trade policy reforms. - Section V: WTO rules relevant to Fund operations. - Section VI: IMF’s role in the WTO Committee on Balance of Payments Restrictions (the BPC). - Information sources available to Fund staff include: - SPR revamping the existing Trade Policy Information Database (TPID). - WTO’s annual Tariff Profiles (www.wto.org). - WTO Trade Policy Reviews (TPRs) on a two, four, or six year schedule. - WTO Regional Trade Agreement Information System (RTA-IS). - Dartmouth University database (with World Bank support) includes PTA texts and in-depth information (www.dartmouth.edu/~tradedb/trade_database.html). - www.bilaterals.org includes PTA articles and many full texts. - Crisis-period trade measures sources: - WTO Secretariat periodic reports (e.g., WT/TPR/OV/W/3, 6/11/10). - Global Trade Alert (www.globaltradealert.org). ### Context for Fund advice on trade policy - Executive Directors emphasized: - Trade policies can strongly influence macroeconomic stability. - The Fund “must play an active role in calling attention to systemic and macroeconomic implications of trade policy developments.” - Greater emphasis in multilateral surveillance on global effects of trade policies in systemically important countries. - Bilateral surveillance should tackle macro-critical trade policy issues for all countries, ensuring evenhandedness. - Staff work on trade policy should remain selective and consistent with other multilateral organizations, principally the WTO. - Conditionality and liberalization: - Directors welcomed earlier scaling back of trade policy conditionality in line with streamlined Fund conditionality and improvements in trade regimes. - For Fund-supported programs, distinguish new trade liberalization measures from backsliding on past reforms. - Guided by the Fund’s Article I, avoiding resort to trade-restricting measures should be emphasized. - Trade liberalization should be promoted actively where necessary for program objectives. - From the 2005 Review: - The Fund has consistently advocated open trade regimes to combat rent seeking, enhance economic efficiency, promote economic growth, and reduce poverty. - Messages vary by country group: - Developed countries: focus on global policy spillovers. - Many developing countries: focus on the unfinished liberalization agenda. - Pace of reform should consider short-term adjustment costs, but reforms must not be postponed indefinitely. - The Fund has pressed for ambitious multilateral (WTO) negotiations, including the Doha Round. ### PTAs: overview and concepts - Fund stance: “neither a critic nor an enthusiast” of PTAs. - PTAs can allow countries to “go further” more quickly, but are inherently discriminatory and can splinter the multilateral trade system. - Staff will not normally have resources or expertise to advise on the appropriateness of individual PTAs. - Nevertheless, PTAs have important systemic implications requiring periodic attention in regional and multilateral surveillance and Fund communications. - Fund can advocate PTA design approaches that increase benefits and reduce costs. - PTAs depart from the MFN (non-discrimination) principle at the core of the multilateral trading system. - Empirical note: in the past two decades, PTAs have increased sharply and now cover “a third to half of global trade.” - Scope of PTAs has broadened to include trade in financial and other services, investment flows, and other rules. - Box 1 — Definitions and concepts (as used in the Note): - Preferential Trade Agreement (PTA): agreement between two or more countries to apply lower trade policy barriers to goods and services imported from members than to those imported from third countries. - Free Trade Area (FTA): a PTA where barriers between members are reduced or eliminated; may include other policy measures; FTA members may elect to impose a common external tariff (CET) with or without continued internal customs controls. - Customs Union (CU): an FTA with a CET and eliminated internal customs controls so goods from third countries circulate freely within the union. - Common market: allows free movement of productive factors (labor and capital) as well as products (goods and services). ### PTAs and Fund surveillance — principles and guidance - General approach: - PTA work should reflect established principles of surveillance and be undertaken selectively, consistent with Fund surveillance policies. - Under bilateral surveillance, staff should acknowledge both benefits and costs of PTAs. - Staff may encourage transparency and communicate principles of PTA design that best serve members and the multilateral system. - Fund advises on managing fiscal and other consequences of PTAs. - Surveillance-related findings and guidance: - Especially when PTAs include systemically important countries, discussions should highlight—and country reports should acknowledge—potentially adverse impact of preferences on non-participants. - Reports should contrast potential gains with possible costs to the parties, third countries, and the global trading system. - Highlight benefits of PTA design that minimize distortions to the multilateral trading system and increase benefits (while reducing costs) to parties. - PTAs should be accompanied by a complementary commitment to prompt and deep reductions of trade barriers on an MFN basis to reduce trade-diverting effects—particularly important if existing MFN trade barriers against non-PTA partners are high. - PTA rules of origin (RoO) should be liberal and transparent: - Restrictive RoO can disqualify shipments that use intermediate inputs from third countries, creating non-transparent protection not evident in a country’s tariff code. - Examples of RoO restrictiveness: - A rule that confers origin as a result of a change in the detailed six-digit product classification is relatively easy to meet and less restrictive than a rule requiring a change in the broad two-digit product classification. - A value-added threshold of a minimum “20 percent domestic value added” is relatively easy to meet and less restrictive than a “50 percent domestic value added” rule. - Many RoO are more complex or ad hoc in specification. - Cumulation provisions should be broad-based, favoring “diagonal” over “bilateral” cumulation: - Bilateral cumulation discourages trade between non-origin suppliers (hub-and-spoke distortions). - Diagonal cumulation allows inputs from multiple PTA partners to count toward origin, reducing fragmentation. - Cumulation provisions are critical in regions with many and/or overlapping PTAs (e.g., East Asia and Africa) and affect South-South trade under unilateral preferences (e.g., GSP, Everything but Arms, AGOA). - PTAs should ideally be open to new members on essentially the same terms as existing members. ### Fund external communications and multilateral engagement on PTAs - Roles and messages: - While multilateral trade negotiations are ongoing, the Fund can highlight the need for caution in embarking on new PTAs and call on members to guard against adverse effects of PTA proliferation. - Fund communications can support strengthened multilateral rules on PTAs and transparency; enhanced WTO provisions are a start but more can be done to clarify and strengthen PTA rules. - Aim to shape PTA evolution positively, not to discourage PTAs per se. - Vocal Fund support for MFN-based reforms (through the Doha Round or unilaterally) can strengthen the multilateral trading system and set the best environment for PTAs. - Spread of PTAs strengthens the case for further MFN-based reforms; an ambitious conclusion to the Doha Round would be a key step. - The Fund can highlight systemic implications of RoO and advocate liberal, transparent RoO and broad cumulation provisions to help “multilateralize” regionalism. ### Revenue and financial services considerations - Revenue implications: - PTAs present revenue issues similar to those of MFN trade reforms; the revenue impact depends on the share of imports sourced from PTA partners and could be much less than with MFN liberalization. - Extension of preferences to a partner that accounts for a large share of imports may result in significant revenue losses. - Trade diversion from dutiable to non-dutiable (PTA partner) sources will exacerbate revenue impact. - With PTAs in place, MFN tariff reductions will have smaller direct revenue effects: - MFN tariff reductions do not directly affect duties collected on imports from PTA partners. - MFN reductions reduce PTA preference margins and partly unwind adverse trade diversion effects, which can enhance revenue, although overall revenue effects of MFN tariff reforms in presence of existing PTAs would in many cases still be negative. - Financial services: - PTAs in services may contain obligations regarding related banking, insurance, and associated capital transactions. - These issues are addressed in the companion Reference Note on Trade in Financial Services. ### Surveillance modalities - Where selectivity criteria indicate a need for bilateral surveillance to cover PTAs, staff may exercise surveillance in a variety of ways. - Area departments are best placed to select the approach, which should be oriented toward considerations such as: - Scope for MFN-based reforms (including, for customs unions, through the common external tariff). - PTA rules of origin (RoO). *Source: This Reference Note introduces guidance on preferential trade agreements (PTAs).* ### Surveillance and PTA coverage (typical team approach) - Typical approach: - Teams consider selected PTAs (or PTA-related issues that run across individual agreements) in Article IV consultation discussions, with appropriate coverage in the relevant staff report. - Country teams determine whether a particular PTA or issue warrants coverage. - Trend: increasingly step back from examining individual PTAs in favor of examining cross-cutting PTA issues the country faces. - Coordination and regional inputs: - Information sharing and coordination across country teams is important for staff efficiency and consistency of messages. - Effective surveillance can require elements of a regional approach; consultations with regional bodies (e.g., Central African Monetary and Economic Community, West African Economic and Monetary Union, European Union (Euro Area reports), and CARICOM) are common and may be supplemented with trade officials from regional bodies. ### Role of trade reform in Fund programs - Trade reforms are often key components of broader medium-term programs emphasizing structural reform. - With progressive reform, trade policy has become less prominent in Fund policy advice and in Fund-supported programs. - Guidance to staff on designing effective trade reforms and assessing progress in trade liberalization when attention to trade reform is appropriate. ### Objectives, scope, sequencing, and pace of trade reform - Objectives: - Maintain liberal trade regimes to promote efficient resource allocation, enhance growth, and contribute to economic stability. - Liberal trade policies improve transparency and promote good governance by reducing rent-seeking and administrative discretion. - Fund advice should be tailored to country circumstances and consider countries’ PTAs without compromising multilateral objectives; guided by efficiency in resource allocation. - Stress complementary policies: appropriate exchange rate regime/level and—where revenue is a concern—strengthening broad-based consumption taxes early. - Scope of liberalization: - Target progressive elimination of policies that discriminate between domestic and foreign products. - Measures include eliminating NTBs (quotas, bans, restrictive licensing, administrative arrangements), progressive lowering of maximum and average tariffs, reducing tariff dispersion through fewer tariff bands (preferably a single relatively low uniform rate), removing export restrictions, eliminating tax exemptions and discriminatory tax treatment, eliminating trade-related subsidies, state trading monopolies, and other discretionary administrative actions. - Where appropriate, address domestic controls, restrictive business practices, or domestic market structures that foster anticompetitive practices. - Sequencing: - First target least transparent and most restrictive elements: NTBs, export restrictions, discriminatory/discretionary tariff exemptions. - Thereafter emphasize attaining low and relatively uniform tariff protection. - Tariff reductions need not wait until elimination of NTBs is complete. - Revenues from tariffication of NTBs can buy time to improve tax administration and diversify the revenue base. - Pace: - Tailor to initial restrictiveness, administrative capacity, short-term adjustment costs. - Experience of successful reformers: liberalized from a highly restrictive to an open regime over about seven years. - Where scope is less far-reaching and commitment higher, reforms can be completed in shorter periods. - Phased reduction recommended; avoid bunching sensitive items toward end of phasing period. - Balanced or frontloaded liberalization with a preannounced timetable provides credibility and attracts investment. - Staff should seek an appropriately ambitious reform program implementable within the program period. ### Quantitative restrictions (QRs), NTBs, exemptions, and export measures - QRs and NTBs: - Eliminate QRs and other NTBs early to improve transparency and reduce discretion. - Convert protectionist QRs to equivalent tariffs at rates not exceeding their WTO bindings; tariffs phased down with defined, monitorable targets and a preannounced timetable. - Licenses required for record keeping should be granted automatically and quickly; national trade authorities can refer to specific WTO provisions regarding automatic import licensing. - Customs classification and valuation procedures should be uniform, transparent and fair; valuation should be based on the transaction value, with exceptions only if the transaction value does not exist or has been distorted (alternatives specified in the WTO Agreement on the Implementation of GATT Article VII). - Trading monopolies should be discontinued by abolishing legislation granting exclusive rights; focus on exclusivity rather than ownership. - Standards and regulations should apply to imports and domestic goods in a non discriminatory manner. - Exemptions: - Discretionary and other tariff exemptions should be largely eliminated. - Circumstances under which exemptions are granted should be in law, publicized, and allow minimal or no discretion. - Export restrictions and export taxes: - Replace export restrictions with domestic policies addressing intended objectives and set a definitive timetable for elimination. - If export taxes are levied to achieve fiscal objectives, replace them by domestic taxes that do not discriminate against trade. - Encourage transition to market prices early in the reform process where restrictions enforce nonmarket prices. - If restrictions reflect environmental concerns, adopt measures that directly limit harvesting/extraction (e.g., auctioning permits) without restricting final disposal of legally harvested/extracted product. - In special instances, export taxes may be used temporarily to absorb windfall gains or to offset domestic subsidies; assurances needed to prevent permanence. - Export subsidies: - Use of export subsidies is strongly discouraged. - Export subsidies are prohibited under WTO rules, with limited exceptions for certain developing countries and for certain agricultural products. ### Tariff reform targets and instruments - Tariff reform objectives and specific recommendations: - Ideally, tariff rates should be reduced according to a clearly specified timetable. - Experience of successful reformers shows: - possible within 2–3 years to reduce maximum tariff rates to some 20–25 percent and subsequently further to 15 percent or less; - reduce average applied tariff rates to about 15 percent initially and to about 10 percent or less in subsequent stages; - reduce the number of tariff bands to 3–4. - Convert specific and other non ad valorem tariff rates to ad valorem rates to improve transparency and efficiency. - Consolidate ―paratariffs‖ or ―other duties and charges‖ (ODCs) into the tariff structure at the outset so nominal tariffs reflect true protection. - Ideally, over the medium term aim to unify the tariff structure at rates of between 5 and 10 percent. - Tariff rates should be as uniform as possible, with little dispersion; escalatory tariff structures are rejected. - Move toward a uniform tariff rate across product groups where possible. - Avoid import surcharges as a means to address revenue shortfalls or balance of payments problems; if unavoidable, temporary and time-bound across-the-board import surcharges applicable to all trading partners are the least distortive. - Allocate products within tariff bands to reduce tariff escalation and effective protection. - Ensure indirect import taxes (e.g., excises) are equivalent to those on domestic goods. ### Complementary policies - Trade reform should be sequenced with macroeconomic and structural reforms within a clearly formulated medium-term framework. - Complementary policies should promote macroeconomic stability and structural reforms that favor competition and efficient resource allocation. - An appropriate exchange rate regime and level are important to manage temporary balance of payments pressures from opening to imports. - Complementary measures may be needed to offset adjustment costs: temporary unemployment in affected industries and possible reductions in trade tax revenues. - Fiscal considerations may necessitate a moderate pace of reform, but efforts to broaden the domestic tax base should be emphasized early. - Policy reversals should be avoided; if trade restrictions are imposed in short-term crises, they should be accompanied by a publicized timetable for elimination. - Nontrade objectives should be pursued with first-best instruments; if trade measures are used short-term, agree on a binding timetable for phased elimination. ### Use and implications of import surcharges - Overall assessment: - Surcharges are normally a poor and ineffective way to address macroeconomic issues; Fund opposes surcharges in the great majority of cases, consistent with WTO principles, and Fund advice must consider adverse spillovers on other countries. - Practical limitations: - Surcharges typically cover a limited share of imports due to broad exceptions and have limited impact on import demand or tax revenue. - Surcharges increase distortions, misallocate resources, strengthen protectionist lobbies, and make the trade regime more complex and less transparent. - Surcharges are liable to change at authorities’ whim, increasing policy instability, deterring investment, and raising governance issues. - Policy guidance: - When used, a surcharge should be at a relatively low rate that is uniform across all products and should be phased out rapidly according to a publicized timetable. - In Fund-supported programs, imposition of import surcharges may breach a standard continuous performance criterion against the imposition or intensification of import restrictions for balance of payments purposes. - Macroeconomic analysis: - Arguments for surcharges: short-term fiscal or BoP relief, switch demand to domestic goods, raise revenue. - Arguments against: distortionary, inferior to alternatives, impact short-lived under flexible exchange rates; under fixed rates, surcharges implicitly tax exports and undermine current account impact over time. - Surcharges heighten anti-export bias and make inputs to exports more expensive; a nominally uniform surcharge is not uniform in effective protection. - Appropriate alternative policy framework: flexible exchange rate with domestic expenditure policies, typically fiscal tightening; under this framework surcharges are redundant and inefficient. ### Findings and case studies on import surcharges - Key findings: - Surcharges are rarely uniform, increasing their costs and making macroeconomic benefits more questionable. - Many surcharges appear to be responses to protectionist pressures rather than instruments to address macroeconomic imbalances. - Once installed, protectionist actions are often difficult to remove. - Case studies (Argentina, Bulgaria, Hungary, Poland, Slovakia): - Typical surcharge characteristics: - Usually comprised a single uniform rate ranging from 3 to 8 percent. - Certain sectors and products were exempt in all countries studied. - In most cases, surcharges applied to all trading partners (at the time there were far fewer preferential trade agreements). - Fiscal outcomes and duration: - Anticipated revenue collection from the surcharges ranged from 0.2 to 1 percent of GDP, but actual receipts were markedly below expectations. - All five countries had alternative revenue options such as broad-based consumption or output taxes. - Duration varied from 14 to 48 months. - Elimination was usually based on a preannounced timetable—usually in compliance with the WTO BPC—that was sometimes not adhered to. - Overall assessment: balance of payments and fiscal impacts were generally limited. - Conclusion on surcharges: - Import surcharges are appropriate only in very limited circumstances. - Arguments can be made for temporary surcharges in instances of inappropriate or inflexible exchange rates, and where alternative fiscal measures are unavailable. - Even then, an import surcharge is inferior and may be ineffective. - In practice, surcharges are not typically introduced under those narrow circumstances but under other conditions where they are more clearly inappropriate. - Fiscal and external balance impacts have in practice been small. - Surcharges entail distortions and delay adjustment; adverse distortionary impact is smaller to the extent the surcharge is low, uniform, and is phased out rapidly. - Fund staff should argue against their introduction and for early elimination where they exist. ### WTO-consistency (overview and guidance for Fund staff) - Coordination with WTO: - Joint IMF-WTO members expect consistent policy advice from the two institutions; Fund staff must ensure recommended measures and program conditionality are consistent with a member’s agreements under the auspices of the WTO. - Fund staff shall consult with the WTO Secretariat on issues of possible inconsistency between measures under discussion with a common member and that member’s obligations under the WTO Agreement. - Fund staff should be aware of WTO rules to identify potentially inconsistent policy measures early and explore alternatives; SPR trade staff can assist and liaise with the WTO Secretariat. - Definitive rulings on WTO-consistency are the jurisdiction of WTO dispute settlement panels and the WTO Appellate Body. - Fund staff are not to pass judgment on WTO-consistency but must identify problems and discuss these with SPR trade staff. - Fund policy advice and program design can encourage unilateral trade liberalization that goes beyond WTO commitments, but “cross-conditionality” should be avoided. - Exchange measures subject to Fund jurisdiction and approved under Article VIII or maintained under Article XIV cannot be challenged under the WTO. - Members not yet in the WTO should be advised to adopt WTO-consistent trade regimes to ease eventual accession. - Key WTO-related technical points summarized: - WTO agreements include Agreement Establishing the WTO; GATT (goods), GATS (services), TRIPS (intellectual property); dispute settlement; reviews of governments’ trade policies; plus extra agreements and annexes. - Trade measures recommended by the Fund should be consistent with the member’s WTO Agreement obligations. - Tariff bindings: - It is very unusual for the Fund to recommend tariff increases; if recommended, avoid breaching WTO tariff bindings. - Assessment requires line-by-line comparison of applied/proposed tariffs with bound rates. - Other duties and charges (ODCs): - WTO rules discipline duties or charges other than customs tariffs levied exclusively on imports (e.g., import surcharges, surtaxes, stamp duties, fiscal duties). - Obligation to bind each ODC is additional to the obligation to bind tariffs; ODCs and tariffs are not bound additively—each binding must be respected separately. - Fees and formalities: - Customs user fees should be limited to approximate costs of processing individual import transactions, should not represent indirect protection or fiscal taxation, and generally should not be ad valorem. - Customs valuation and import reference prices: - Primary method is transaction value of imported goods (Agreement on the Implementation of Article VII of the GATT, 1994). - Threshold/reference price systems are typically WTO-inconsistent; valuation should not be based on domestic prices for like goods or on “arbitrary or fictitious” values. - Discriminatory domestic taxes: - Domestic taxes (VAT, excise, other sales taxes) and border tax adjustment rules must not treat imported goods less favorably than “like” domestic products (GATT Article III). - Markups to the value of imports in the calculation of domestic taxes violate national treatment provisions. - Agriculture: - Uruguay Round Agreement on Agriculture required tariffication and binding of all tariffs; introduced rules on export subsidies and domestic support; prohibited nontariff measures like minimum import prices and discretionary import licensing; tariff-rate quotas and special safeguards were provided. - Textiles and clothing: - ATC provided phased elimination of MFA quotas, completed end-2005; some developed countries introduced special safeguard measures and retain relatively high tariffs in these categories. - Voluntary export restraints: - WTO Agreement on Safeguards prohibits VERs, orderly marketing arrangements, and “any other similar measures” on export or import side. - Import licensing: - Non-automatic import/export licensing procedures are prohibited under GATT Article XI, with exceptions (e.g., preventing critical shortages); GATT Articles XX and XXI establish certain exceptions. - TRIMs: - TRIMs Agreement requires elimination of local content requirements, trade balancing requirements, and foreign exchange balancing requirements. - Preshipment inspection: - Topic introduced; see separate section below. ### Preshipment inspection (PSI) under the WTO - Scope and definition: - PSI activities covered under the WTO Agreement on PSI relate to the verification of quality, quantity, price (including exchange rate and financial terms), and the classification of goods. - The Agreement applies to all PSI activities, whether contracted or mandated by the government or any government body. - Requirements imposed by the Agreement on PSI: - Governments must ensure that the PSI entity meets provisions concerning transparency; treatment of business confidential information; avoidance of conflict of interest; prompt inspection; and appeals procedures. - Governments must ensure that the PSI entity follows certain guidelines regarding price verification. - Before recommending introduction or expansion of PSI, Fund staff should consult the WTO Agreement on PSI and consider whether the authorities can meet its requirements and what assistance they may need before using PSI. - Experience and policy recommendations: - Findings: - PSI contracts can be expensive and their revenue-generating capability over-stated. - Countries often struggle to enforce contractual commitments by the PSI provider to training and other capacity building in the customs service. - Information obtained and held by the PSI provider regarding import transactions is frequently not made available to customs to inform decision making and build capability in risk assessment, valuation, and other aspects of import clearance. - Operational guidance: - PSI arrangements (and “destination inspection”) should be seen as a short-term necessity only, unless compelling reasons exist to the contrary. - PSI should be accompanied by an adequate government commitment to strengthen customs administration. - To avoid over-dependence on the PSI provider, contracts should target an exit date and adopt a strategy to support that exit objective. ### Subsidies, dumping, and export measures (WTO rules and Fund guidance) - Subsidies (ASCM): - WTO Agreement on Subsidies and Countervailing Measures (ASCM) circumscribes use of specific trade-distorting subsidies; farm subsidies are disciplined by the Agreement on Agriculture. - Definitions: - ASCM applies to subsidies as defined in Article 1, which are specific (Article 2). - Specific subsidies may be: - Prohibited, if contingent on export performance or on the use of domestic over imported goods. - Actionable, when they cause injury to the domestic industry of another member, nullification or impairment of benefits, or “serious prejudice.” - Remedies: - Countervailing measures may be imposed after investigation; duties may not exceed the level of subsidization found. - Duty-drawback provisions: drawbacks on customs duty, sales tax, or VAT on imports physically consumed in exported production are permitted (ASCM Annex III); drawback on capital goods used in production of exports would constitute an export subsidy and be prohibited. - Dumping / Antidumping (AD): - AD duties may be used if (i) dumping is found to exist; and (ii) dumped imports are causing or threatening material injury to a domestic industry (AD Agreement). - AD measures may be imposed only after an investigation; an AD duty may not exceed the dumping margin. - Duration: AD duties are to be terminated no later than five years from imposition unless review justifies continuation. - Export measures: - GATT Article XI forbids quantitative import and export restrictions, except for “temporary” restrictions to prevent or relieve critical shortages of food or other essential products. - Export taxes must be applied according to the MFN principle; export taxes are otherwise not disciplined (with some exceptions for recently acceded WTO members). ### Major exceptions to WTO rules and Fund implications - Balance of Payments (BoP) trade restrictions: - WTO permits temporary restrictions for BoP purposes (GATT Articles XII and XVIII:B; GATS Article XII for services). - WTO obligations on BoP measures include prompt notification and consultation with the WTO. - Requests to maintain import restrictions under BoP provisions are considered by the WTO Committee BPC, which relies heavily on the formal Fund assessment of the member’s BoP and reserves situation and outlook. - In imposing trade restrictions for BoP purposes: - Price-based measures should be used rather than quantitative restrictions; - If quantitative restrictions are used, the consulting member should justify choosing these over price-based measures; - Measures are to be broad-based and may not target a narrow range of products. - Fund members with IMF arrangements should avoid imposing or intensifying import restrictions for BoP purposes; all Fund arrangements feature a continuous performance criterion against such restrictions. - Emergency action — safeguards: - GATT Article XIX and the Agreement on Safeguards allow additional import restrictions on an MFN basis for a limited period in event of serious injury or threat to a domestic industry due to imports. - Written notice to the WTO and opportunity for consultation are required; proposed restrictions may need compensation via trade liberalizing measures on other products. - If a safeguard measure is in place for more than one year, it is to be progressively liberalized over the period of application. - General and security exceptions: - General Exceptions (GATT Article XX and GATS Article XIV) include measures for protection of human, animal or plant life or health; conservation of exhaustible natural resources; products of prison labor; protection of national treasures. - Security Exceptions (GATT Article XXI and GATS Article XIV (bis)) provide exceptions for national security and related matters. - Modification of tariff bindings and waivers: - A WTO member may modify or withdraw a concession following agreement to compensate other members with equivalent concessions elsewhere. - Under exceptional circumstances, WTO members acting jointly may waive a WTO obligation for any party (GATT Article XXV). ### VI. WTO Committee on Balance of Payments Restrictions (BPC) — IMF role and procedures - IMF role and collaboration: - When WTO BoP provisions are invoked, the Fund has a formal role requiring a Fund statement approved by the IMF Executive Board in the WTO’s deliberations. - WTO Agreements require consultation with the IMF on matters concerning monetary reserves, balances of payments, or foreign exchange arrangements, and to accept Fund findings of statistical and other facts related to foreign exchange, monetary reserves and balances of payments (GATT Article XV; GATS Article XII). - The IMF’s assessment of a country’s BoP situation is a key factor for the BPC to determine whether additional import restrictions are justified, based on whether the country is experiencing: - a very low level of reserves; - a serious decline in reserves; or - an imminent threat of such a decline. - The centerpiece of Fund collaboration is the formal Fund statement, approved by the Executive Board, normally on a lapse-of-time basis. - Fund staff coordinate to allow adequate time for preparation of the formal statement while meeting BPC timetable requirements. - Typical BPC procedures and representation: - A typical BPC formal consultation meeting: - attended by about 30–50 country delegations (occasionally with representation from capitals) and several observer organizations; - includes a delegation from the country consulted, typically with trade and Ministry of Finance and/or central bank officials; - features platform speakers: the BPC Chairman, WTO Secretariat staff, and the Fund representative; - opens with a formal statement by the head of the country delegation, followed by the Fund statement; - proceeds to statements from delegations, then reconvenes in informal session to prepare the Chairman’s summing up; a further formal meeting the next day agrees the summing up. - Processes can be lengthy, particularly if capital input is involved; countries place considerable weight on their hearing with the BPC. ### Procedures and Fund input for BoP consultations - GATT Article XII and the Understanding on BoP Provisions: - GATT Article XII allows additional import restrictions under conditions specified but only to the extent necessary: - to forestall the imminent threat of, or to stop, a serious decline in its monetary reserves; or - for a member with very low monetary reserves, to achieve a reasonable rate of increase in its reserves. - The Understanding confirms preference for price-based measures rather than quotas and requires that import measures for BoP purposes control the general level of imports and not exceed what is necessary. - IMF-WTO Cooperation Agreement and Fund responsibilities: - The Fund participates in consultations by the WTO BPC on measures taken by a WTO member to safeguard its BoP. - Fund input is sought to: - present the general macroeconomic picture; - assess the country’s BoP situation and reserves adequacy at the time the restrictions were introduced; - indicate whether the BoP need continues; and - evaluate alternative macroeconomic policies. - The Fund statement — required analyses and content: - The Fund statement should: - Assess the country’s BoP situation and reserves adequacy at the time the restrictions were introduced, ideally referencing standards in GATT Article XV and addressing whether the country still has a BoP need. - Provide information and analysis on the member’s reserve position; reserves adequacy must be assessed with reference to country-specific circumstances. - Assess what is needed to restore BoP equilibrium on a sound and lasting basis, including appropriate macroeconomic policies and a possible time line for alternative policies to work. - While not required to assess whether the trade measures are justified, the Fund has commented on whether particular trade measures assist BoP adjustment and offered views on early or phased removal, with some indication of a reasonable timetable. - Scheduling and representation for BPC consultations: - SPR consults with the WTO Secretariat to anticipate suitable dates for BPC consultations. - SPR will normally request advance notice of eight weeks for a BPC meeting requiring a Fund statement to allow: - preparation of the draft statement by the area department country team; - inter-departmental review (LEG and SPR); - clearance by the SPR IO reviewer (according to standard deadlines); - management clearance; and - Board approval. - Board approval on a lapse-of-time basis should be requested in time so that an Executive Director requesting discussion would not cause delays. - SPR staff normally represent the Fund in formal BPC consultations, with additional representation from the area department when useful. - If controversial issues are foreseen, an informal briefing to the Board or to the Committee on Liaison with the World Bank, the WTO, and other International Organizations may be useful. *Source: This Reference Note introduces guidance on preferential trade agreements (PTAs).* ### 1. This Reference Note introduces guidance on preferential trade ### This Reference Note introduces guidance on preferential trade agreements (PTAs) ### Introduction and scope - The Reference Note introduces guidance on preferential trade agreements (PTAs) in response to a request by the Executive Board in the context of the Independent Evaluation Office (IEO) Evaluation of IMF Involvement in Trade Policy Issues. - Section II draws on the 2009 IEO Evaluation, the 2005 Review of Fund Work on Trade, and related Executive Board discussions. - Section III reflects issues presented in Preferential Trade Agreements—Issues for the Fund (informal Board seminar, December 2006). - The remainder consolidates and updates existing guidance in other trade-related areas consistent with the Fund’s mandate and applicable Fund policies: - Section IV: Fund guidance on trade policy reforms. - Section V: WTO rules relevant to Fund operations. - Section VI: IMF’s role in the WTO Committee on Balance of Payments Restrictions (the BPC). - Information sources available to Fund staff include: - SPR is re-vamping the existing Trade Policy Information Database (TPID). The TPID will emphasize information available from other sources and present this information in a manner that facilitates cross-country comparisons. - The WTO’s annual Tariff Profiles (see www.wto.org) provide average applied tariff rates and WTO bound (ceiling) rates. - The WTO’s periodic Trade Policy Reviews (TPRs) prepared on a two, four, or six year schedule depending on the country’s relative importance in global trade (see www.wto.org). - The WTO’s Regional Trade Agreement Information System (RTA-IS) for RTAs officially notified to the WTO (see www.wto.org). - A Dartmouth University database (with World Bank support) includes PTA texts and in-depth information (www.dartmouth.edu/~tradedb/trade_database.html). The website www.bilaterals.org includes PTA articles and many full texts. - Two sources focusing on crisis-period trade-related policy measures: - WTO Secretariat periodic reports, including “Report to the TPRB from the Director-General on Trade-Related Developments” (WT/TPR/OV/W/3, 6/11/10) (see www.wto.org). - Global Trade Alert (www.globaltradealert.org), supported by the World Bank. ### Context for Fund advice on trade policy - Executive Directors (in discussing the 2009 IEO Evaluation) emphasized: - Trade policies can strongly influence macroeconomic stability. - The Fund “must play an active role in calling attention to systemic and macroeconomic implications of trade policy developments.” - Greater emphasis in multilateral surveillance on global effects of trade policies in systemically important countries. - Bilateral surveillance should tackle macro-critical trade policy issues for all countries, ensuring evenhandedness. - Staff work on trade policy should remain selective and consistent with other multilateral organizations, principally the WTO. - On conditionality and liberalization: - Directors welcomed earlier scaling back of trade policy conditionality in line with streamlined Fund conditionality and improvements in trade regimes. - For Fund-supported programs, distinguish new trade liberalization measures from backsliding on past reforms. - Guided by the Fund’s Article I, avoiding resort to trade-restricting measures should be emphasized. - Trade liberalization should be promoted actively where necessary for program objectives. - From the 2005 Review of Fund Work on Trade: - The Fund has consistently advocated open trade regimes to combat rent seeking, enhance economic efficiency, promote economic growth, and reduce poverty. - Messages vary by country group: - Developed countries: focus on global policy spillovers. - Many developing countries: focus on the unfinished liberalization agenda. - Pace of reform should consider short-term adjustment costs, but reforms must not be postponed indefinitely. - The Fund has pressed for ambitious multilateral (WTO) negotiations, including the Doha Round. ### PTAs: overview and concepts - The Fund is “neither a critic nor an enthusiast” of PTAs: - PTAs can allow countries to “go further” more quickly, but are inherently discriminatory and can splinter the multilateral trade system. - Staff will not normally have resources or expertise to advise on the appropriateness of individual PTAs. - Nevertheless: - PTAs have important systemic implications requiring periodic attention in regional and multilateral surveillance and Fund communications. - Certain PTA design approaches increase benefits and reduce costs; the Fund can advocate these principles. - PTAs depart from the MFN (non-discrimination) principle at the core of the multilateral trading system. - In the past two decades, PTAs have increased sharply and now cover “a third to half of global trade.” - The scope of PTAs has broadened to include trade in financial and other services, investment flows, and other rules. Box 1 — Definitions and concepts (as used in the Note) - Preferential Trade Agreement (PTA): agreement between two or more countries to apply lower trade policy barriers to goods and services imported from members than to those imported from third countries. - Free Trade Area (FTA): a PTA where barriers between members are reduced or eliminated; may include other policy measures; FTA members may elect to impose a common external tariff (CET) with or without continued internal customs controls. - Customs Union (CU): an FTA with a CET and eliminated internal customs controls so goods from third countries circulate freely within the union. - Common market: allows free movement of productive factors (labor and capital) as well as products (goods and services). ### PTAs and Fund surveillance — principles and guidance - General approach - PTA work should reflect established principles of surveillance and be undertaken selectively, consistent with Fund surveillance policies. - When covered under bilateral surveillance, staff should acknowledge that PTAs can bring both benefits and costs. - Staff may encourage transparency and communicate principles of PTA design that best serve the interests of members and the multilateral system. - The Fund also advises on managing fiscal and other consequences of PTAs. - Surveillance-related findings and guidance (bulleted) - Especially when PTAs include systemically important countries, discussions should highlight—and country reports should acknowledge—potentially adverse impact of preferences on non-participants. - Reports should contrast potential gains with possible costs to the parties, third countries, and the global trading system. - Highlight benefits of PTA design that minimize distortions to the multilateral trading system and increase benefits (while reducing costs) to parties. - PTAs should be accompanied by a complementary commitment to prompt and deep reductions of trade barriers on an MFN basis to reduce trade-diverting effects—particularly important if existing MFN trade barriers against non-PTA partners are high. - PTA rules of origin (RoO) should be liberal and transparent: - Restrictive RoO can disqualify shipments that use intermediate inputs from third countries, creating non-transparent protection not evident in a country’s tariff code. - Examples of RoO restrictiveness: - A rule that confers origin as a result of a change in the detailed six-digit product classification is relatively easy to meet and less restrictive than a rule requiring a change in the broad two-digit product classification. - A value-added threshold of a minimum “20 percent domestic value added” is relatively easy to meet and less restrictive than a “50 percent domestic value added” rule. - Many RoO are more complex or ad hoc in specification. - Cumulation provisions should be broad-based, favoring “diagonal” over “bilateral” cumulation: - Under bilateral cumulation, inputs that Y imports from Z do not count in meeting RoO for Y when exporting to X, discouraging trade between Y and Z (hub-and-spoke distortions). - Under diagonal cumulation, inputs that Y imports from Z help Y meet RoO when exporting to X, reducing fragmentation. - Cumulation provisions are critical in regions with many and/or overlapping PTAs (e.g., East Asia and Africa) and affect South-South trade under unilateral preferences (e.g., GSP, Everything but Arms, AGOA). - PTAs should ideally be open to new members on essentially the same terms as existing members, allowing third countries the opportunity to overcome disadvantages by joining. ### Fund external communications and multilateral engagement on PTAs - The Fund can bring useful perspectives in external communications and regional/multilateral surveillance: - While multilateral trade negotiations are ongoing, the Fund can highlight the need for caution in embarking on new PTAs and call on members to guard against adverse effects of PTA proliferation. - Fund communications can support strengthened multilateral rules on PTAs and transparency; enhanced WTO provisions are a start but more can be done to clarify and strengthen PTA rules. - The aim is to shape PTA evolution positively, not to discourage PTAs per se. - Vocal Fund support for MFN-based reforms (through the Doha Round or unilaterally) can strengthen the multilateral trading system and set the best environment for PTAs. - Fund communications and surveillance could explicitly acknowledge that the spread of PTAs strengthens the case for further MFN-based reforms; an ambitious conclusion to the Doha Round would be a key step. - The Fund can highlight systemic implications of RoO and advocate liberal, transparent RoO and broad cumulation provisions to help “multilateralize” regionalism. ### Revenue and financial services considerations - Revenue implications - PTAs present revenue issues similar to those of MFN trade reforms; the revenue impact depends on the share of imports sourced from PTA partners and could be much less than with MFN liberalization. - Extension of preferences to a partner that accounts for a large share of imports may result in significant revenue losses. - Trade diversion from dutiable to non-dutiable (PTA partner) sources will exacerbate revenue impact. - With PTAs in place, MFN tariff reductions will have smaller direct revenue effects: - MFN tariff reductions do not directly affect duties collected on imports from PTA partners. - MFN reductions reduce PTA preference margins and partly unwind adverse trade diversion effects, which can enhance revenue, although overall revenue effects of MFN tariff reforms in presence of existing PTAs would in many cases still be negative. - Financial services - PTAs in services may contain obligations regarding related banking, insurance, and associated capital transactions. - These issues are addressed in the companion Reference Note on Trade in Financial Services. ### Surveillance modalities - Where selectivity criteria indicate a need for bilateral surveillance to cover PTAs, staff may exercise surveillance in a variety of ways. - Area departments are best placed to select the approach, which should be oriented toward considerations such as: - Scope for MFN-based reforms (including, for customs unions, through the common external tariff). - PTA rules of origin (RoO). *Source: This Reference Note introduces guidance on preferential trade agreements (PTAs).* ### 16. The typical approach is for teams to consider selected PTAs (or a set of ### _093010 - 16. The typical approach is for teams to consider selected PTAs (or a set of ### Surveillance and PTA coverage - Typical approach: teams consider selected PTAs (or a set of PTA-related issues that may run across individual agreements) in Article IV consultation discussions, with appropriate coverage in the relevant staff report. - Flexibility: country teams determine whether a particular PTA or issue warrants coverage. - Trend: increasingly step back from examining individual PTAs in favor of examining cross-cutting PTA issues the country faces. - Coordination: information sharing and coordination across country teams is important for staff efficiency and consistency of messages. - Regional inputs: effective surveillance can require elements of a regional approach; consultations with regional bodies (e.g., Central African Monetary and Economic Community, West African Economic and Monetary Union, European Union (Euro Area reports), and CARICOM) are common and may be supplemented with trade officials from regional bodies. ### Role of trade reform in Fund programs - Trade reforms are often key components of broader medium-term programs emphasizing structural reform. - With progressive reform, trade policy has become less prominent in Fund policy advice and in Fund-supported programs. - Guidance: this section guides staff on designing effective trade reforms and assessing progress in trade liberalization for occasions when attention to trade reform is appropriate. ### Objectives of trade reform - The Fund encourages members to maintain liberal trade regimes to: - promote efficient resource allocation, - enhance growth, - contribute to economic stability. - Liberal trade policies also improve transparency and promote good governance by reducing rent-seeking and administrative discretion. - Fund advice on trade reform programs should: - draw on consensus regarding scope, sequencing, and pace while tailored to country circumstances and consider countries’ PTAs without compromising multilateral objectives; - be guided by efficiency in resource allocation—typically more ambitious than WTO requirements but not contravening WTO obligations; - stress complementary policies, notably an appropriate exchange rate regime/level and—where revenue is a concern—strengthening broad-based consumption taxes early in the reform process. ### Scope of trade liberalization - Target progressive elimination of policies that discriminate between domestic and foreign products. - Liberalization measures include eliminating NTBs such as quotas, bans, restrictive licensing, administrative arrangements; progressive lowering of maximum and average tariffs; reducing tariff dispersion through fewer tariff bands (preferably a single relatively low uniform rate); removing export restrictions; eliminating tax exemptions and discriminatory tax treatment; eliminating trade-related subsidies, state trading monopolies, and other discretionary administrative actions. - Where appropriate, address domestic controls, restrictive business practices, or domestic market structures that foster anticompetitive practices. ### Sequencing of reforms - First target the least transparent and most restrictive elements: NTBs, export restrictions, discriminatory/discretionary tariff exemptions. - Thereafter emphasize attaining low and relatively uniform tariff protection. - Tariff reductions need not wait until elimination of NTBs is complete. - Revenues from tariffication of NTBs can buy time to improve tax administration and diversify the revenue base. ### Pace of reform - Pace should be tailored to circumstances: initial restrictiveness, administrative capacity, short-term adjustment costs. - Experience of successful reformers: liberalized from a highly restrictive to an open regime over about seven years. - Where scope is less far-reaching and commitment higher, reforms can be completed in shorter periods. - Most cannot remove all restrictions in one step; phased reduction recommended. - Avoid bunching sensitive items toward end of phasing period to prevent backtracking. - Balanced or frontloaded liberalization with a preannounced timetable provides credibility and attracts investment. - Staff should seek an appropriately ambitious reform program implementable within the program period. ### Quantitative restrictions (QRs) and NTBs - QRs and other NTBs should be eliminated early to improve transparency and reduce discretion that fosters lobbying and corruption. - Specific guidance: - QRs that are protectionist can be converted to equivalent tariffs at rates not exceeding their WTO bindings; tariffs phased down with defined, monitorable targets and a preannounced timetable. - Licenses required for record keeping should be granted automatically and quickly; national trade authorities can refer to specific WTO provisions regarding automatic import licensing. - Customs classification and valuation procedures should be uniform, transparent and fair; valuation should be based on the transaction value, with exceptions only if the transaction value does not exist or has been distorted (alternatives specified in the WTO Agreement on the Implementation of GATT Article VII). - Trading monopolies should be discontinued by abolishing legislation granting exclusive rights; focus on exclusivity rather than ownership. - Standards and regulations should apply to imports and domestic goods in a non discriminatory manner. ### Exemptions - Discretionary and other tariff exemptions should be largely eliminated. - Circumstances under which exemptions are granted should be in law, publicized, and allow minimal or no discretion. ### Export restrictions and export taxes - Export restrictions should be replaced by domestic policies addressing the intended objectives and a definitive timetable set for elimination. - If export taxes are levied to achieve fiscal objectives, these should be replaced by domestic taxes that do not discriminate against trade. - Where export restrictions enforce nonmarket prices (as in transition economies), encourage transition to market prices early in the reform process. - If restrictions reflect environmental concerns, adopt measures that directly limit harvesting/extraction (e.g., auctioning permits) without restricting final disposal of legally harvested/extracted product. - In special instances, export taxes may be used temporarily to absorb windfall gains from exceptional movements in world commodity prices or to offset domestic subsidies to avoid countervailing duties; assurances needed to prevent permanence. ### Export subsidies - Use of export subsidies is strongly discouraged. - Export subsidies are prohibited under WTO rules, with limited exceptions for certain developing countries and for certain agricultural products (the latter expected to be eliminated with the completion of the Doha Round). - Note: exceptions include least developed countries, countries listed in Annex VII of the Agreement on Subsidies and Countervailing Measures until their GNP per capita reaches US$1,000, and certain small economies benefiting from temporary exemptions under Art. 27.4 ASCM. ### Tariff reform targets and instruments - Tariff reform should seek a simple, transparent system with low uniform applied tariff rates. - Specific recommendations: - Ideally, tariff rates should be reduced according to a clearly specified timetable. Experience of successful reformers shows that, even starting from a restrictive regime, it is possible within 2–3 years to reduce maximum tariff rates to some 20–25 percent and subsequently further to 15 percent or less; to reduce average applied tariff rates to about 15 percent initially and to about 10 percent or less in subsequent stages; and to reduce the number of tariff bands to 3–4. - Convert specific and other non ad valorem tariff rates to ad valorem rates to improve transparency and efficiency. - Consolidate ―paratariffs‖ or ―other duties and charges‖ (ODCs) into the tariff structure at the outset so nominal tariffs reflect true protection. - Ideally, over the medium term aim to unify the tariff structure at rates of between 5 and 10 percent. - Tariff rates should be as uniform as possible, with little dispersion; escalatory tariff structures are rejected. - Countries that categorize tariff rates by product groups should be advised to move toward a uniform tariff rate across product groups. - Avoid import surcharges as a means to address revenue shortfalls or balance of payments problems; if unavoidable, temporary and time-bound across-the-board import surcharges applicable to all trading partners are the least distortive. - Allocate products within tariff bands to reduce tariff escalation and effective protection. - Ensure indirect import taxes (e.g., excises) are equivalent to those on domestic goods. ### Complementary policies - Trade reform works best when sequenced with macroeconomic and structural reforms within a clearly formulated medium-term framework. - Complementary policies should promote macroeconomic stability and structural reforms that favor competition and efficient resource allocation. - An appropriate exchange rate regime and level are important in the face of temporary balance of payments pressures from opening to imports. - Complementary measures may be needed to offset adjustment costs: temporary unemployment in affected industries and possible reductions in trade tax revenues. - Fiscal considerations may necessitate a moderate pace of reform, but efforts to broaden the domestic tax base should be emphasized early. - Policy reversals should be avoided; if trade restrictions are imposed in short-term crisis situations, they should be accompanied by a publicized timetable for elimination. - Nontrade objectives should be pursued with first-best instruments; if trade measures are used short-term, agree on a binding timetable for phased elimination. ### Use and implications of import surcharges - Overall assessment: surcharges are normally a poor and ineffective way to address macroeconomic issues; Fund opposes surcharges in the great majority of cases, consistent with WTO principles, and Fund advice must consider adverse spillovers on other countries. - Practical limitations: - Surcharges typically cover a limited share of imports due to broad exceptions and have limited impact on import demand or tax revenue. - Surcharges increase distortions, misallocate resources, strengthen protectionist lobbies, and make the trade regime more complex and less transparent. - Surcharges are liable to change at authorities’ whim, increasing policy instability, deterring investment, and raising governance issues. - Policy guidance: - When used, a surcharge should be at a relatively low rate that is uniform across all products and should be phased out rapidly according to a publicized timetable. - In Fund-supported programs, imposition of import surcharges may breach a standard continuous performance criterion against the imposition or intensification of import restrictions for balance of payments purposes. - Macroeconomic analysis: - Arguments for surcharges: short-term fiscal or BoP relief, switch demand to domestic goods, raise revenue. - Arguments against: distortionary, inferior to alternatives, impact short-lived under flexible exchange rates (excess supply of foreign exchange leads to appreciation offsetting surcharge); under fixed rates, surcharges implicitly tax exports and undermine current account impact over time. - Surcharges heighten anti-export bias and make inputs to exports more expensive; a nominally uniform surcharge is not uniform in effective protection. - Appropriate alternative policy framework: flexible exchange rate with domestic expenditure policies, typically fiscal tightening; under this framework surcharges are redundant and inefficient. *Italic: IMF internal guidance excerpt from the chapter provided.* ### 39. In practice, since surcharges are rarely uniform, their costs can be even ### _093010 - 39. In practice, since surcharges are rarely uniform, their costs can be even ### Findings on import surcharges - Surcharges are rarely uniform, which can increase their costs and make macroeconomic benefits more questionable. - Many surcharges appear to be responses to protectionist pressures rather than instruments to address macroeconomic imbalances. - Once installed, protectionist actions are often difficult to remove. ### Institutional factors and policy stance - Surcharges as protectionist responses run counter to the principle of liberal trade systems and the Fund’s goal of promoting open international trade. - Introduction of a surcharge in one country often triggers similar actions in others. - Surcharges may, in some circumstances, be contrary to WTO rules: - WTO members must maintain tariffs at no more than bound levels and apply them on an MFN basis to all other WTO members. - An across-the-board tariff increase is within WTO commitments only if all tariff rates remain below their bound levels. - A country introducing a surcharge beyond bound rates could justify them under GATT Articles XII or XVIII:B (exceptions discussed later in the note). - Fund staff should argue against the introduction of surcharges and—for those in place—for their early elimination. ### Case studies on import surcharges (Argentina, Bulgaria, Hungary, Poland, Slovakia) - Studies examined coverage, duration, level, revenue impact, and economic circumstances at introduction. - Macroeconomic and fiscal impacts were generally limited. - Surcharges were usually introduced with stated intentions to correct fiscal and/or external imbalances and frequently imposed alongside other macroeconomic and structural measures. - Preceding imbalances varied dramatically across cases. - Typical surcharge characteristics: - Usually comprised a single uniform rate ranging from 3 to 8 percent. - Certain sectors and products were exempt in all countries studied. - In most cases, surcharges applied to all trading partners (at the time there were far fewer preferential trade agreements). - Fiscal outcomes and duration: - Anticipated revenue collection from the surcharges ranged from 0.2 to 1 percent of GDP, but actual receipts were markedly below expectations. - All five countries had alternative revenue options such as broad-based consumption or output taxes. - Duration varied from 14 to 48 months. - Elimination was usually based on a preannounced timetable—usually in compliance with the WTO BPC—that was sometimes not adhered to. - Overall assessment from case studies: balance of payments and fiscal impacts were generally limited. ### Conclusion on surcharges - Import surcharges are appropriate only in very limited circumstances. - Arguments can be made for temporary surcharges in instances of inappropriate or inflexible exchange rates, and where alternative fiscal measures are unavailable. - Even then, an import surcharge is inferior and may be ineffective. - In practice, surcharges are not typically introduced under those narrow circumstances but under other conditions where they are more clearly inappropriate. - Fiscal and external balance impacts have in practice been small. - Surcharges entail distortions and delay adjustment; adverse distortionary impact is smaller to the extent the surcharge is low, uniform, and is phased out rapidly. - Fund staff should argue against their introduction and for early elimination where they exist. ### WTO-consistency (overview and guidance for Fund staff) - Joint IMF-WTO members expect consistent policy advice from the two institutions; Fund staff must ensure recommended measures and program conditionality are consistent with a member’s agreements under the auspices of the WTO. - The Fund’s staff shall consult with the WTO Secretariat on issues of possible inconsistency between measures under discussion with a common member and that member’s obligations under the WTO Agreement. - Fund staff should be aware of WTO rules to identify potentially inconsistent policy measures early and explore alternatives; SPR trade staff can assist and liaise with the WTO Secretariat. - Definitive rulings on WTO-consistency are the jurisdiction of WTO dispute settlement panels and the WTO Appellate Body. - Fund staff are not to pass judgment on WTO-consistency but must identify problems and discuss these with SPR trade staff. - Fund policy advice and program design can encourage unilateral trade liberalization that goes beyond WTO commitments, but “cross-conditionality” should be avoided. - Exchange measures subject to Fund jurisdiction and approved under Article VIII or maintained under Article XIV cannot be challenged under the WTO. - Members not yet in the WTO should be advised to adopt WTO-consistent trade regimes to ease eventual accession. ### Key WTO-related technical points summarized - WTO agreements include: Agreement Establishing the WTO; GATT (goods), GATS (services), TRIPS (intellectual property); dispute settlement; reviews of governments’ trade policies; plus extra agreements and annexes. - Trade measures recommended by the Fund should be consistent with the member’s WTO Agreement obligations. - The note does not cover all WTO rules; many exceptions, transition periods, and special treatments exist. - Tariff bindings: - It is very unusual for the Fund to recommend tariff increases; if recommended, avoid breaching WTO tariff bindings. - Assessment requires line-by-line comparison of applied/proposed tariffs with bound rates. - Some exceptions allow exceeding bindings if justified under special WTO provisions. - Other duties and charges (ODCs): - WTO rules discipline duties or charges other than customs tariffs levied exclusively on imports (e.g., import surcharges, surtaxes, stamp duties, fiscal duties). - Obligation to bind each ODC is additional to the obligation to bind tariffs; ODCs and tariffs are not bound additively—each binding must be respected separately. - Fees and formalities connected with importation and exportation: - Customs user fees should be limited to approximate costs of processing individual import transactions, should not represent indirect protection or fiscal taxation, and generally should not be ad valorem. - Customs valuation and import reference prices: - Primary method is transaction value of imported goods (Agreement on the Implementation of Article VII of the GATT, 1994). - Threshold/reference price systems are typically WTO-inconsistent; valuation should not be based on domestic prices for like goods or on “arbitrary or fictitious” values. - Discriminatory domestic taxes: - Domestic taxes (VAT, excise, other sales taxes) and border tax adjustment rules must not treat imported goods less favorably than “like” domestic products (GATT Article III). - Markups to the value of imports in the calculation of domestic taxes violate national treatment provisions. - Agriculture: - Uruguay Round Agreement on Agriculture required tariffication and binding of all tariffs; introduced rules on export subsidies and domestic support; prohibited nontariff measures like minimum import prices and discretionary import licensing; tariff-rate quotas and special safeguards were provided. - Textiles and clothing: - ATC provided phased elimination of MFA quotas, completed end-2005; some developed countries introduced special safeguard measures and retain relatively high tariffs in these categories. - Voluntary export restraints: - WTO Agreement on Safeguards prohibits VERs, orderly marketing arrangements, and “any other similar measures” on export or import side (includes export moderation, monitoring systems, surveillance, compulsory import cartels, discretionary licensing). - Import licensing: - Non-automatic import/export licensing procedures are prohibited under GATT Article XI, with exceptions (e.g., preventing critical shortages); GATT Articles XX and XXI establish certain exceptions. - TRIMs: - TRIMs Agreement requires elimination of local content requirements, trade balancing requirements, and foreign exchange balancing requirements. - Preshipment inspection: (topic introduced but text beyond this point not included in the supplied content) *Source: IMF content unit _093010 - 39. In practice, since surcharges are rarely uniform, their costs can be even* ### 66. Preshipment inspection (PSI) activities covered under the WTO ### 66. Preshipment inspection (PSI) activities covered under the WTO ### Scope and definition of PSI under the WTO - PSI activities covered under the WTO Agreement on PSI relate to the verification of quality, quantity, price (including exchange rate and financial terms), and the classification of goods. - The Agreement on PSI applies to all PSI activities, whether contracted or mandated by the government or any government body. ### Requirements imposed by the Agreement on PSI - Governments must ensure that the PSI entity meets provisions concerning: - transparency; - treatment of business confidential information; - avoidance of conflict of interest; - prompt inspection; and - appeals procedures. - Governments must ensure that the PSI entity follows certain guidelines regarding price verification. - Before recommending introduction or expansion of PSI, Fund staff should: - consult the WTO Agreement on PSI; and - consider whether the authorities can meet its requirements and what assistance they may need before using PSI. ### Experience with PSI contracts and policy recommendations - Findings from experience: - PSI contracts can be expensive and their revenue-generating capability over-stated. - Countries often struggle to enforce contractual commitments by the PSI provider to training and other capacity building in the customs service. - Information obtained and held by the PSI provider regarding import transactions is frequently not made available to customs to inform decision making and build capability in risk assessment, valuation, and other aspects of import clearance. - Policy recommendations and operational guidance: - PSI arrangements (and ―destination inspection‖) should be seen as a short-term necessity only, unless compelling reasons exist to the contrary. - PSI should be accompanied by an adequate government commitment to strengthen customs administration. - To avoid over-dependence on the PSI provider, contracts should target an exit date and adopt a strategy to support that exit objective. --- ### M. Subsidies ### General rule and applicable WTO agreements - The WTO Agreement on Subsidies and Countervailing Measures (ASCM) aims to circumscribe the use of specific trade-distorting subsidies. - Farm subsidies are also disciplined by the WTO Agreement on Agriculture. ### Definitions and categories under the ASCM - The ASCM applies to subsidies as defined in Article 1, which are specific (targeted) within the meaning of Article 2. - Such specific subsidies may be either: - (i) Prohibited, if contingent on export performance or on the use of domestic over imported goods. Attachment 1 to the ASCM provides an illustrative list of prohibited export subsidies; or - (ii) Actionable, when they cause injury to the domestic industry of another member, ―nullification or impairment of benefits‖ for other WTO members, or ―serious prejudice‖ to the interests of another member. ### Remedies and limits - Countries can take actions within the WTO or impose countervailing measures under national procedures of the importing country (subject to multilateral rules) against prohibited and actionable subsidies. - Countervailing measures: - typically take the form of special duties; - may be imposed only if subsidized imports are found to be causing or threatening to cause injury to a domestic industry; - cannot exceed the level of subsidization found to exist; - may be imposed only after an investigation, with detailed rules governing the investigatory process. - Duty-drawback provisions: - Any drawback of customs duty, sales tax, or VAT on imports physically ―consumed‖ in exported production are not deemed export subsidies and are permitted (ASCM Annex III). - A duty drawback on the import of capital goods used in the production of exports, including drawback claimed on depreciation of capital goods, would constitute an export subsidy and thus be prohibited. - Certain limited exceptions apply; for example, least-developed countries are allowed to use export subsidies, although subsidized imports can still be subject to countervailing measures. --- ### N. Dumping / Antidumping (AD) ### Conditions and procedures for AD measures - Antidumping duties may be used under certain conditions and following specific procedures to apply a higher rate of duty (which may exceed the bound tariff rate) temporarily against a specific product imported from an exporting company and country found to have dumped that product. - The Agreement on Implementation of Article VI (the ―AD Agreement‖) requires two criteria before imposing an AD duty: - (i) dumping must be found to exist; and - (ii) it must be established that dumped imports are causing or threatening material injury to a domestic industry. - AD measures may be imposed only after an investigation, with detailed rules governing the investigatory process. - Limits on AD duties: - An AD duty may not exceed the dumping margin. - The AD Agreement indicates it is desirable (but not required) that the duty be less than the margin if a lesser duty is adequate to remove the injury. - Duration: - Unless a review determines that expiration would likely lead to continuation or recurrence of dumping and injury, AD duties are to be terminated no later than five years from imposition. --- ### O. Export Measures - GATT Article XI forbids quantitative import and export restrictions, except for ―temporary‖ restrictions to prevent or relieve critical shortages of food or other essential products. - Temporary restrictions have been used frequently and sometimes maintained for long durations. - Any export taxes must be applied according to the MFN (nondiscrimination) principle; export taxes are otherwise not disciplined (with some exceptions for recently acceded WTO members). --- ### P. Major Exceptions to WTO Rules ### Balance of Payments (BoP) trade restrictions — framework and Fund implications - The WTO permits temporary restrictions on trade in goods for balance of payments purposes that would otherwise be inconsistent with WTO obligations (GATT Articles XII and XVIII:B). GATS (Article XII) permits temporary restrictions on services trade for BoP protection. - WTO obligations on BoP measures include prompt notification and consultation with the WTO. - Requests to maintain import restrictions under BoP provisions are considered by the WTO Committee BPC, which relies heavily on the formal Fund assessment of the member’s BoP and reserves situation and outlook. - In imposing trade restrictions for BoP purposes: - price-based measures should be used rather than quantitative restrictions; - if quantitative restrictions are used, the consulting member should justify choosing these over price-based measures; - measures are to be broad-based and may not target a narrow range of products. - Fund members with IMF arrangements should avoid imposing or intensifying import restrictions for BoP purposes; all Fund arrangements feature a continuous performance criterion against such restrictions. - Invoking import restrictions under the WTO’s BoP provisions would normally indicate to the Fund that the member had imposed or intensified these restrictions for BoP purposes. ### Emergency action — safeguards - GATT Article XIX and the Agreement on Safeguards allow additional import restrictions or ―safeguard measures‖ on an MFN basis for a limited period in the event of serious injury or threat to a domestic industry due to imports. - Written notice to the WTO and opportunity for consultation with other WTO members are required before taking safeguards. - A proposing member must attempt to maintain a substantially equivalent level of concessions toward other members; proposed trade restrictions may need compensation via trade liberalizing measures on other products. - If a safeguard measure is in place for more than one year, it is to be progressively liberalized over the period of application. - Additional safeguard provisions exist under the Agreement on Agriculture and transitional safeguards under China’s Protocol of Accession; safeguard provisions for services are expected under GATS (Article X). ### General and security exceptions - General Exceptions (GATT Article XX and GATS Article XIV) include measures for: - products of prison labor; - protection of national treasures of artistic, historic or archaeological value; - measures necessary for protection of human, animal or plant life or health; - restrictions relating to conservation of exhaustible natural resources if made effective with restrictions on domestic production and consumption. - Security Exceptions (GATT Article XXI and GATS Article XIV (bis)) provide exceptions for disclosure of national security information, regulation of fissionable materials, regulation of traffic in arms, and action in pursuit of UN Charter obligations; they also include a catch-all clause for actions deemed ―necessary for the protection of its essential security interests...taken in time of war or other emergency in international relations.‖ ### Modification of tariff bindings and waivers - A WTO member may modify or withdraw a concession (e.g., raise a tariff binding) following agreement to compensate other members with equivalent concessions elsewhere; renegotiation rights and possibility of withdrawal of equivalent concessions have helped maintain discipline. - Under exceptional circumstances, WTO members acting jointly may waive a WTO obligation for any party (GATT Article XXV); temporary waivers have been approved for certain subsidy schemes that would otherwise be prohibited. --- ### VI. WTO Committee on Balance of Payments Restrictions (BPC) ### IMF role and collaboration with the BPC - When WTO BoP provisions are invoked, the Fund has a formal role requiring a Fund statement approved by the IMF Executive Board in the WTO’s deliberations. - The WTO Agreements require consultation with the IMF on matters concerning monetary reserves, balances of payments, or foreign exchange arrangements, and to accept Fund findings of statistical and other facts related to foreign exchange, monetary reserves and balances of payments (GATT Article XV; GATS Article XII). - The IMF’s assessment of a country’s BoP situation is a key factor for the BPC to determine whether additional import restrictions are justified, based on whether the country is experiencing: - a very low level of reserves; - a serious decline in reserves; or - an imminent threat of such a decline. - The centerpiece of Fund collaboration is the formal Fund statement, approved by the Executive Board, normally on a lapse-of-time basis. - Fund staff coordinate to allow adequate time for preparation of the formal statement while meeting BPC timetable requirements. ### Typical BPC procedures and representation - A typical BPC formal consultation meeting: - is attended by about 30–50 country delegations (occasionally with representation from capitals) and several observer organizations; - includes a delegation from the country consulted, typically with trade and Ministry of Finance and/or central bank officials; - features platform speakers: the BPC Chairman, WTO Secretariat staff, and the Fund representative; - opens with a formal statement by the head of the country delegation, followed by the Fund statement; - proceeds to statements from delegations, then reconvenes in informal session to prepare the Chairman’s summing up; a further formal meeting the next day agrees the summing up. - Processes can be lengthy, particularly if capital input is involved; countries place considerable weight on their hearing with the BPC. --- ### A. Procedures and Fund input ### GATT Article XII and the Understanding on BoP Provisions - GATT Article XII allows maintenance of additional import restrictions under conditions specified, but such import restrictions must not exceed those needed: - a) to forestall the imminent threat of, or to stop, a serious decline in its monetary reserves; or - b) for a member with very low monetary reserves, to achieve a reasonable rate of increase in its reserves. - The Understanding on the BoP Provisions of the GATT confirms: - preference for measures with the least disruptive effect on trade, i.e., price-based measures rather than quotas; - members ―shall seek to avoid the imposition of new quantitative restrictions...unless, because of a critical balance of payments situation, price-based measures cannot arrest a sharp deterioration in the external payments position‖; - import measures for BoP purposes ―may only be applied to control the general level of imports [that is, they are not to be used to advantage individual sectors] and may not exceed what is necessary to address the balance of payments situation.‖ ### The IMF-WTO Cooperation Agreement and Fund responsibilities - The IMF-WTO Cooperation Agreement provides that the Fund participates in consultations by the WTO BPC on measures taken by a WTO member to safeguard its BoP (paragraph 4). - The Fund's input is sought by the WTO to: - present the general macroeconomic picture; - assess, as candidly and explicitly as possible, the country’s BoP situation and reserves adequacy at the time the restrictions were introduced; - indicate whether the BoP need continues; and - evaluate alternative macroeconomic policies. ### The Fund statement — required analyses and content - The Fund statement should: - Assess the country’s BoP situation and reserves adequacy at the time the restrictions were introduced, ideally referencing standards in GATT Article XV and addressing whether the country still has a BoP need (including what constitutes a ―serious decline‖ in an overall macroeconomic setting). - Provide information and analysis on the member’s reserve position; reserves adequacy must be assessed with reference to country-specific circumstances. - Assess what is needed to restore BoP equilibrium on a sound and lasting basis, including appropriate macroeconomic policies and a possible time line for alternative policies to work. - While not required to assess whether the trade measures are justified, the Fund has commented on whether particular trade measures assist BoP adjustment and offered views on early or phased removal, with some indication of a reasonable timetable. ### Scheduling and representation for BPC consultations - SPR consults with the WTO Secretariat to anticipate suitable dates for BPC consultations. - SPR will normally request advance notice of eight weeks for a BPC meeting requiring a Fund statement to allow: - preparation of the draft statement by the area department country team; - inter-departmental review (LEG and SPR); - clearance by the SPR IO reviewer (according to standard deadlines); - management clearance; and - Board approval. - Board approval on a lapse-of-time basis should be requested in time so that an Executive Director requesting discussion would not cause delays. - SPR staff normally represent the Fund in formal BPC consultations, with additional representation from the area department when useful. - If controversial issues are foreseen, an informal briefing to the Board or to the Committee on Liaison with the World Bank, the WTO, and other International Organizations may be useful. *Source: _093010 - 66. Preshipment inspection (PSI) activities covered under the WTO* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2010/_093010.pdf_