Iceland WT/TPR/S/65
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IV. TRADE POLICIES BY SECTOR
(1) INTRODUCTION
1. The fishing industry has been traditionally the backbone of the Icelandic economy.  Although
its importance is currently less pronounced than in the past, fisheries remains the most important
single economic activity in Iceland, accounting for some 13% of GDP in 1998, 71% of total
merchandise export revenues, and generating 49% of foreign currency earnings.  The fishing industryis not protected by any border measure, nor does it receive any type of direct subsidy, but foreign
ownership is strictly limited, and to protect the resource base, the volume of annual catch is managed.
Iceland's system of fisheries management is based on individual transferable quota shares (ITQs).
The system appears to have played a key role in ensuring the sustainable exploitation of marine
resources and in reducing overcapacity in the industry.  As from 1999, new fishing licences may beissued without the previous requirement of replacing a vessel, or vessels ceasing operations, and
applications for a fishing permit can be now granted to any vessel registered in Iceland.  However, the
allocation of quotas free of charge remains a major topic of policy discussion in Iceland:  it is seen as
creating windfall profits for vessel owners, and collection of public revenue, through resource rent
taxes, is forgone.
2. The agriculture sector has undergone a process of structural reform in recent years, in the
light of Iceland's commitments under the WTO Agreement on Agriculture and the EEA Agreement,
whereby price support measures have been replaced with direct income payments.  Nevertheless, such
payments still grant considerable support to domestic producers, notably of lamb and meat, and tariffs
for agricultural goods remain way above average.  A number of agricultural products are subject to
import restrictions for sanitary reasons.
3. Manufacturing activities other than fish processing are concentrated in power-intensive
industries based on Iceland's low energy costs.  In 1998, the sector contributed 12% of GDP, and
exports of manufactured products account for some 22% of total merchandise exports.  Expansion of
aluminium and ferrosilicon production and power generating capacity accounts for much of the surge
in investment in recent years.
4. The services sector accounts for some two thirds of GDP, and has been expanding rapidly in
the 1990s, particularly in the areas of financial services, tourism, software production, and
biotechnology.  Service exports and, more particularly, imports have expanded at a brisk pace.
Iceland's GATS offer grants unlimited market access and national treatment for cross border supply,
consumption abroad, and commercial presence of telecommunication services, construction and
related engineering services, distribution services, and transport services.  Market access throughcommercial presence in banking and other financial services is subject to certain conditions, but these
generally also apply for domestic institutions.  However, foreign penetration in telecommunications,
banking, and in energy, remains limited.
(2) A
GRICULTURE
(i) Features
5. The agriculture sector contributed an estimated 2% to GDP in 1998, down from some 3%
in 1990 and 5% in 1980.  The sector employed 4.1% of the total work force in 1997, down from 5%
in 1990 and 8% in 1980.  Assistance to agriculture is the equivalent of some 1.5% of GDP.  One fifth
of the total land area of Iceland is suitable for fodder production and the raising of livestock.  AboutWT/TPR/S/65 Trade Policy Review
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6% of this area is currently under cultivation, with the remainder devoted to raising livestock or left
undeveloped.1
6. The main agricultural activities in Iceland are cattle and sheep farming, which account for
some two thirds of the value of agriculture output.  The principal crops are hay and potatoes.  Based
on the use of geothermal energy, hot-house cultivation of various fruit, flowers, vegetables (tomatoes
and cucumbers mainly) and other plants has been increasing during the past few years.  Iceland alsoproduces some cereals (Table IV.1).
Table IV.1
Production of main crops
Production of field crops 1990 1995 1997
Total hay yield, m³ 3,256,405 2,503,564 2,653,840
Potatoes (tonnes) 14,893 7,324 8,557
Cereal grains (tonnes) - 485 2,902
Turnips (tonnes) 808 328 414
Tomatoes (tonnes) - 810 805
Cucumbers (tonnes) - 623 733
- Zero or negligible.
Source : Statistics Iceland (1998), Iceland in figures .
7. Iceland is a net importer of agricultural products, mainly those with no domestic substitutes
such as cereals, fruit, sugar, coffee, and tea.  Agricultural exports are limited to a few items such as
wool, sheepmeat, live horses, and fish farming products.  These have been declining since 1990,
totalling US$29.7 million in 1997, around half their 1990 level.
8. In recent years, the agriculture sector has been affected by a shift in demand away from
traditional products, especially lamb and mutton.  Consumption of other, non-traditional products,
such as pork and poultry meat has risen.  The production of milk and lamb meat has fallen slightly
since 1995, while the production of beef, pork and poultry has increased marginally (Table IV.2).
Table IV.2
Production of meat and processed milk
(Tonnes)
1990 1995 1997
Mutton and lamb 9,454 8,690 7,903
Beef 2,932 3,061 3,441
Pork 2,533 3,330 3,938
Poultry 1,520 1,952 2,107
Processed milk ('000 litres) 107,011 102,864 101,945
Source: Information provided by the Icelandic authorities.
9. Sheepmeat production is still of great importance;  sheepmeat, mostly lamb, accounts for
nearly 50% of total meat consumption.  However, its contribution to total agricultural income hasdeclined to 23%.  Changes to quotas have seen the number of winter-fed sheep decline from 896,000
in 1978 to 477,000 in 1998;  during this period, the annual production of sheepmeat fell from 15,000
to 8,200 tonnes.  This trend reflects a decline in annual domestic sheepmeat consumption from 47 kg.
to 27 kg. per capita, and a substantial reduction in exports of lamb, currently only 1,100 tonnes per
                                                     
1 Central Bank (1999), p. 20.Iceland WT/TPR/S/65
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year.  There has also been a reduction in the number of producers and average flock size.  Wool and
skins account for 10% of total farm income from sheep by-products.
10. The process of structural reform affecting the agriculture sector in recent years  also reflects
changes in government policy, some in the light of commitments under the WTO and the EEA
agreements.  Currently, the main objectives of Icelandic agricultural policy are to keep rural areas
inhabited and to maintain an adequate standard of living for farmers.  This represents a substantialpolicy change since the early 1990s, away from encouraging production and exports by replacing
subsidies at the wholesale level with direct paymen ts to farmers, abolishing export subsidies, and
progressively reducing administered prices.  Act No. 99/1993, on the production, pricing and sale of
agricultural products, as modified by Act No. 124/ 1995, is the main legislation defining agricultural
policy.
(ii) Border measures
(a) Tariffs and tariff quotas
11. The applied average tariff on agricultural products (WTO definition) is 10.8% including only
in-quota rates;  it rises to 13.5% if out-of-quota ad valorem  equivalent rates (AVEs) are used.  The
average preferential rate for agricultural products is 9.2% if only in-quota rates are considered, or12.7% if  only out-of-quota AVEs ar e used.  Preferences are granted to other EEA and EFTA states
and to countries with FTAs with EFTA.  In this case, preferences vary and are inscribed in each
country's Bilateral Agricultural Protocol.
12. As a result of the Uruguay Round, 100% of Iceland's agricultural tariff lines are bound, up
from 58% at the time of Iceland's first Trade Policy Review in 1994.  Average bound rates remain
well above applied duties;  in year 2000, bound rates should stand at 66% including only in-quota
rates or 110.7% including only out-of-quota AVEs.  Out-of-quota bound rates are specified as thehigher of a specific or an ad valorem rate.
13. Tariff quotas are, in principle, applied to some 320 eight-digit HS headings on which Iceland
made minimum or current access commitments under the WTO Agreement on Agriculture. In
practice, however, only products subject to minimum access commitments (meat products, eggs and
dairy products), and live plants and flowers are subject to quotas (see below).  Imports of products onwhich current access commitments were made take place at unrestricted quantities (open quotas) at
in-quota or lower tariff rates.  In the case of vegetables (potatoes, cabbages, tomatoes, lettuce, onions,
carrots, cucumbers, mushrooms, aubergine and others), open quotas and seasonal preferential rates
and out-of-season in-quota (or sometimes lower) rates have been used.  These rates are determined
through regulations.  A list of tariff headings relevant to Iceland's current access commitments notsubject to quotas has been notified each year to the WTO.
14. Notwithstanding the use of open quotas, tariff quotas play a significant role in shielding
sensitive activities, such as milk and sheepmeat production from foreign competition, imports being
allowed only to supplement domestic production.  Tariff quotas have also encouraged domestic
production in areas where no or little production existed, as in the case of vegetables.  In some cases,tariff quotas have been superseded by bans or strict licensing requirements, (raw meat products,
unpasteurized dairy products);  in the case of fresh meat, for example, no or negligible imports have
taken place (Table AIV.1).  Quotas are still determined for products subject to such non-tariff
restrictions but they are merely indicative.
15. All in-quota rates are ad valorem  and generally set at 30%, with the following exceptions
(HS four-digit code/in-quota rate between parenthese s):  margarine (1517-0%);  chocolate (1806-0, 10WT/TPR/S/65 Trade Policy Review
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or 20%);  preparations of cereals and  pasta (1901 and 1902-0%);  prepared food obtained from
cereals (1904-7.5%);  bread, pastries, etc. (1905-20%);  preparations of vegetables, fruit, etc. and
miscellaneous edible preparations (20 and 21-0% except ice cream and a few food preparations 30%);
and beverages, spirits and vinegar (20%).
16. Out-of-quota rates are all specific, determined as krona per litre or per kg..  Out-of-quota
AVEs may reach three-digit levels for some vegetables (potatoes, tomatoes, cabbages, mushrooms,and other vegetables), as well as for preserved meat, and for some live plants.  However, those rates
are seldom used, the in-quota or a lower, administratively determined rate is normally applied.
17. Quotas are determined at a global level;  allocations to importers are made by the Minister of
Agriculture based on recommendations made by a special committee comprising representatives from
the Ministries of Agriculture, Commerce, and Finance.  If applications exceed the quota, allocationsare auctioned and assigned to the highest price bidders, or determined by drawing the lots.
Auctioning is used for all products under minimum-access commitments and in a few cases for plants
and flowers.  The auction system may also apply to imports exceeding the quota if the special
committee decides to expand it.  Part of the quota may be reserved for the domestic food processing
industry, but the authorities noted that this has not occurred recently.
2
18. Imports of live plants and flowers and related products (HS Chapter 6) are subject to seasonal
tariff quotas, with a WTO-committed tariff quota (not subject to reduction) of 192.5 and 41.9 tonnes,
and a filling rate in the 70-85% range in 1996-98 (Table AIV.1).  In practice, importation
(US$19.2 million in 1998) takes places mainly free of quotas, at in-quota rates or duty free (at an
average tariff rate of 24.1%), and with only a small amount of imports subject to in-quota rates in
season (30%).  In 1999, only other potted plants not exceeding 1 m in height (HS 0602.9093) and
some fresh flowers (0603.1009) were subject to tariff quotas of 2.2 and 3.3 tonnes respectively, at thein-quota rate of 30% (Table IV.3).
3
19. Imports of meat and dairy products are also subject to minimum access commitments and
tariff quotas (Table IV.3).  However, meat imports are restricted for sanitary reasons, as are most
imports of dairy products (section (b) below).  As a result, with the exception of poultry and cheese,
practically no or very small amounts of imports of meat or dairy products were registered in 1998,despite minimum access commitments.  Imports of fertilized eggs and pasteurized egg yolks were not
subject to quotas in 1999;  they entered Iceland duty free but remained under the control of the
Icelandic Chief Veterinary Officer.
4
20. Quota commitments for potatoes (1,575 tonnes not subject to reduction) have remained
unfilled between 1995 and 1998, with quota utilization decreasing from 78.9% in reporting year1995-96 (1 July-30 June), to 50.7% in reporting year 1997-98 (Table AIV.1).  According to the
authorities, this is due to an increase in domestic production and a lack of demand for imports;  no
quotas were actually applied on imports, and in-quota rates or lower rates applied only seasonally.  In
this respect, Regulations No. 357/1999 and No. 420/1999 declared quotas open in 1999, and set an
import duty of 15% for in-season imports (31 May- 30 June and 1 July-31 August).  Imports of a
number of other vegetables, including potatoes and tomatoes were also exempted from seasonal
quotas in 1999 by Regulation No. 420/1999;  applied rates were set between 7.5 and 30%, and
different rates were sometimes applied on the same product according to the period within the season.
                                                     
2 WTO document G/AG/N/ISL/1, 13 November 1995.
3 Regulation No. 770/1998.
4 Regulation No. 359/1999 sets an open quota for imports of eggs between 1 July 1999 and
30 June 2000.  Regulation No. 754/1999 also covered egg imports in 1999.Iceland WT/TPR/S/65
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Table IV.3
Products subject to tariff quotas in 1999-2000
Description Tariff heading Quota 1 July 1999 -
30 June 2000 (kg.)In-quota
rate (%)Out-of-quota
rate (ISK/kg.)
Beef meat; offals 0202.3002-04; 0210.2001  87,400 0 503;  306
Pork; offals 0203.2903-09;  0210.1200;
0210.1901, 0210.1909 58,800 0 408; 292;
331
Poultry 0207.1200; 0207.1401; 0207.1402;
0207.1409;  0207.2500;0207.2701,02.09; 0207.3300;
0208.9006;09.56,200 0 150; 150; 206;
150; 206;
206;  474;272
Butter  0405 48,800 0 202
Cheese 0406.1000;  0406.2000;  0406.3000;
0406.4000;  0406.9000.108,800 0 144, 144, 107,
165, 161
Live plants , other potted plants
not exceeding 1 m in height;
some fresh flowers0602.9093; 0603.1009 2,200; 3,300 Seasonal;
applied from 1 May to
30 September 199930 0a
Other prepared or preserved meat,
meat offal or blood :
Homogenized preparation:1602.10; Of liver of any animal:
1602.20;  Of turkeys: 1602.31; Of
chicken: 1602.32; Of swine:Hams and cuts thereof: 1602.41;
Shoulders and cuts thereof:
1602.42; Other, includingmixtures: 1602.49; Of bovine
animals: 1602.50; Of lamb meat:
1602.90.1602.1001,09
; 1602.2011,12
1602.2019; 1602.2021; 1602.2022;
1602.2029; 1602.3101,02; 1602.3109;
1602.3201,02; 1602.3209;
1602.3901,02;  1602.3909;1602.4101; 1602.4102; 1602..4109;
1602.4201; 1602.402; 1602.4209;
1602.4901; 1602.4902; 1602.4909;1602.5001; 1602.5002, 1602.5009;
1602.9011; 1602.9012; 1602.9019;
1602.9021;   1602.9022;    1602.9029.79,200 0 85;  118;
44;  118;  78;
26;  206;  115;
206;  115;
206;  115;529;  343;  115,
412;  247;  83,
511;  307;  102;
368;  304;  102;442;  265;  89;
442;  265;  89.
a Out-of-season rate.
Note: Rates determined by Regulations No. 358/1999, 360/1999 and 770/1998 are lower than those quoted in Iceland's tariff schedu le.
Source : Regulations No. 358/1999, 360/1999 and 770/1998;  and information provided by the Icelandic authorities.
(b) Non-tariff measures
21. Import licensing and restrictions affect a number of agricultural products, including tobacco
products, seeds, fodder, and prepared fodder.  The importation of flowers and plants requires a healthcertificate from an official institute in the country of cultivation as well as confirmation from the
Icelandic Agricultural Research Institute.
22. Imports of fresh and frozen meat, unpasteurized milk and milk products from unpasteurized
milk, and unpasteurized eggs and egg products are banned, unless explicitly authorized by the
Minister of Agriculture following the recommendati on of the Chief Veterinarian officer.  As noted
above, imports of fertilized eggs and egg yolks have been authorized in recent years.  In practice, the
importation of live animals is likewise banned under Act No. 54/1990;  if authorized, animals must be
kept for two to three months in quarantine.  In exceptional cases, import of genetic material are
permitted under strict supervision of the Icelandic Chief Veterinary Officer.  Imports of animal feed
of animal origin or containing waste offal are al so prohibited, as are imports of feed containing
antibiotics or growth promoters of chemotherapeutic origin.WT/TPR/S/65 Trade Policy Review
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23. Iceland has reserved its right to use the Special Safeguard provisions of the Agreement on
Agriculture for all products subject to tariff quotas.  However, Iceland has not invoked these
provisions to date.5
(iii) Internal measures
(a) Assistance levels
24. Despite the elimination of direct export subsid ies and the reform in the agriculture sector,
domestic assistance remains high:  according to the Icelandic authorities, support to the agriculture
sector accounts for some 1.5% of GDP.6   In the agricultural fiscal year from October 1997 to
October 1998, direct support payments to farmers were estimated to have amounted to 42% of the
farmers' costs in raising lamb and to 40% of the costs in milk production.7   Other measures of support
confirm the high support provided to agriculture:  the Producer Support Estimate (PSE) calculated bythe OECD for Iceland was 68% in 1997 (albeit down from 82% in 1986-88), and the Total Support
Estimate (TSE) for 1998 was ISK 12,787 million, or some 108% of agricultural GDP.
25. In 1998, the aggregate measure of support (AMS) notified to the WTO totalled
ISK 13,043.7 million (without inflation adjustment), or 111.3% of agricultural GDP, and some 2% of
total GDP.
8  Despite its high level, the total AMS with inflation adjustment, of SDR 119.12 million in
1998, was below the total AMS commitment for the year, SDR 140.9 million.9   Most of the support to
the sector is through implicit transfers (revenue forgone), support from administered prices, high
tariffs and stringent licensing and sanitary requirements;  however, direct payments have been
gathering importance in recent years (Table IV.4).  Direct payments to milk producers, and wool
subsidies are considered non-exempt direct payments and are included in the calculation of the AMS;
direct payments to sheep farmers are classified as "green box" measures.
26. Iceland does not provide support under production limiting programmes ("blue box"
measures).  The value of measures included under the "green box" increased substantially in 1996,
when direct payments to sheep farmers were included.  Since then, however, it has declined somewhat
(Table IV.5).
                                                     
5 WTO documents G/AG/N/ISL/3, 17 October 1996 (no use in the period 1 July 1995-30 June 1996);
G/AG/N/ISL/7, 15 July 1997 (no use in the period 1 July 1996-30 June 1997); and G/AG/N/ISL/13,
26 January 1999 (no use in the period 1 July 1997-30 June 1998).
6 Central Bank of Iceland (1999c), p. 18.
7 Central Bank of Iceland (1999c), p. 18.
8 Although they both include outlays and implicit transfers, the TSE and the AMS differ, among other
things, in that the first subtracts from its support estimate the budget contribution of the agricultural sector,while the AMS does not, and in that the TSE includes general services provided to the sector in its calculation of
support, while the AMS does not, since these are "green box" measures.  The PSE, on the other hand, is not a
broad measure of support, but a measure of implicit and explicit transfers to individual producers;  it excludesboth the budget contribution of the agriculture sector and general services. OECD documentsCOM/AGR/APM/TD/WP(97)89, 18 September 1997, and COM/AGR/APM/TD/WP(99)58, 16 June 1999.
9 WTO document G/AG/N/ISL/14, 23 July 1999.Iceland WT/TPR/S/65
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Table IV.4
Product-specific aggregate measures of support:  market price support and direct payments, 1995-98
Aggregate measure of support
(ISK million)
Description of basic products/Measure type 1995 1996 1997 1998
Milk/market Price support 3,876.4 3,440.3 3,396.3 4,319.2
Sheepmeat/market price support 2,232.6 1,761.8 1,756.1 2,192.2
Beef /market price support 905.2 723.0 800.5 1,062.1
Horse meat/market price support 97.5 52.2 62.1 87.3
Pigmeat/market price support 922.3 693.6 770.1 1,019.1
Poultry meat/market price support 768.5 494.1 636.3 822.2
Eggs/market price support 610.8 472.2 354.2 381.6
Total market price support  a5,536.9 7,637.3 7,775.6 11,881.7
Milk/Direct Payments 462.0 2,579.4 2,690.4 2,916.8
Sheep/Wool Subsidies 247.5 207.5 275.1 243.2
Total non-exempt direct Payments 709.5 2,786.9 2,965.5 3,160.0
Total aggregate measurement of support 6,246.4 10,425.2 10,741.1 13,043.7
a Revenue forgone.
Source : WTO documents G/AG/N/ISL/2, 20 September 1996, G/AG/N/ISL/9, 15 September 1997, G/AG/N/ISL/11, 15 June 1998, and
G/AG/N/ISL/14, 23 July 1999.
Table IV.5
Measures exempt from the reduction commitment - "green box"
Value of the measure during the reporting
period (ISK million)
Type of measure Name and description of measure 1995 1996 1997 1998
"General services"
RepaymentsResearch, advisory and training
Veterinary, pest and disease control, plant
and animal diseases
Relief services programmeCultivation and animal breeding programmes
(inspection, grading and standardization)
Marketing levy refund to farmers217.6
180.2
15.0
128.0
223.5218.2
161.0
15.0
123.1
80.5203.9
218.9
-
-
104.493.5
369.8
-
-
36.5
"Other domestic
support". Market
regulation storage for
security purposesAccumulation and holding of stocks of sheepmeat
between slaughter periods (November-August),
i.e. security measures to ensure supply267.2 280.7 193.4 198.8
"Decoupled income
support"Farmers pension fund (retirement scheme)
Direct payments to sheep farmer165.0
..186.0
1,480.3183.0
1,516.0191.0
1,549.0
"Structural adjustment
assistance;  resource
retirement
programmes"Permanent withdrawal of quota (removing livestock from
agricultural production);  instalment for payment of
bought-up sheepmeat quota455.2 577.9 236.0 40.2
"Structural adjustment
assistance through
investment aids"State Agricultural Productivity Fund. Programme is
designed to assist financial and/or physical restructuring
of farmers' operations due to structural disadvantages250.0 209.6 274.0 175.0
"Environmental
programmes"Promotion of organic production
Support to farmers who clean up their land- - 25.0 25.0
16.3
"Regional assistance
programmes"Support for advancement in slaughterhouses for sheep - - - 36.4
Total of table 1,901.4 3,337.3 2,954.6 2,860.6
- Zero or negligible.
Source : WTO documents G/AG/N/ISL/2, 20 September 1996, G/AG/N/ISL/9, 15 September 1997, G/AG/N/ISL/11, 15 June 1998, and 
G/AG/N/ISL/14, 23 July 1999.WT/TPR/S/65 Trade Policy Review
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(b) General support schemes
27. Support to the agriculture sector is provided through various funds, in particular the
Agricultural Productivity Fund (APF) and the Agricu ltural Loan Fund (ALF), which replaced the
Agricultural Investment Fund (AIF) in January 1998.  The ALF is aimed at strengthening productivity
and production in agriculture, and at keeping rural areas inhabited by providing financing at
subsidized interest rates.  The ALF also provides loans for construction projects and for companiesproviding services to agriculture.  The Ministry of Agriculture estimates that the ALF has experienced
a 50% reduction of its levy-based income, compared to the AIF, and that this has prompted the ALF
to increase interest rates accordingly to make up for lost income, reducing the concessional element of
loans.
28. The APF (Law 89/1966) grants subsidies and loans to facilitate increased productivity in
agriculture and business activity in farms, and provides capital to strengthen new branches of
agriculture, reorganize activities and support projects undertaken in rural areas to create alternative
employment.  Support projects are generally aimed at milk and sheepmeat farmers facing income loss
due to reductions in production quotas and other subsidy reductions.  The APF has been notified to
the WTO Committee on Agriculture as a "green box" measure.  Outlays under the APF totalledISK 274 million in 1997 (out of total "green box" outlays of ISK 2,954.6 million).
29. Other "green box" forms of assistance are provided through general services to farmers
(research, advice, training, veterinary, pest and disease control; cultivation and animal breeding
programmes) (ISK 527 million in 1997);  accumulati on and holding of stocks of sheepmeat between
slaughtering periods (ISK 193.4 million);  income support decoupled from production (ISK 1,699
million);  permanent  withdrawal of quota of livestock production (ISK 236 million);  and promotion
of organic production (ISK 25 million).
10
(c) Support to sheep and dairy production
30. Agricultural support programmes for sheep and dairy production have undergone
considerable modification since Iceland's first Trade Policy Review.  Changes to move away from
production and export support were introduced in 1991, through an agreement for sheepmeat and milk
between the Minister of Agriculture and the Farmers' Union:  direct payments to farmers replacedsubsidies at the wholesale level and export subsidies were abolished.  The agreement also introduced
freely transferable production quotas between farms (sheepmeat and milk products have been subject
to production quotas per farm since 1986), which were later abolished by the 1995 agreement on
sheepmeat production.  The dairy quota was increased by 1 million litres in the 1998/99 production
year, to 103 million litres.  As in the previous agreement, production quotas are determined by actualuse of the quota in the previous year.
31. The 1991 agreement on sheepmeat and milk began the process of phasing out administered
prices.  Administered wholesale sheepmeat prices were discontinued in 1995;  the administration of
producer prices was abolished on 1 September 1998.  Administered producer prices for eggs and
poultry were abolished in early 1997.
11  Currently, a list of recommended prices is published by the
associations of beef and sheepmeat producers.  Acco rding to the authorities, prices are increasingly
determined by retailers.
32. The support programme for producers of dairy products was terminated in 1998;  a new
agreement governing milk production through 2005 took effect on 1 September 1998.  The new
                                                     
10 WTO document G/AG/N/ISL/11, 15 June 1998.
11 OECD (1998), p. 90.Iceland WT/TPR/S/65
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agreement introduced changes with respect to the admi nistered prices to be received by producers.  A
minimum milk price replaced the applied fixed admi nistered price.  This minimum price is expected
to remain in effect until 30 June 2001, when it should be eliminated and agricultural prices completely
liberalized.
33. An agreement reached in 1995 on sheepmeat production reduced production quotas and
granted state assistance to clear up surplus meat stocks.12   The scheme of domestic support for sheep
farmers was modified to decouple direct payments from the level of production, while preserving
production-limiting goals.  Incentives were offered to encourage retirement from sheep production.
Between 1 September 1996 and 31 August 2000, sheep farmers may receive full direct payments
without the need to produce sheepmeat.  Currently, sheepmeat production quotas only provide the
basis on which direct payments are divided between farmers.  The total cost of the programme incalendar year 1998 was ISK 2,192.2 million.
13   A total of about 2,500 sheep farmers qualify for direct
payments, which amounted to ISK 221 per kg. of sheepmeat within the quota in 1998;  this is 50% of
the total price per kg. received by the farmer.
34. Supply control measures, which translate into a regulated level of export, are applied in the
case of lamb meat.  According to the authorities, the proportion set for export for the 1998/99slaughter season was 15% of total lamb meat production;  the level set for export in 1999/2000 was
25%.  No subsidies are granted to agricultural products specifically for export purposes,  however,
exports of sheepmeat benefit from the subsidies granted to producers in general:  the amount of
subsidy is well below the annual commitment level under the WTO Agreement on Agriculture
(Table IV.6).
Table IV.6
Export subsidies, allocation and commitment levels(SDR million;  and tonnes)
Outlay allocated Outlay committed Quantity subsidized Quantity committed
1995-
961996-
971997-
981995-
961996-
971997-
981995-
961996-
971997-
981995-
961996-
971997-
98
Dairyproducts0 0.5 0.2 3.8 12.7 11.9 0 0 0 2,195 2,116 2,036
Sheep-
meat3.6 0 0 13.6 3.6 3.4 1,347 221 16 3.86 3.72 3.58
Note: Marketing year 1 September -31 August.
Source: WTO documents G/AG/N/ISL/6, 9 June 1997, G/AG/N/ISL/13, 13 March 1999, and G/AG/N/ISL/15, 2 September 1999.
(d) Taxation
35. Iceland applies a number of taxes on agricultural products.  The structure of these taxes has
changed since the conclusion of the Uruguay Round, for example, in 1995, import duties replaced all
variable levies, a basic feed tax, and an equalization tax on potatoes and derived commodities(Table IV.7).
36. A 2% inspection tax is levied on the c.i.f. price of imported seeds, some flowers, bulbs,
tubers, and live plants.  Levies on inputs include the  feed inspection tax, charged at 0.5 % of the c.i.f.
price of imported feed or an equal percentage of the wholesale price for feed produced domestically;
the tax is used to pay for the inspection undertaken by the Agricultural Research Institute of allimported or domestically produced feed.  A feed tax of ISK 0.70 per kg. of raw material and ISK 7.80
                                                     
12 WTO document G/AG/N/ISL/5, 24 February 1997.
13 WTO document G/AG/N/ISL/14, 23 July 1999.WT/TPR/S/65 Trade Policy Review
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per kg. of whole feed compounds was introduced in 1995 to replace the special feed tax;  the new tax
is generally refunded at around 90%, the non-refunded portion being used to finance of the
Agricultural Productivity Fund (section (b) above), and research and development in the agricultural
sector.
Table IV.7
Treasury income derived from taxes applied on agricultural activities, 1991-98
(ISK '000)
Source and type of tax 1991 1992 1993 1994 1995 1996 1997 1998
1. Agricultural Productivity Fund
Feed inspection tax 2,780 2,681 2,927 3,151 4,365 5,904 5,527 4,570
Import inspection tax on plants - 3,360 7,343 8,643 6,817 7,475 7,095 7,743
2.  Agricultural Production Board
Special feed tax 250,610 241,268 174,236 169,716 253,013 - - -
Special feed tax for mink and fox
feed1,497 1,065 412 460 462 - - -
New feed tax, refunded except: - - - - - 350,688 364,926 351,000
Contributions to the APF and for
R&D- - - - - 10,188 49,308 34,000
3. Indirect taxes
Basic feed tax 69,525 75,781 81,087 33,472 -3,891 - - -
Equalization tax on potatoes and
derived commodities105,808 144,997 147,752 123,481 61,259 - - -
Variable levies 3,316 67,966 103,960 101,949 46,571 - - -
Import duties under UR regime - - - - 1,255 14,475 13,595 18,215
4. State farm property rent 33,461 23,805 17,873 21,300 24,120 27,945 17,036 27,400
Total 466,997 560,923 535,590 462,172  393,971  406,487  417,179  408,928
Total net of refunds .. .. .. .. .. 56,201 52,253 57,928
-N i l .
.. Not available.
Source : Information provided by the Icelandic authorities.
37. A number of levies at the producer level are also applied.  The collection and distribution of
these levies is administered by the Agricultural Production Board, under the authority of the Minister
of Agriculture.  Levies may be on output, imports or inputs.  In January 1998, a single 2.65% levy on
the total agricultural income of each farm replaced the interest equalization and consumer levy andthree other levies previously collected for the same purpose;  in 1997, revenue collected under those
levies was ISK 698.6 million (US$9.7 million).  The new levy is divided between different
institutions, including the Agricultural Loan Fund (section (b) above), which receives 1.15% of the
income of sheep and cattle farmers, and 0.8% from other subsectors.
(3) F
ISHERIES
(i) Features
38. Fisheries remain Iceland's most important economic activity;  in 1998 it accounted for some
8.5% of GDP (13.4% including fish processing), 71% of total merchandise export revenue, and 49%
of all foreign currency earnings.  Exports of marine products were valued at ISK 99.3 billion
(US$1.4 billion), from a total catch of about 1.7 million tonnes.  Some 15,000 people or 11% of thetotal workforce are employed directly in fishing or fish processing activities, of which some 4,500 are
fishermen.  The fishing sector has important spillover effects in other services and industries, such asIceland WT/TPR/S/65
Page 75
shipbuilding, repair and maintenance of vessels, and design and manufacture of fishing gear and
processing equipment.  Fishing productivity (catch per fisherman) in Iceland is the highest in the
world.
39. Ownership of fishing operations and primary fish processing are limited to Icelandic nationals
or residents;  foreign direct ownership (including nationals of other EEA countries) is not permitted,
and indirect ownership is permitted up to 25% (33% in certain circumstances).  This restriction doesnot apply to secondary fish processing operations, such as canning.
40. The main species fished in Icelandic waters are cod, haddock, saithe, redfish, shrimp, lobster,
herring, and capelin.  Cod is the most important product in economic terms, despite fluctuations over
the years.  Iceland has a system of fisheries management for the 15 main species, which account for
98% of the landed catch;  this system was introduced in 1991 and is based on individual transferablequota shares (ITQs), in which the annual catch quota is a simple multiple of each vessel's permanent
quota share and the total allowable catch (TAC) for a given year.  Annual catch quotas are fixed in kg.
or tonnes of cod-equivalent units, obtained by multiplying the weight (share) of the species by the
relative price of cod to that species.  The weight of each species is determined annually.
41. The introduction of ITQs has helped prevent major fluctuations in the volume of total annual
catch in recent years.  Those fluctuations that have taken place have been mainly due to the size of the
catch of capelin (Table IV.8).  In the first half of 1999, total catch increased by 18% over the same
period the previous year, basically due to a surge in the catch of capelin.  In the first half of 1999, cod
catch was some 12% above levels in the same period in 1998.  The value of the demersal catch as a
whole at fixed prices is expected to have increas ed by 4% and marine production for export by 3.5%
in 1999.  Fishing volumes in 2000 are expected to be lower than in 1999.
14
42. Marine product prices rose moderately durin g the 1990s:  special drawing rights (SDRs),
were some 10% higher in 1998 than in 1990.  Due to high demersal prices and unchanged fish-meal
and fish oil prices, the National Economic Institute estimates an average price increase of 2.5%
in 1999.  Despite variations in catch volume, revenue fluctuations have generally been avoided by
concentrating on the species where stocks are stronger at any given time.
43. Some 97% of the total catch is exported. In 1998, the export value of marine products
increased 6% over 1997, but declined by 5% in volume.  Land-based and on-board freezing earn some
56% of the total value of marine exports;  salted products account for 16%, iced fish for 8%, and fish
meal and oil for 10%.  In terms of value, some 65% of fish and seafood from Iceland is exported to
Europe, 18% to the United States,  16% to Asia, and 1% to Africa.  Exports to Japan have become
gradually more important while exports to some traditional markets such as the ex-Soviet Union andNigeria have plummeted.  The major exporters are:  the Icelandic Freezing Plants Corporation;
Iceland Seafood International;  the Union of Icelandic Fish Producers (SÍF).  Affiliates of the leading
exporters own and operate processing facilities in the United States, the United Kingdom, and France.
44. Imports of fish, which enter duty free, are mainly for processing in Iceland. In 1998, foreign
vessels landed 216,000 tonnes for this purpose, up from 107,000 tonnes the year before, with anestimated value of ISK 4 billion (US$56 million).  Total imports of fish and fish products reached
US$61.8 million.
                                                     
14 Marine Research Institute (1999).WT/TPR/S/65 Trade Policy Review
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Table IV.8
Fish catch volume 1996-99 a
('000 tonnes of cod-equivalent units)
Species 1996 1997 1998 1999bForecast 2000
Cod 204 209 243 269 269
Other demersal species 298 268 257 277 253
   Haddock 56 43 41 45 38
   Saithe 39 37 31 32 30
   R e d f i s h 6 87 36 9 7 46 5
   Deep-sea redfish 53 39 47 45 45
   C a t f i s h 1 51 21 2 1 31 3
   Greenland halibut 22 19 11 12 10
   Plaice 11 11 7 7 3
   O t h e r 3 43 44 0 5 05 0
Herring 100 71 77 95 100
Icelandic herring 165 220 200 202 202
Capelin 1,179 1,319 750 800 1,043
Blue whiting - 11 69 75 75
L o b s t e r 211 11
Shrimp 90 83 63 42 42
Scallops 9 10 10 8 10
Other 12 7 9 8 8
Total 2,059 2,199 1,679 1,776 2,003
aP r e l i m i n a r y .
b Includes catch by Icelandic vessels outside of Icelandic waters.
Source : Ministry of Fisheries.
45. The capacity of Iceland's fishing fleet has declined since 1990 as a consequence of a vessel
retirement programme and of quota mergers to improve the efficiency of fishing operations.  In
September 1999, a total of  1,706 vessels with commercial fishing permits were in operation, downfrom 2,562 in 1992.  There were 110 trawlers, which account for half of the average annual demersal
catch of 600,000 tonnes.  Some 160 freezing plants were authorized to operate in Iceland in 1999,
along with 208 salting plants, 19 herring processing factories, 17 shrimp plants, and 19 canning
factories.  In addition, a large number of small-boat fishermen are authorized to process lumpfish roe
from their own catches.
(ii) Sectoral policies
(a) Trade policy formulation
46. The Ministry of Fisheries is responsible for the management of fisheries in Iceland and
determines the annual total allowable catch (TAC);  it is assisted in its functions by the Directorate of
Fisheries, the Marine Research Institute (MRI), a nd the Icelandic Fisheries Laboratories (IFL).  The
Ministry of Foreign Affairs administers foreign trade and export matters, and is responsible for
international agreements.  The Directorate of Fisheries is responsible for applying legislation onfisheries management, including supervision of processing and handling of fish products;  collecting
and publishing data and fisheries statistics;  issu ing fishing permits to vessels;  controlling the
reporting of data on the landings of individual vessels;  monitoring the weighing-in of catches; and
imposing penalties for illegal catches.  The Directorate is also in charge of supervising the transfer of
quotas and quota shares between fishing vessels,  and of issuing licences to processing plants andIceland WT/TPR/S/65
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supervising their production.  The IFL promotes the advancement of Icelandic fishing and fish
processing through a variety of research and development projects.
47. The MRI conducts research and provides advice regarding fishing and sustainable utilization
of living marine resources, and advises the Ministry of Fisheries with respect to the TAC based on an
assessment regarding the stock size of individual species.  This assessment is based on information
obtained through an annual trawler and net "rally" by the MRI, as well as on information provided bythe catch log books of fishing vessels, landing reports and other sources.  Cod and capelin are subject
to a specific catch rule; other species are not, but, according to the authorities, the aim is to establish
such rules for most commercial stocks.
15  The MRI issues its advice on quotas at the end of
May/beginning of June for the fishing year starting on 1 September.  The Ministry of Fisheries
broadly follows the MRI's recommendations, but it may modify them for certain species:  for
example, in fishing year 1998-99, the Ministry fo llowed the MRI's recommended TAC for 14 of 15
species.
(b) The fisheries management system
48. The Icelandic fisheries management system, as it currently stands, resulted from the Fisheries
Management Act of 1990 and its amendment16;  it is based on individual transferable quotas (ITQs).
The present quota system is organized on the basis of a fishing year running from 1 September to
31 August.  Every vessel with a commercial fishing permit has been allocated a permanent "quota
share",  mainly on the basis of its catches of the different species in the 1981-83 period, and without
any payment involved.  This quota share is a percentage of the TAC for each of all 15 regulated
species, which amount to 95% of the total catch value (Table IV.9).  The quota share is unchanged
from one fishing year to the next unless the vessel owners have given notification of changes due to a
combination of quota shares or their transfer (see below).  If a new species is included in the ITQsystem, the quota share assigned to each vessel is based on its catch performance of that species
during the previous three fishing seasons.
49. The catch quota of each vessel is a simple multiple of its quota share and the TAC.  Vessels
fishing inside the Icelandic exclusive fishing zone must hold a commercial fishing permit and a catch
quota, allocated or transferred from another vessel, in order to fish regulated species.  Although quotashares remain unchanged unless transferred from another vessel and merged to the existing quota
share, the allocated catch quota of each vessel changes from one year to the next, depending on the
TAC for the species in question.  Up to 20% of an unused catch quota may be carried over to the
following year;  overfishing is allowed up to 5%, other than for cod, provided that an equivalent
amount of catch quota for other species remains unused.
50. Fishing by vessels under six gross registered tonnes that limit their operations to hook and
line fishing for demersal species is exempted from the ITQs system;  since 1996, vessel owners can
choose between a cod share quota system (share of a global TAC) and a cod effort reduction system
(maximum number of fishing days).  Of the 807 vessels in this group operating in 1998, 480 opted for
cod shares quotas.  Small vessels receive, as a group, 13.75% of the global TAC.
                                                     
15 The annual TAC for cod is determined at 25% of the mean fishing stock size for the last three fishing
years.
16 The Act has been amended seven times, in 1992, 1994, 1995, 1996, 1997, 1998 and 1999
(Runolfsson, 1999).WT/TPR/S/65 Trade Policy Review
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Table IV.9
Allowable catches (TAC)a1996-99 and recommended TAC for 1999-2000
('000 tonnes of cod-equivalent units)
1996/1997 1997/1998 1998/1999 1999/2000b
Cod 186 218 250 247
Haddock 40 40 35 35
Saithe 50 30 30 25
Redfish 65 65 60. 60
Greenland halibut 15 10 10 10
Plaice 10 9 7 3
Catfish 13 13 13 13
Witch 1.2 1.1 1.1 1.1
Dab 7.0 7 7 7
Rough dab 5.0 5 5 5
Capelin 1,600 1,265 1,200 856
H e r r i n g 1 1 3 1 1 79 01 0 0
Shrimp 65 76.9 44.9 23.3
Lobster 1.5 1.5 1.2 1.2
Scallops 9.3 9.3 9.8 9.8
a Fishing year 1 September to 31 August.
b Recommended by the MRI.
Source : Ministry of Fisheries and MRI .
51. Both catch quotas and quota shares are transferable.  The quota share of a vessel (permanent
quota)  can be transferred wholly or in part between licensed fishing vessels registered in Iceland;  it
may also be merged with the quota share of other vessels.  In 1998, a ceiling on the quota shares
individual enterprises may hold for the eight main species was established:  10% for cod and haddock
and  20% for the other seven species.  No fishing enterprise may control more than the equivalent of8-12% of the combined value of all harvest rights.  The transfer of quota shares must be reported to
the Directorate of Fisheries and is not valid until the transfer of harvest rights has been confirmed.
52. Catch quotas may be transferred for a single fishing year (rental quota) without the need to
resort to a share transfer:  up  to 50% of a catch quota may be transferred between vessels under
different ownership.  Up to 20% of unused catch quotas may be moved from one fishing year toanother.  Trading in catch quotas (except quota swaps) takes place in the Fishing Quota Exchange,
created in 1998, and regulated by the Act on a Quota Exchange of 1 September 1998.  The purchase
or sale of catch quotas requires registration of a bid or offer;  trading in each individual species takes
place at the same price for a single day.  According to the authorities, prices in the market of transfer
rights is determined by supply and demand.  However, quotas have been trading at high prices relativeto the price of cod, fluctuating between ISK 70 and ISK 110 per kg., approximately.  Quota prices
exceeded the price of cod in 1995 and 1996, which would seem to indicate the presence of decreasing
average costs and constant marginal costs, resu lting from overcapacity in the fishing companies
buying quotas. The price difference also seems to indicate  the existence of profits in these industries,
part of which were being absorbed by the premium paid for the quota.  Since 1997, cod prices havebeen some 20% above quota prices, signalling a reduction in overcapacity and a return to a normal
situation of increasing marginal costs.
53. The transfer of catch (rental or annual) quotas between vessels expanded considerably
between 1992 and 1995; declined subsequently and levelled off in fishing year 1997-98, when it
reached some ISK 10 billion (US$139 billion).  The 1998 limit set on inter-owner quota transfer isIceland WT/TPR/S/65
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expected to discourage somewhat exchange activitie s, especially considering that more than 50% of
catch quotas have been transferred between vessels in the 1992-1998 period (Table IV.10). The
ceilings set on quota shares aim at stopping the concentration of quota shares which has taken place in
the last few years:  in 1998, the ten largest harvesting firms held 37.6% of all quota holdings in
demersal fisheries, up from 25.9% in 1992.  However, no single firm reached the legal limit of 8-12%
for the combined value of harvesting rights:  the largest two firms each hold some 5.5% of harvestingrights.
Table IV.10
Transfers of catch quotas between vessels, 1992-1998
(Percentage of total quota)
Transfer type/ Fishing year 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98
Between vessels with the same owner 33.0 26.3 41.3 32.5 31.3 38.6
Between vessels from different owners 54.5 62.4 46.7 60.4 58.6 52.4
Offsetting transfers of different species between vessels
with different owners12.6 11.3 12.0 7.2 10.1 9.0
Source: Ministry of Fisheries.
54. Commercial fishing permits are granted by the Directorate of Fisheries;  the permits are
bound to vessels.  Until late 1998, new fishing permits could be issued only to replace a vessel or
vessels ceasing operations.  Replacement was based on fishing capacity and not on the number of
vessels replaced.  Regulations were issued each year, from 1991 to define "comparable" capacity.
Between 1997 and end 1998, a new vessel could be up to 60% larger than the vessel it replaced,provided the vessel replaced had been subject to the ITQ system for at least seven years.  In December
1998, the Supreme Court ruled against this replacement requirement, finding it discriminatory and
considering that it violated the constitutional right to equal employment opportunities.  As a result, the
Government decided to abolish the de facto prohibition on new fishing licences and as of
1 September 1999 any registered fishing vessel can be licensed;  for species subject to the ITQ systemoperators need to obtain a quota share.  The existence of the quota system and the allocation of
permanent quotas as opposed to an auction system has also been challenged in court;  in late 1999 a
verdict was still awaited.
55. There are a number of regulations with respect to permitted fishing gear.  Fishing with trawls
is prohibited in large areas near the coast;  extensive provision is made for temporary closures offishing areas to protect spawning fish from all fishing.  The MRI has the authority to close fishing
areas temporarily, without prior notice, if the proportion of small fish in the catch exceeds certain
limits.  In 1996 a bill was adopted outlawing practices such as discarding fish, avoiding weighing-in
of catch or fishing in excess of quotas.  Punishment for infringements has become more severe,
particularly  in the case of repeated violations.
56. Enforcement of catch quotas by the Directorate of Fisheries takes place through controls at
each landing site.  Additionally, the catch status of each vessel is constantly controlled with the helpof the computer system "Lóðs", which provides information to the Directorate of Fisheries about all
landed catch, broken down by species and fishing gear, for a given fishing trip.  Information on
harvest rights, transfers, and the catch of individual vessels is publicly available on the Internet,
through the Directorate of Fisheries.
17   Any catch in excess of quotas (including the 5% overfishing
allowance) is confiscated, and the vessel operator must pay a fine equivalent to the value of the catchin excess of the quota.  Recurrent fishing in excess of the catch-quota status of each vessel can result
in a long-term withdrawal of the commercial fishing permit.
                                                     
17 Internet address:  http://brunnur.stjr.is/.WT/TPR/S/65 Trade Policy Review
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57. The fisheries management system has proved successful in helping to increase and
subsequently stabilize the stock of cod, herring, capelin, and other species.  By doing this, the system
has managed to reduce export income fluctuation, providing some relief against the external shocks
that occurred in the past when there was a sudden fall in the catch of some major species.  The system
has been less successful, however, in increasing the stock of Greenland halibut, saithe, plaice and
witch.  An important achievement of the management system has been to halt, and to a certain extent,reverse, the overcapitalization of the fishing industry
18:  there has been a significant decrease in the
number of vessels with commercial fishing permits, from 2,560 in January 1991, to 1,688 in May
1999 (of which 798 over six gross registered tonnes and hence subject to the TAC), as well as an
increase in the average size of vessels.
58. According to the authorities, the quota system has also contributed to increased profits in
recent years, by increasing capital gains from the sale of fixed capital, particularly vessels and quotas.
In 1997, pre-tax profits of fishing activities amounted to around 10% of revenue, of which
11 percentage points were due to capital gains, partly from quota transactions, which offset losses
from regular fishing operations equivalent to 1% of revenue.  This would seem to indicate that the
economic value of quota shares has been at least partly incorporated in the accounting value of the
fishing firms, which received them free of cost. Total factor productivity has increased slightly since
the management system was introduced in 1991, with reductions both in capacity and employment
outweighing the TAC's restrictive effects on the catch.
59. Although there seems to be general satisfaction in Iceland with the overall fishing
management system, the allocation of fishing quotas has been the subject of an internal debate.
Opponents to the system claim that granting quota holders free access to a public good is equivalent to
a capital transfer and creates a rent, from which only a few benefit.19   Moreover, the size of the
transfer appears to be large, some 8% of GDP if the catch volume of cod and other species is
multiplied by the quota price.  Another point made is that the rent generated by the quota leads to an
allocation of resources that is not optimal, since it allows enterprises that are not efficient to operate,
as witnessed by the reported operation losses of fishing companies and the large gains from quota
transactions.  Arguments in favour of the system include that the distribution of quotas has no effecton other fish exporting countries, and that it has not made anybody in Iceland worse off, while the
economy as a whole has benefited from it.
(c) Support to fisheries
60. No subsidies or other direct support measures are granted in Iceland to the fishing industry.
Iceland has submitted to the WTO a proposal for the elimination of all subsidies granted to fisheries(Chapter II).
61. Until 1997, the Fisheries Development Fund, created in 1994, provided grants for the
retirement of fishing vessels.  To receive a grant, a vessel had to be de-registered and its commercial
fishing licence withdrawn.  The amount of the grant was equivalent to 45% of the insurance value of
the vessel in 1994 and 1995, and to 20% thereafter, with a maximum of US$1.3 million per vessel.Between 1994 and 1997, 459 vessels were decommissioned under the Fund, most of them of a size
under 10 gross registered tonnes, receiving grants for US$40 million.  Fishing capacity equivalent to
some 7,800 gross registered tonnes was withdrawn.  The Fisheries Development Fund also provided
grants for the retirement of some 20 processing plants, which received some US$6 million.
20   Since
                                                     
18 Runolfsson (1999a and 1999b).
19 As reported in "Daily News from Iceland", [Online]. Available at:
http://www.icenews.is//daily1.html [4 December 1998].
20 Ronulfsson (1999a).Iceland WT/TPR/S/65
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1997, the role of the Fund has been limited to managing its own debt and to paying for a new research
ship for the Marine Research Institute.  The Fund is financed by fees collected on all fishing vessels,
based on their size, as well as on vessel quotas.
(d) International fishing arrangements
62. Icelandic waters were internationally open until 1976, when an exclusive fishing zone of
200 nautical miles was established and foreign fishing within the Icelandic zone largely came to anend.  However, as result of a number of fishing arrangements, Faeroese and Norwegian vessels have
the right to fish a certain amount of capelin and herring, and Russian vessels may catch a limited
amount of herring each year in Icelandic waters.  According to a bilateral agreement between Iceland
and the EU, vessels from the EU may catch up to 3,000 tonnes of redfish in Icelandic waters while
Icelandic vessels are allowed to catch up to 30,000 tonnes of capelin from EU quotas.  Despite thesearrangements, foreign fishing in Icelandic waters is currently negligible, accounting for well below
1% of total fishing of most species.
63. Iceland holds periodic talks and negotiations with other countries fishing in the North
Atlantic.  In this respect, Iceland concluded a new capelin agreement with Greenland and Norway in
May 1998, by which the Icelandic fishing quota in the area between Iceland, Greenland and Jan
Mayen Island (Norway) was increased from 78% to 81% of Iceland's TAC for that species.  A new
international agreement regarding cod catches in the Barents Sea was subscribed with Norway and
Russia in March 1999.  In exchange for a quota allowance of 4,450 tonnes of cod in the fishing
economic zone of Norway, Iceland granted Norway the right to fish 500 tonnes of blue ling, ling, and
tusk in Icelandic waters.  In exchange for a similar right in Russian waters, Iceland accepted that
Russian fishermen catch up to 37.5% of the Icelandic quota (some 1,669 tonnes) for subsequent sale,
at market prices, to Icelandic processors.  A quota arrangement for the fishing of North AtlanticScandia herring in the Norwegian Sea was negotiated with Norway, the Faeroe Islands, and the
European Union.
64. Iceland is a member of the North West Atlantic Fisheries Organization (NAFO) and the North
East Atlantic Fisheries Commission (NEAFC)
21, which aim at promoting the conservation and
optimal management of the fishery resources of the North West and North East Atlantic areas,respectively.  Species regulated by the NEAFC include Oceanic redfish and Atlantic-Scandian
herring, both of significant importance for Iceland.  In 1999 the total allowable catch (TAC) for these
species was 153,000 tonnes for Oceanic redfish, and 1,302,000 tonnes for Atlantic-Scandian herring,
of which 45,000 tonnes and 202,000 tonnes, respectively, were allocated to Iceland.  Of the species
regulated by NAFO, shrimp is the most important.  According to the authorities, Iceland has objectedto the effort system of fishing days managed by NAF O, and has instead put in place a unilateral catch
quota of 9,300 tonnes of shrimp.
(4) E
NERGY
65. Iceland's energy sector accounts for some 4.2% of GDP.  More than 99.9% of all electricity
generated in Iceland stems from hydro and geotherm al energy.  Imported oil is almost exclusively
used when there is a breakdown in the transmission or distribution systems.  Despite having one of the
highest levels of per capita consumption of electricity in the world (20,490 kWh per capita in 1997),
power generation, at 6,276 GWh in 1998, is well below potential;  power potential from hydro and
geothermal sources is estimated to be at 50,000 GWh per annum.
                                                     
21 The contracting parties are, apart from Iceland,  Denmark (on behalf of the Faeroe Islands and
Greenland), the European Union, Norway, Poland, and Russia.WT/TPR/S/65 Trade Policy Review
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66. Only Icelandic and EEA residents are entitled to own energy exploitation rights as regards
waterfalls and geothermal areas, and  to produce, transmit or distribute such energy.  The National
Power Company, Landsvirkjun, owns and operates all the largest hydroelectric power plants as well
as all interregional power lines.  It generates over 90% of the electricity used in Iceland.  Landsvirkjun
is a public company, 50% owned by the State, 45% by the City of Reykjavik and 5% by the Township
of Akureyri.
67. In late 1997, the Government reiterated its decision to reorganize the energy sector,
particularly electricity supply, to increase efficiency and lower prices.  In the spring of 1999, the
Ministry of Industry and Commerce released a draft energy bill for comment by stakeholders, namely
municipalities, utilities, industry, the National Energy Authority, the Nature Conservation Agency,
and the Competition Authority.  The draft bill proposes the introduction in stages of competition inthe generation and sale of electricity:  as of 2003, competition would be allowed in the provision of
large electricity consumers (over 50 GW);  competition in the provision of small users would be
implemented in 2008.  The bill also seeks to promote transparency and facilitate competition by
requiring that the use of transmission grids be based on published tariffs.  To avoid discrimination and
cross-subsidization, the draft bill proposes that electricity undertakings be required to keep separateaccounts for generation, transmission, distribution, and sales activities.  The authorities expected the
draft bill to be presented to the AlÞingi in the spring of 2000.
68. In late 1999, Iceland was in talks with the European Union to settle the issue of
implementation of a 1997 EU directive mandating competition in the provision of electricity, by the
end of 2001 in the case of Iceland.  The Icelandic authorities expected that new energy legislation
would have entered into force by then.
69. Some district heating companies owned by loca l governments also engage in the supply of
electricity.  Although the 1999 energy bill would allow these companies to maintain their monopoly
position in the provision of hot water for heating, they would be required to keep separate accounts
for their different activities.  This requirement is aimed at preventing the cross-subsidization of
electricity plants through the use of monopoly rents generated in local hot water markets.
70. Hot water from geothermal sources provides most space heating (86% of such requirements).
The bulk of geothermal water is used directly, without the need for heat exchange.  Hot water from
geothermal sources and natural steam is also used in swimming pools, in aquaculture, for cultivation
in greenhouses (particularly of vegetables), and for the drying of seaweed, diatomite, and salt.  Oil
imports (fuels and lubricants) reached US$128.3 million in 1998, accounting for only slightly over
5% of the total value of merchandise imports, compared to 19.3% in 1979.  Imported oil is usedmainly in transportation, for fishing and commercial fleets, and the industrial production of fish meal
and fish oil.  Crude and refined petroleum products are imported mostly duty free:  the average MFN
tariff rate for HS chapter 27 is 0.1%.
(5) M
ANUFACTURING
71. Manufacturing activities in Iceland are mainly concentrated in power-intensive industries
based on Iceland's natural endowment of energy-generating sources.  Manufacturing (other than fish
processing) contributed 12% of GDP and employed 11.3% of the labour force in 1997;  it expanded at
an average annual rate of around 2% between 1990 and 1997, lower than the economy as a whole but
higher than traditional sectors, such as agriculture.  The main manufacturing sectors include cement,
aluminium, diatomite, non-automotive transport equipment, and ferro-silicon.Iceland WT/TPR/S/65
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72. The manufacturing sector is export-oriented, given the small size of the domestic market.
Exports of manufactured products were some 25% of total merchandise exports in 1997, with
aluminium accounting for 11.6% of the total (some US$214 million), followed by non-automotive
transport equipment, particularly vessels (U S$75 million), and some non-electrical machinery
(US$26.6 million).  Aluminium is the second most  important merchandise export, after fishing
products;  exports expanded by some 40% in volume terms in 1998, and a 25% growth rate isestimated for 1999;  the increase of exports in value terms was smaller, due to lower prices.
73. Imports of manufactured products totalled US$2.2 billion in 1998, representing over three
quarters of total imports.  The largest imports are of machinery and equipment (HS chapters 84, 85
and 87), which represent some 40% of total imports, particularly automotive products
(US$246.9 million), electrical machinery (US$294.5 million), office and telecommunicationsequipment (US$346.5 million), and consumer goods.
22   Some 73.5% of  imports of manufactured
goods enter Iceland duty free.23   The average MFN tariff is 2.5%;  the preferential tariff rate is zero
for all industrial products.  The highest rates are applied on imports of clothing and footwear.24
74. Foreign participation in the aluminium industry is  significant.  The largest industrial plant in
Iceland is the Straumsvik  aluminium smelter owned and operated by the Icelandic Aluminium
Company Ltd (ISAL), a wholly owned subsidiary of Alusuisse Lonza AG of Switzerland.  The plant
has a total capacity of 162,000 tonnes of aluminum pe r year.  Another smelter, Nordic Aluminium at
Grundartangi , owned by the U.S. company Columbia Ventures, completed the first phase of a new
60,000 tonne aluminium smelter in June 1998.
75.  Icelandic Alloys Ltd, ( Járnblendifélagið ,), a joint venture between the Icelandic Government,
Elkem  A/S of Norway, and the Sumitomo  Corporation of Japan, operates a 72,500 tonne ferrosilicon
plant located also at Grundartangi , and is currently in the process of expanding its production
capacity.  The production expansion was decided in conjunction with the partial privatization of the
smelter and is expected to be completed by end 1999.25
76. A diatomite plant operates in northern Iceland using geothermal steam.  The plant is owned
and operated by Kísiliðjan  Ltd, a joint venture between the Government of Iceland and a U.S.
company, Celite  Inc.  The Icelandic Magnesium Corporation is planning to build a 50,000 tonnes/year
magnesium plant in Reykjanes .
77. Other manufacturing operations are mostly medium or small size-enterprises.  The main four
medium-sized manufacturing enterprises are engaged in the production of fertilizers, cement, rock
wool, and seaweed meal.  The first two produce main ly for the domestic market;  the latter two also
export.  Small manufacturing enterprises engage in the production of fishing gear;  food products;beer;  liquor;  soft drinks;  packaging for exports;  building components;  soap and related chemical
and pharmaceutical products;  plastics;  ceramics;  paints and furniture,  machinery and equipment;
and electronic appliances for fishing and fish processing.  High-technology industries have expanded
at a fast pace in the past few years.
                                                     
22 Imports of goods classified under HS chapter 84 are subject to an average MFN tariff rate of 0.6%;
goods under HS chapter 85 face an average tariff of 3.8%, while imports under HS chapter 87 are subject to anaverage tariff rate of 1.3%.  Preferential rates are zero.  Imports under these three chapters represent some 40%of total imports.
23 Imports under HS chapters 25, 26, 28, 29, 31, 47, 50, 51, 52, 53, 54, 55, 60, 81, 86, 88, 90 and 92 are
entirely duty free.
24 Imports under HS chapter 61, 62 and 64 are subject to average tariff rates of 14.2%, 14.4%, and
13.9%, respectively.
25 Central Bank of Iceland (1999b), p. 19.WT/TPR/S/65 Trade Policy Review
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(6) SERVICES
(i) Features
78. The services sector is the largest in the Icelandic economy, accounting for around two thirds
of GDP.  Services  have expanded rapidly in the 1990s, mainly financial services, tourism, software
production, and biotechnology.  Growth of trade in services has also proceeded very rapidly in the last
decade.  Revenues from the export of non-factor services, which accounted for roughly 31% ofIceland's total export earnings in 1998, increased at over 10% per year between 1996 and 1998,
mainly due to a substantial increase in tourism.  Imports of services have been growing at an even
faster pace than exports:  while exports rose by 13.5% in 1998, imports increased by 21.5%.
26  The
non-factor service balance recorded a deficit of ISK 500 million in 1998.  Estimates for 1999 point to
a 6.5% increase in service expenditures, and a 5% increase in revenue, resulting in a deficit on theservice balance of more than ISK 1 billion.
27
79. Under the General Agreement on Trade and Services (GATS), Iceland undertook
sector-specific commitments in business services, telecommunications services, construction and
related engineering services, distribution services, financial services, tourism and travel related
services, as well as on environmental, recreational, cultural and sporting, and transport services(Table AIV.2).  Iceland bound market access and national treatment without limitations on
cross-border supply, consumption abroad and commercial presence for a number of service activities,
including: telecommunication services, construction and related engineering services, distribution
services and transport services.  Market access was left unbound with respect to the presence of
natural persons, except for the temporary entry of executives, managers, specialists, and service
sellers.
80. Some limitations on market access and national treatment specified in Iceland's GATS
Schedule are applied to all scheduled sectors.  These cover services provided in Iceland through
commercial presence or presence of natural persons, and are generally in the form of reporting
requirements and investment limitations (Box IV.1).
81. Other limitations to national treatment exist:  nati onal treatment is accorded to subsidiaries of
non-EEA companies formed in accordance with the law of, and established in, an EEA State, but notto branches or agencies.  Eligibility for subsidies may be limited to juridical persons established
within the territory of Iceland. Regarding the presence of natural persons, subsidies available to
natural persons may be limited to Icelandic citizens.  Subsidies related to research and development
are unbound.
82. Iceland's final list of GATS Article II MFN ex emptions cover audio-visual and air transport
services.  Exemptions include also some measures to maintain and develop Nordic cooperation
(Table IV.11).  All these measures are intended by the authorities to have an indefinite duration.
                                                     
26 These are balance-of-payments figures;  they capture only transactions between residents and
non-residents and, thus, are more limited in coverage than the scope of the GATS.
27 National Economic Institute (1999), p. 27.Iceland WT/TPR/S/65
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Box IV.1  Reporting and licensing requirements and investment limitations in Iceland's GATS Schedule
- All foreign investment and currency transfers must be reported to the Central Bank.
- Investment by non-residents in the manufacturing industry other than power-intensive industries, trade
services, communications, and fish farming may not exceed 25% of the total investment of the relevant sector without special permission.
- Total investment by a non-resident or the joint investment of financially related non-residents in 
enterprises in the above-mentioned sectors may not exceed ISK 250 million within a year, unless a 
special concession is granted by the Ministry of Industry and Commerce.
- Foreign investment of a foreign State or companie s/organizations owned by a foreign State requires a 
special concession of the Ministry of Industry and Commerce.
- Non-residents require permission from the Ministry of Justice to engage in any agreement on real 
estate lease for periods exceeding three years and not for use in conducting normal business 
activities.
- Non-residents may only acquire real estate in conjunction with their business activities and can only 
obtain ordinary proprietary rights linked to the real estate (and hence may not take advantage of unusual rights, such as exploitation rights regarding waterfalls, geothermal energy, etc.).
- Contracts concerning ownership and long-term use of real estate by non-residents are not valid until 
endorsed by the Ministry of Justice in writing.
- Non-residents and Icelandic providers of video rental services need a trade licence.- All provision of services by non-resident natural persons, self-employed or taking part in a business 
enterprise with unlimited liability, needs a concession by the Ministry of Industry and Commerce.
EEA citizens and enterprises are exempt from all the residency and licensing requirements, except for 
the provisions regarding video rental services.
Source : Information provided by the Icelandic authorities.
(ii) Banking, finance and insurance
(a) Features, supervision and regulation
83. The financial system is comprised of the Central Bank of Iceland, commercial and savings
banks, investment credit funds, securities houses, mutual funds and the Iceland Stock Exchange,which lists both securities and equities.  The present structure is a result of significant liberalization
and reforms, of a process of mergers in the banking sector in the beginning of the 1990s, the
deregulation of interest rates, and the establishment of securities companies and mutual funds.  The
Central Bank of Iceland was until the end of 1998, responsible for the supervision of financial
institutions; as well as the Government's borrowi ng agent in international capital markets.  The
Ministry of Commerce is responsible for issuing banking licences to operate in Iceland.
28   Financial
supervision is currently the task of the Financial Supervisory Authority (FSA), created on
1 January 1999 by merging the Bank Inspectorate of the Central Bank, which supervised the
operations of all financial institutions with the ex ception of insurance companies, with the Insurance
Supervisory Authority.
                                                     
28 Act No. 113/1996 on Commercial Banks and Savings Banks.WT/TPR/S/65 Trade Policy Review
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Table IV.11
Summary of Article II (MFN) exemptions listed by Iceland
All measures are intended to have an indefinite duration.
I.  All sectors
With the objective of maintaining and developing Nordic cooperation, Iceland maintains measures such as: guarantees and loans t o
investment projects and exports (The Nordic Investment Bank); financial support to R&D projects (The Nordic Industrial Fund); f unding
of feasibility studies for international projects (The Nordic Fund for Projects Exports); financial assistance to companies (Ea st European
companies, which are co-operating with a Nordic company) utilizing environmental technology (The Nordic Environment Finance
Corporation).  Countries to which the measure applies are Denmark, Finland, Iceland, Norway and Sweden.
II.  Sector-specific commitments
COMMUNICATION SERVICES
Audio-visual services
Transmission of audio-visual programmesIceland maintains measures in conformity with EC Television Directive No. 89/55 which define
programmes of European origin.  National treatment is limited to audio-visual programmes meeting specific
origin criteria: parties to the Council of Europe Convention on Transfrontier Television and other European
countries with whom an Agreement is concluded.
Production and distributionof cinematographic works
and television programmesIceland maintains measures in conformity with the  MEDIA and EURIMAGES support programmes to
audio-visual productions and suppliers meeting specific European origin criteria.
To maintain and develop Nordic Cooperation, Iceland maintains support programmes for the production
and distribution of cinematographic works and television programmes (The Nordic Film and TV Fund).
This measure applies to Denmark, Finland, Norway and Sweden.
To promote cultural links between the countries concerned, Iceland maintains measures based upongovernment-to-government framework agreements and pl urilateral agreements on co-production of audio-
visual works. National treatment is granted to audio-visual works covered by these agreements, in particular
in relation to distribution and access to funding.  The measure applies to all countries with whom cultural
cooperation may be found to be desirable.
TRANSPORT SERVICES
Air transport services
CRS and sales andmarketing of air transport
servicesIceland maintains reciprocity provisions with respect to the treatment of CRS system vendors or parent and
participating air carriers.  This applies to all countries where a CRS system vendor or a parent air carrier is
located.
Source : WTO document GATS/EL/41, 15 April 1994.
84. The Icelandic financial system's legal framework is based on European Union (EU)
directives;  since Iceland joined the EEA the implementation of EU directives has been an ongoing
process.  Iceland undertook a number of important steps to meet these requirements including the
adoption of a new Foreign Exchange Act, which entered into force in November 1992, implementing
a policy of a phased elimination of foreign exchange restrictions by the beginning of 1995, and the
amendment of legislation on commercial and savings banks, other credit institutions, securitiestransactions, and mutual funds.  Current rules on capital adequacy ratios for credit institutions and
securities firms are based on the Basle guidelines, which became effective in 1993,  and on the EU
capital adequacy directive, which envisages a minimum capital adequacy ratio of 8%.  Bank
supervision has also been strengthened with the creation of a Financial Supervisory Authority, which
encompasses both the banking and securities market and the insurance market.
85. The Financial Supervisory Authority (FSA) was created by Act No. 87/1998 from the merger
of the Bank Inspectorate of the Central Bank with the Insurance Supervisory Authority.  The FSA,
which started operating on 1 January 1999, is a fully autonomous institution;  it has a Board of
Directors with three members appointed by the Minister of Commerce, one of the them on
recommendation from the Central Bank.  The FSA supervises commercial banks, savings banks andother credit institutions, insurance companies, companies and individuals acting as insurance brokers,
undertakings engaged in securities services, mutual and pension funds, management companies, stock
exchanges and other regulated markets, and central securities depositories.  Supervision is statutory
and supervised institutions must provide the FSA with all the required information.  The operations ofIceland WT/TPR/S/65
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the FSA are financed by a quarterly fee paid by the institutions under supervision.  The FSA is
entitled to impose penalties in cases of violation of laws and regulations.  It may also recommend
corrective action to redress a practice, but has no formal authority to prescribe provisions.  Banks
must report to the FSA every six months with respect to the quality of their assets;  banks with total
assets of less than ISK 2 billion may report annually.  Banks must also report periodically on a
number of indicators (capital adequacy ratio, return on equity, non-performing loans);  periodicityvaries between one month and a year, according to the indicator.
86. Under the Fifth Protocol to the GATS, Iceland undertook horizontal commitments on
financial services in accordance with the Unders tanding on Commitments in Financial Service; and
bound market-access with respect to cross-border supply and consumption abroad.
87. Trade in financial services remains limited and concentrated on insurance.  Exports totalled
US$6 million in 1998 and imports were US$15 million.
(b) Banking and finance
88. Iceland's banking and finance system comprises the Central Bank, four commercial banks, 26
savings banks, three investment banks, five investment funds, six securities houses, two securities
brokerages, three housing funds, eleven mutual f unds, 65 pension funds, three leasing companies, and
the Stock Exchange (Table IV.12).  Mutual, housing and pension funds have been particularly active
in the late 1990s.  The capitalization of the Stock Exchange has increased substantially over the same
period as a result of the privatization of a number of financial and non-financial enterprises, and also
due to the increasing role of mutual, housing and pension funds as providers of capital.
89. Under the GATS Fifth Protocol, Iceland agreed to bind market access and national treatment
for consumption abroad of banking and other financial services.  Market access for the cross-border
supply of banking and other financial services was bound with no limitations.  Market access throughcommercial presence is subject to a number of limitations, most of which also apply to domestic
institutions:  credit institutions and undertakings engaged in securities services must be limited
liability companies; only commercial and saving banks are authorized to accept deposits and other
repayable funds from the public;  the public issue of securities must be conducted by securities
undertakings or other authorized parties.  Credit institutions and undertakings engaged in securitiesservices established in a non-EEA State must operate through an established branch or representative
office, prior authorization by the Ministry of Commerce is required.  With respect to presence of
natural persons, market access was left unbound except as provided in the horizontal commitments.
90. Limitations to national treatment under the commercial presence mode are basically
nationality or residency requirements, such as the requirement that the founder, managers, and boardmembers of credit institutions and undertakings engaged in securities services, must reside in Iceland,
except if they are citizens and legal persons of other EEA Member States.  Exemptions to residency
requirements for non-EEA citizens or legal persons may be granted by the Minister of Commerce.
Additionally, service providers are under the obligation to inform the Ministry of Commerce of
investments made by non-residents in business enterpri ses in Iceland, and the Central Bank of Iceland
as regards investment in securities in Iceland.
Banks
91. Of the four commercial banks, two, the National Bank of Iceland ( Landsbanki Íslands ) and
the Agricultural Bank of Iceland ( Búnaðarbanki Íslands ) are state-owned corporations;  one, the Bank
of Iceland ( Íslandsbanki ) is a private limited liability company, and one, Icebank, is owned by the
savings banks.  Three of these four commercial banks perform all the traditional banking operations,WT/TPR/S/65 Trade Policy Review
Page 88
including the acceptance of deposits, granting of credit, dealings in foreign currencies, and
maintenance of accounts with correspondent banks abroad.  They account for some 75% of assets.
The two state-owned banks were transformed into limited liability enterprises in early 1998; initially
they continued to be wholely state-owned, but the Minister of Commerce was granted the
authorization to sell new equity for up to 35% of the equity position held when they were converted
into limited liability companies.  Public offerings of 15% of new equity in Landsbanki Íslands  and in
the Búnaðarbanki were launched in September and December 1998, respectively.
Table IV.12
Financial Sector Indicators
1995 1996 1997 1998
Number of banks 33 33 31 30
Number of investment banks 1 1 2 3
Number of investment funds 9 9 9 5
Total assets of banks, investment banks and investment
funds as a percentage of GDP75.1 78.6 86.0 97.4
Total loans of banks as a % of GDP 45.9 47.1 48.0 53.7
Real estate loans (as a % of total loans) 8.2 8.3 7.9 7.5
Loans to fisheries(as a % of total loans) 20.4 22.8 23.9 22.4
Loans to households (as a % of total loans) 22.9 22.9 24.1 25.3
Non-performing loans (as a % of total loans) 5.89 5.37 4.64 4.05
Average lending spread 6.9 6.4 6.1 5.8
Capital adequacy ratio banks 11.1 10.7 9.9 9.8
Capital adequacy ratio investment banks 14.5 14.1 16.3 14.9
Source : Financial Supervisory Authority.
92. The Icebank is the banking institution owned by the 26 private savings banks, which perform
most traditional banking operations at a local level.  The Icebank is generally responsible fororganizing larger loans than would have been possible by an individual savings bank;  it also handles
foreign exchange transactions, acts as a clearing bank, and fulfils the reserve requirements of the
Central Bank on behalf of the savings banks.  Savings banks control around a quarter of Iceland's
banking market. In addition to commercial and savings banks,  the savings departments of
co-operatives, and the Post Giro within the Post Office operate as deposit receiving institutions.
93. A number of international banks operate in Iceland, but none of these banks provides services
locally;  instead, they act as contact points for services provided from London or each bank's
headquarters.
94. The investment banks, funds and leasing companies operate in Iceland in accordance with Act
No. 123/1993 on Credit Institutions other than Commerci al Banks.  Of these, the Icelandic Investment
Bank Ltd (FBA or, Fjárfestingabanki atvinnulífsins)  was created by a merger of four investment
credit funds: the Fisheries Investment Fund, the Industrial Loan Fund, the Industrial Development
Fund, and the Export Credit Fund, and began operating on 1 January 1998 with a capital base of ISK
8 billion (US$113 million), making it the largest Icelandic financial institution.  The FBA is not
permitted to take deposits from the public.  Initially fully owned by the Government, the FBA was
privatized in two stages between 1998 and end 1999, th e largest privatization in Iceland to date;  the
bank's market capitalization is currently ISK 20 billion (some US$ 278 million).  As a result oflegislation approved by Parliament in June 1 998, a new State Housing Fund began operations at the
beginning of 1999.  The three operating leasing companies are also currently engaged in granting
loans.Iceland WT/TPR/S/65
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95. Banking licences are granted by the Ministry of Commerce. The minimum capital required is
ISK 400 million (US$5.5 million) for a commercial  bank, and ISK 80 million (US$1.1 million) for
savings banks.  The statutory (risk-weighted) capital adequacy ratio is 8%;  the Central Bank imposes
liquidity requirements.  Since 1995, no new licences have been granted to commercial and savings
banks;  five savings banks ceased operations due to mergers.  In accordance with Central Bank rules,
commercial and savings banks are limited in their foreign exchange exposure to 30% of equity;  thelimit is 15% for any single currency except the U.S. dollar, for which the limit is 20%.  The same is
true for indexed assets and liabilities.  Banks may not lend more than 25% of capital to a single
borrower.  This requirement has been waived for the 1999-2001 period:  banks may lend up to 40% of
their own funds in 1999;  35% in 2000,  and 30% in 2001.
96. There are two deposit insurance schemes in force:  the Deposit Guarantee Fund of the
Commercial Banks, and the Deposit Guarantee Fund of Savings Banks.  The Deposit Guarantee Fund
of the Commercial Banks is an independent public -sector entity, administered by a Board appointed
by the Minister of Commerce.  The Deposit Guarantee Fund of Savings Banks is a private institution,
of which all savings banks are members, administered by a Board appointed partly by the Minister of
Commerce and partly by the savings banks.  Commercial and savings banks are require to contribute0.15% of their deposits annually to these funds until the funds reach 1% of total deposits, the
minimum size required by the banking legislation.  All deposits are covered except those owned by
banks or other credit institutions and their subsidiaries, and those connected to money laundering.
There is no limit to the amount covered, except if the assets of the Deposit Guarantee Fund prove
insufficient to cover all the claims, in which case all claims up to ISK 1.7 million are paid in full, but
claims exceeding that amount are paid as the resources of the Fund allow.
97. The Central Bank is not obliged by law to act as a lender of last resort; however, it does
engage in supplying short-term capital to banks if there is an overdraft in their settlement account,
with Treasury bonds or other securities as collateral, and at a cost based on the daily loan rate plus a
penalty.
98. The process of reform undertaken by the financial sector in the 1990s, including mergers, has
strengthened the position of the banking sector.  In 1998, all commercial and savings banks, exceptone, met the statutory capital adequacy ratio of 8%, with an average of 9.8% for the banking sector.
29
Subordinated loans issued by individual institutions to support their equity position have become anincreasing component of capital adequacy ratios in the past few years.  Net profit before tax for the
commercial and savings banks was 1.04% of the balance sheet in 1998;  it increased by 9.5%
compared with 1997, and fares favourably compared with the low, 0.1%, ratio of the 1990-94 period.The improvement has come about as a result of a sizeable reduction in banks' operating expenses, and
of the decline in provisions for losses from loans, from 2% of the balance sheet in 1990-94, to 0.78%
in 1998.  The return on equity in 1998 was 14.2%, the highest in many years.
The securities market
99. The securities market is primarily governed by Act No. 10/1993 on Open-ended Mutual
Funds;  Act No. 13/1996 on Securities Transactions;  Act No. 131/1997 on Electronic Registration of
Title to Securities;  Act No. 34/1998 on Securities Exchanges and Regulated Securities Markets;  and
Act No. 87/1998 on the Financial Inspectorate.  The development of the securities market is relatively
recent.  The Government started issuing indexed bonds in 1964, but a secondary market for these
bonds did not develop until the 1980s.  Since then, the importance and degree of sophistication has
been increasing, with the share in GDP of market able bonds and money market instruments increasing
                                                     
29 Financial Supervisory Authority of Iceland (1999).WT/TPR/S/65 Trade Policy Review
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from 6% in 1985 to 56% in 1997.  This result has been partly a consequence of the introduction of the
housing bond system in 1989, and of the initiation in 1992 of regular auctions of treasury bills,
treasury notes and government savings bonds.
100. All bills and bonds are sold at regular auctions held by the National Debt Management
Agency and registered on the Iceland Stock Exchange;  prices are market-determined.30   I n
June 1999, the total amount of outstanding treasury bonds, bills, and notes reached someISK 120 billion (US$1.66 billion), of which around two thirds were long-term paper.
101. The Icelandic financial market began using indexation in the 1960s to accommodate high
inflation.  This practice contributed positively to the stabilization process
31, but also resulted in a loss
of effectiveness of monetary policy;  according to the Central Bank, "the two-tier system of indexed
and non-indexed obligations has tended to cause nominal interest rates to change in accordance withinflationary trends rather than as a reflection of changes in credit supply and demand".
32  With
regained price stability, indexation is receding from the short end of the financial market;  currently,
treasury paper with a maturity of less than five years is no longer indexed.  Long-term bonds with an
initial maturity of five years are still fully linked to changes in the CPI, while indexation is prohibited
on deposits under three years.  The Central Bank's aim is to eliminate indexation from newinstruments with a maturity under seven years by 2000.
33
102. A market that has been particularly active in the past few years in Iceland is the housing bond
market.  Housing bonds, which are traded on the Stock Exchange, are issued to finance housing
construction or purchases; they have a 25-year or 40-year maturity, are linked to the evolution of the
CPI, and carry a government guarantee.  Their stock doubled between 1994 and 1998, reaching
ISK 127 billion (US$1.77 billion) at the end of the latter year, exceeding the stock of government
bonds.  There are three government-owned housing funds:  the State Housing Fund, the HousingBond Department, and the Workers Building Fund, each holding around one third of the market.
Other types of bonds are issued by the various investment credit funds, state housing funds, leasing,
and other private companies. Bonds issued by stat e housing funds more than tripled between 1994 and
1998.
103. The Iceland Stock Exchange was established in 1985 and currently operates under Act
No. 34/1998 on Securities Exchanges and Regulated Securities Markets.  Act No. 13/1996 on
Securities Transactions sought to set securities trading in Iceland in conformance with EU Directives.
The 1998 Act required the Icelandic Stock Exchange to be converted into a limited liability company,
and abolished its monopoly on exchange activities.  Currently there are twenty members of the Stock
Exchange, including the Central Bank, all commercial banks and securities houses, and some savingsbanks.  Trading is computerized and done on a continuous basis, using an order-based accept system.
Securities in Iceland are all in physical form and a signature is required for transfers.  Settlement must
take place within 24 hours after the trade and it is not automated.  There is no net settlement of trades
between brokers.  A Central Depository began operations in early 1999.  The performance of the
Stock Exchange is measured through the use of ICEX indices (select stock and all listed indices),based on market capitalization, calculated at the end of each trading day for shares and various
categories of bonds.
                                                     
30 The National Debt Management Agency acts as a security house, selling government bonds and
treasury bills by regular multiple price auctions.
31 Bragí Jónsson (1999).
32 Central Bank of Iceland (1999b), p. 33.
33 Central Bank of Iceland (1999b), p. 33.Iceland WT/TPR/S/65
Page 91
104. A public issue of securities must be approved by the Iceland Stock Exchange and follow
disclosure requirements for offers of securities to the public.  The activity of brokers is subject to a
licensing requirement, the licence being granted by the Minister of Commerce, and is supervised by
the FSA.  Transactions are subject normally to a broker's  commission (listed securities) of between
0.5 and 3%.  No stamp duty is charged. Interest and dividends are in general subject to a 10%
withholding tax, except for nationals of countries with which Iceland has a double taxation agreement.
105. The Stock Exchange lists stocks, government bonds, notes and bills and various private bond
issues, primarily by credit institutions.  Its scope, both with respect to volumes traded and to
companies listed, has increased substantially during the late 1990s, receiving a boost from
privatization and from the activity of mutual funds.  A total of 64 companies and 11 mutual funds
were registered on the Icelandic Stock Exchange in mid 1999, compared to 31 in 1996.  Some350 debt instruments were listed.  The market value of registered companies totalled ISK 287 billion
(US$3.9 billion, or some 45% of GDP) at the end of July 1999, up from ISK 151 billion at end 1997.
In 1992, the largest brokers started operating a non-regulated over-the-counter (OTC) market for
non-listed shares; the shares of some 50 companies are listed on the OTC market, but only a few are
actively traded.  The Stock Exchange allows its members to use its trading system for operations inthe OTC market.
106. Share turnover in the Stock Exchange increased dramatically during most of the 1990s, more
than doubling between 1996 and 1997, before declining slightly in 1998, to ISK 12.7 billion.  OTC
transactions also increased swiftly, to ISK 19.3 billion in 1998.  Share trading rose considerably
during the last few months of 1998 and first half of 1999;  at the end of June, combined on and off
exchange turnover reached ISK 40 billion.  Despite the sharp increase in turnover in recent years,  the
ratio turnover/market capitalization remains very low, at 5.5% in 1998;  however, this ratio isexpected to increase especially considering the decline in the yield of long-term government bonds
and the plans to stop indexing bonds with a maturity of less than seven years.
107. Undertakings engaged in securities services must obtain a licence from the Ministry of
Commerce, either as a securities company or as a securities brokerage.  A securities company may
engage in full service and non-core service activities.  A securities brokerage is only allowed to act asan intermediary for a fee on the purchase and sale of securities, and to provide counsel relating to
securities transactions.  There are 24 licensed brokers currently trading.
Pension and mutual funds
108. The 65 pension funds, currently in operation in Iceland, are independent non-governmental
entities.  They are the single most important source of long-term capital, investing in treasury andother bonds, and extending credit to members.  It is estimate that around 20% of their assets are in
Icelandic and foreign equity and in mutual funds.
34  In recent years pension funds have started to
invest in foreign securities;  these represent currently some 12% of nets assets.
109. Mutual funds were first established in Iceland in 1985;  they are limited liability companies.
At present, there are eleven closed-end mutual funds  in operation;  nine of which are quoted on the
Iceland Stock Exchange.  There are eight open-end mutual funds.  One credit institution, Kaupþing,
also operates mutual funds quoted on the Luxembourg Stock Exchange.
                                                     
34 National Economic Institute (1999), p. 23.WT/TPR/S/65 Trade Policy Review
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(c) Insurance
110. There are currently 15 domestic insurance companies licensed to operate in Iceland;  three are
life-insurance companies. In addition, 146 foreign insurance companies have licences to provide
services in Iceland; only two of these companies have established branches.  About half of the
insurance companies' portfolios consists of marketable securities. Insurance companies are among the
most active participants in the Stock Exchange.
111. The Act of Law on Insurance Activities No. 60/1994, as amended, is the main legislation
governing the insurance sector.  Under the Act, insurance business may be conducted in Iceland by:
(a) limited liability companies which have been granted authorization to operate in Iceland;
(b) non-Icelandic insurance companies with head offices in other EEA States and which have been
granted authorization to operate in their home country;  and (c) non-Icelandic insurance companieswhich have their head offices outside the EEA and have been granted authorization to operate
branches in Iceland.  Authorization to operate life or non-life insurance is restricted to specific classes
or subclasses of insurance activities. Insurance companies based in another EEA country do not need
to be established in Iceland and may provide cross-border services.  Insurance companies from non-
EEA countries may not provide cross-border insurance services; they must be established andregistered in Iceland.  This limitation has been inscribed in Iceland's GATS Schedule (see below).
112. The minimum solvency margin varies acco rding to the type of insurance company:
ECU 800,000 for life insurance companies;  ECU 200,000 to 400,000 for non-life insurance
companies, depending on the authorized activities;  and ECU 1.4 million for companies engaging in
credit insurance, provided annual premiums are a minimum of ECU 2.5 million or 4% of the total
premiums of the company.  Annual fees must be paid to the FSA by insurance companies granted
authorization to operate in Iceland.  These fees amount to up to 0.33% of written premiums for directinsurance business, and 0.04% of written premiums for reinsurance acceptances.
113. Under the Fifth Protocol to the GATS, Iceland agreed to bind market access and national
treatment for consumption abroad of insurance services.  For cross-border transactions, the supply of
direct insurance is reserved for Icelandic insuran ce undertakings or authorized insurance undertakings
from another EEA country.  The supply of insurance broker services is reserved for insurance brokersauthorized by the Ministry of Industry and Commerce or by competent authorities of another EEA
member.  For commercial presence, limitations on market access include requiring an authorization to
establish branch offices in Iceland for insurance undertakings not established in another EEA country.
National treatment limitations require founders of an insurance undertaking to be Icelandic residents
or legal entities registered in Iceland, citizens and residents of another EEA State or legal entitiesregistered in an EEA country.  Branch offices of non-EEA insurance undertakings must be managed
by a resident agent.  Insurance companies' board members or managers as well as brokers must reside
in Iceland or another EEA State.  However, the Minister of Industry and Commerce may waive this
residency requirement for nationals of non-EEA countries.  With respect to the presence of natural
persons, market access was left unbound except as provided in the horizontal commitments, andnational treatment was granted with no limitations.
(iii) Telecommunications and information technology services
114. Iceland's telecommunications traffic increased substantially in the late 1990s,  at pace with the
expansion of Internet connection and the development of the information technology industry (see
below).  The volume of telecommunications traffic in 1999 is estimated at 80 million minutes, up
from 64.5 million in 1996.  The largest telecommunications route is with the United States, whichIceland WT/TPR/S/65
Page 93
represented some 22.1% of total outgoing traffic in 1996, followed by Denmark (17.1%); the
United Kingdom (10.8%);  Sweden (9.6%);  Norway (9.1%);  and Germany (7.6%).
115. The telephone and telegraph system is operated by Iceland Telecom, ( Landssími Íslands)
created on 1 January 1998 from the spin-off of Post and Iceland Telecom (in operation for only a
year) into Iceland Post and Iceland Telecom, both limited liability companies owned by the State.
Iceland Telecom employed 1,175 people in late 1998.35  The state monopoly on telecommunications
was abolished in early 1998.  Three companies held licences for basic telephony in late 1999:  a
private operator, Islandssimi , started providing fixed public telephone services in October 1999.  A
private firm, Tal Ltd, services the digital mobile phone market;  Skíma Ltd. offers international phone
services through the Internet.  Iceland Telecom remains the sole provider of fixed public telephone
services and the only provider of analogue mobile phone services;  the authorities are consideringprivatizing Iceland Telecom before 2002.
116. The Public Broadcasting System, Ríkisútvarp , operates two radio channels and one television
channel.  Íslenska  útvarpsfélagið , a private company, operates two television and two radio channels.
Telecommunications operators are allowed to provid e cable television services, but cable television
companies must obtain a licence from the Post and Telecom Administration to providetelecommunication services.  The authorities indicated that this requirement would be abolished by a
telecommunications act under consideration in late 1999.  Iceland Telecom provides multimedia
services over the broadband, through a television service, Breidvarp, which offers the viewing of
16 foreign television channels since 1 March 1999.  A new privately run television station, Skjár einn,
began broadcasting in October 1999.
117. The main legislation currently regulating the sector is the Post and Telecommunications
Administration Act of 1996, which provides details of the tasks of the Icelandic regulator, and theTelecommunications Act of 1997, which provides an overall framework for the sector and follows EU
regulations.  The Post and Telecommunications Administration of Iceland is the market regulator;
policy-making is under the responsibility of the Ministry of Transport and Communications.
118. The Post and Telecommunications Administration is in charge of issuing licences and
ensuring adherence to their conditions;  it is also in charge of providing type approval, allocatingfrequencies, numbering plans, and monitoring service quality.  The Administration does not
participate in rate determination, which is left to the operator; however, it may intervene in the
determination of interconnection fees, where it can demand information with respect to costs.  In the
case of leased lines, the Administration must ensure that rates reflect costs. Apart from the three
licences granted for basic telephony, some ten other licences have been granted by the Administrationfor different kinds of telecommunications services.  The Post and Telecommunications
Administration also has the mandate to ensure that universal service obligations are met. Decisions by
the Post and Telecommunications Administration may be appealed to an independent body, the
Appeals Committee for Communications and Post.
119. A licence is required for the operation of any kind of telecommunications service;  licences
are subject to a fee, with the exception of international long distance services.  The duration of the
licences is between five and ten years.  The provision of call-back services is not prohibited and does
not require a licence.   There are no restrictions placed on Internet service providers: the main
providers are Internet Iceland Inc. (INTIS), Skima, Tal, and Iceland Telecom.  The use of leased lines
or private networks is not restricted, and third-party resale is allowed.  Connection of leased lines or
private networks to the public telephone network is allowed at one end only.  Optical fibre cables are
                                                     
35 Iceland Telecom (1999).WT/TPR/S/65 Trade Policy Review
Page 94
used for general telephonic traffic, connections for mobile telephones, data links, and television
signals.
120. The number of telephone subscribers to the fixed network was 171,000 in mid 1999, about a
third more than in 1990.  The use of mobile phones has increased substantially in the last few years:
in mid 1999, the number of users reached 125,000, of which 95,000 were subscribers to Iceland
Telecom’s GSM system,  and 30,000 to Tal Ltd., which started operating in May 1998.  There were13,216 subscribers to paging services at the end of 1998.
121. Iceland became a single tariff area in the public switched telephone system on
1 November 1997,  in advance of the mandated date (1 July 1998).  Following this, Iceland Telecom
introduced a single domestic rate (initially ISK 1.99, subsequently lowered to ISK 1.56),  whereby
long-distance call charges dropped significantly, but local call charges increased.  Liberalization ofservices led to a 14% drop in international call rates in 1998 and to a reduction in GSM rates.
Domestic telephone calls are, according to the OE CD, the least expensive in PPP terms in the OECD
area.
36   Telecommunication rate cuts led to a 0.1% reduction of the consumer price index in 1998,
according to calculations by the Statistical Bureau of Iceland.
122. Iceland's commitments in the extended WTO Negotiations on Basic Telecommunications
Services supplement the commitments contained in its initial GATS Schedule.37   The Icelandic
Schedule now covers basic and value-added services, for which Iceland agreed to impose no
limitations on market access or national treatment for cross-border supply, consumption abroad and
commercial presence.  Market access through the presence of natural persons was left unbound except
as indicated in the horizontal commitments.  The Schedule incorporates, under additional
commitments, the telecommunications Reference Pape r negotiated in the context of the extended
negotiations.  Relevant disciplines include a prohibition on competitive cross-subsidization,confidentiality and transparency obligations, non-discriminatrory and cost-oriented interconnection
guarantees, and the requirement to operate an independent regulator.  Interconnection conditions may
vary, however, depending on whether the supplier is  a public telecommunications network or services
supplier, and for operations in different market segments provided on the basis of non-discriminatory
and transparent national licensing.
38
123. Following the Reference Paper, Iceland also committed to publicly available licensing criteria
and transparent procedures for interconnection negotiations and agreements.  Service suppliers
requesting interconnection have recourse to dispute settlement procedures.  Iceland made
transparency commitments regarding the terms and conditions of  individual licences and, upon
request,  the reasons for the denial of a licence.  Iceland committed the independence of its regulator,the Post and Telecommunications Administration, and its separation from any supplier of basic
telecommunications services.
124. Following the sector's liberalization, a number of complaints have been addressed to the
Competition and Fair Trade Authority, mostly against Iceland Telecom.  Some of these cases have
been taken further, to the Competition Council,  including a complaint by Tal Ltd. with respect to
Iceland Telecom's pricing policies;  a case involving Iceland Telecom's free provision of Internet
services, which was considered illegal;  and a complaint by a pay-TV firm regarding access to Iceland
Telecom's broadband network.  The Competition Co uncil also ruled that, at incorporation, Iceland
Telecom's assets were undervalued by some US$150 million, which was deemed to be a subsidy and
hence a breach of EEA Competition laws.  The authorities stated that the Minister of Communications
                                                     
36 OECD (1999).
37 WTO document S/NGBT/W/12/Add.33/Rev.1, 30 April 1996.
38 WTO document GATS/SC/41/Suppl.1, 11 April 1997.Iceland WT/TPR/S/65
Page 95
appointed a Committee to look into the findings of the Competition Council, which concluded that
Iceland Telecom's assets should be revalued.
125. Information technology services are an increasingly important activity for Iceland.  IT
services (comprising software consultancy and wholesale activities) represent 97% of the IT industry
in Iceland, the rest being accounted by manufacturing.  The industry's turnover in 1998 reached ISK
42.9 billion (US$596 million), some three quarters of which generated by wholesale activities.Information technology services generated some 4% of GDP in 1998, and accounted for some 4% of
total private-sector employment. Exports have been increasing exponentially since 1994, reaching
ISK 1.75 billion (US$24.3 million) in 1998, mainly through exports of software.  Some 20 Icelandic
companies and a number of subsidiaries of foreign firms and joint ventures provide information
technology services in Iceland.  There are no restrictions on the provision of Internet services and nolicence is required.  Foreign companies are granted unrestricted market access and national treatment
except with respect to the presence of natural persons.
(iv) Transport
(a) Overview
126. Due to its geographical location, maritime transport plays a major role in Iceland's economy.
Practically all movement of goods to and from Iceland, as well as a considerable part of domestic
movement of goods is by this mode of transportation.  Air transport services are also becoming
increasingly important.  Transport, together with communications, represent some 9.5% of GDP.  The
domestic transportation network consists of roads, air transportation, and coastal shipping.  Car
ownership is widespread:  Iceland had 487 passenger cars per 1,000 inhabitants in 1997.
127. Iceland's GATS Schedule includes commitments in air transport services (see below), road
transport services, services auxiliary to all modes of transport, and other transport services.  Icelandsubmitted a draft conditional offer in the  suspended Negotiations on Maritime Transport Services.
Although no specific commitments were made in maritime transport, MFN and national treatment
were bound for all transport services.
39   Market access and national treatment in cross-border supply
of some transport services remained unbound. A requirement of authorization, and numerical quotas
or exclusive licences apply for commercial presence for road passenger transportation services.
(b) Air transport
128. The commercial aspects of air transport are regulated by the Ministry of Transport and
Communications, which also assigns landing rights.  The Icelandic Civil Aviation Administration
(ICAA) is in charge of monitoring the safety aspects of commercial aviation.  The main legislation
regulating the industry is the Aviation Act of 1998.
129. There are six international airports in Iceland;  three other airports provide scheduled flights.
More than 90% of international traffic goes through Keflavík  airport, near Reykjavík , which is
managed by the Ministry of Foreign Affairs and External Trade.  All main airports are government-
owned and run;  although foreigners may operate airports, they may not own the land on which the
airport operates.
130. A total of 13 airlines, including those providing rental services, were in operation in Iceland
in 1999.  The largest, Icelandair ( Flugleiðir ), is a private company with international routes and direct
flights from Iceland to a number of cities in Europe and the United States.  The second largest,
                                                     
39 WTO document S/NGMTSW/27, 24 June 1996.WT/TPR/S/65 Trade Policy Review
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Air Atlanta, mainly operates as a charter airline on international routes outside Iceland.  There were
336 registered aircraft in Iceland at end 1998, the highest number in ten years, of which 38 were over
10 tonnes.  The domestic market is dominated by two airlines:  Flugfélag Íslands , owned by
Icelandair;  and Íslandsflug , another private company. Both airlines run routes between several towns
and villages around the country.
131. Some 2.3 million passengers passed through Icelandic airports in 1998, of which 1.25 million
were international passengers (1.23 million using Keflavík airport), a two thirds increase since 1990
(Table IV.13).  Total aircraft movements at Icelandic airports with scheduled services reached
214,413 in 1998, up 10% over 1997;  188,141 were domestic movements and 26,002 international
movements.  International cargo and mail movement increased at an average annual rate of 12%
between 1994 and 1998, reaching some 27,108 tonnes in 1998, while domestic cargo and mail hasdeclined steadily, at an annual rate of 13%, over the same period, totalling 2,987 tonnes in 1998.
Table IV.13
Passengers through Icelandic airports
1990 1997 1998 % change 1990-98 Average annual growth rate
1990-1998
Total 1,432,063 1,964,699 2,277,181 59.0 6.0
Keflavík airport 735,064 1,098,191 1,226,395 66.8 6.6
Other airports 696,999 866,508 951,786 36.6 4.0
Source : Statistics Iceland.
132. Air fares were liberalized in 1997.  The civil aviation industry is subject to EEA competition
laws.  The Competition Authority is in charge of checking that pricing policy and other arrangements
do not breach competition law.
133. In its GATS Schedule of commitments, Iceland granted market access and national treatment
with no limitations for consumption abroad and commercial presence in maintenance and repair of
aircraft and parts.  The Icelandic authorities indicated that, in practice, most of these services are
provided by Icelandic companies.
134. For sales and marketing and for computer reservation systems (CRS), market access was
granted with no limitations in cross-border supply, consumption abroad and commercial presence.National treatment for cross-border supply and commercial presence remains unbound for sales and
marketing of air transport through CRS provided by a CRS parent carrier.  The presence of natural
persons was left unbound except as provided in the horizontal commitments.  Iceland's list of MFN
exemptions covers CRS and sales and marketing of air transport services.  The exemptions reserve the
possibility for Iceland to apply the country-reciprocity principle in the case of CRS system vendors orof parent and participating air carriers.
135. Iceland has signed 14 bilateral air transport agreements (Table IV.14).  The scope of these
agreements varies; two (with Germany and the United Kingdom) go beyond air transport and cover
other air services.  Since Iceland's last Review, tw o new agreements have been signed, one with the
United States (an open skies agreement) and one with Russia.Iceland WT/TPR/S/65
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Table IV.14
Iceland's bilateral air transport agreements
Country Type of agreement Effective since
Canada Memorandum of Understanding
Denmark Air Transport Agreement 22 March 1950
Finland Air Transport Agreement 10 March 1960
Germany Air Services Agreement 5 January 1961 (amended in 1992)
Ireland Memorandum of Consultation
Luxemburg Air Transport Agreement 29 September 1953
Netherlands Air Transport Agreement 22 March 1950
Norway Air Transport Agreement 14 July 1951
Russia Air Transport Agreement 19 February 1999
Spain Air Transport Agreement 17 January 1966
Sweden Air Transport Agreement 12 May 1960
Thailand Air Transport Agreement 22 January 1957
United Kingdom Air Services Agreement 14 June 1972
United States Open Skies Agreement 12 October 1995
Source : Icelandic Civil Aviation Administration.
(c) Maritime transport
136. Maritime transport is under the responsibility of the Ministry of Transport and
Communications.  The Icelandic Maritime Administration is responsible for maritime safety and forports, having taken over the responsibilities of the Directorate of Shipping and Ports and the Harbour
Administration (both abolished).
137. Practically all movements of goods and materials to and from Iceland are by maritime
transport:  some 1.6 million tonnes of imports and 0. 9 million tonnes of exports, or some 99% of the
total, are carried by sea. All liner and cabotage operations from Iceland are fully containerized.  Thereare 48 ports, of which 45 are active;  15 of these account for 99% of all cargo.  The rest were built for
fishing vessels, but may receive merchant vessels, on an irregular basis, for exports of fish meal, fish
oil, salted fish, and other fish-based products.
138. Reykjavík and adjacent ports serve as the principal import and export points for the whole
country.  Reykjavík handles more than 85% of load ed containers, or an annual turnover of around
200,000 TEU of loaded containers.  Cabotage activities have been decreasing, with cargo increasingly
transported by road to and from Reykjavík.  Other important ports are Hafnarfjördur, Akureyri,
Grundartangi, Vestmannaeyjar, Fjarðabyggð, Þorláksh öfn and Ísafjörður.  A large share of exports
with higher value added, i.e., frozen, chilled and processed seafood, are trans-shipped to their final
markets through Reykjavík in containerized liner vessels while bulk exports such as fish meal, fishoil, aluminium, and ferrosilicon are exported directly from the producing ports.  Raw materials for
power-intensive industries, such as alumina and ore are imported directly in bulk. Icelandic merchant
shipping employs about 1,100 persons directly and a further 350 persons indirectly.
139. Harbours are the property of the community where they are located.  The Government has
engaged in a policy of setting all harbours on the same competitive level.  In this sense, subsidies aregranted for harbour construction;  they provide, for example, up to 60% of the cost of construction of
piers, the remaining costs being financed through service fees.
140. National treatment is granted to foreign provid ers of maritime transport services, irrespective
of nationality of a vessel's ownership, registry, or crew.  An exception to national treatment applies toWT/TPR/S/65 Trade Policy Review
Page 98
certain ferry operations.  According to the authorities, Icelandic shipping companies do not enjoy
preferential treatment, subsidies, or protection from foreign competition, and no restrictions apply on
foreign ownership of seaborne or land-based face ts of merchant shipping, including all support
services.  The minimum conditions for granting a ship the right to fly the Icelandic flag are contained
in Laws No. 115/1985 and No. 19/1991 on the registration of ships.  Most merchant ships operating in
Iceland are registered abroad;  in 1999, there were only three merchant ships registered in Iceland.
141. It appears that although no nationality restrictions apply, liner trades (some 800,000 tonnes)
are almost entirely controlled by Icelandic shipping companies:  about 46% of liner trade cargoes are
carried in national-flag vessels, 52% are carried in foreign-flag vessels owned or chartered by
Icelandic liner companies, and only 2% are carried by foreign-owned and operated vessels.  Cabotage
services are provided only by domestic companies, but not on a regular basis.40  Bulk imports and
exports, as well as imports of oil, on the other hand, are for the most part carried in foreign-controlled
vessels, with little participation of Icelandic companies.  Despite the lack of foreign-ownership
restrictions, there are currently no foreign-owned operators of container stations or depot services;
maritime agency services;  maritime freight forwarding services;  maritime cargo handling services;
storage and warehousing services;  custom clearance services; and maintenance  and repair of vessels.Shipment of raw materials to power-intensive indu stries in Iceland and of finished products from
these industries is tendered internationally for one- or  two-year contract periods.  The largest Icelandic
shipping companies are Eimskip (The Iceland Stea mship Co. Ltd.), Samskip Ltd., Nesskip,  and Nes.
142. Liner shipping to and from Iceland is not orga nized in a conference;  no Icelandic shipping
company is a member of any shipping conference.  The Establishment of a conference liner trades to
and from Iceland, would need to be notified to the Competition and Fair Trade Authority, which
would determine whether it violated the Competition Act of 1992.  In principle, no antitrust exception
is granted to liner conferences, since Iceland has not ratified the UN Liner Code. No formal
arrangement exists between shippers and carriers to determine rates.
143. Under a cargo sharing agreement between Iceland and the United States, an exception to
MFN treatment is granted to all incoming and outgoing liner cargoes destined for and originating
from the U.S. military forces stationed in Iceland.  Tenders for the transport requirements of U.S.Military Sealift Command (MSC) are open for bids only to Icelandic and U.S. shipping companies.
The lowest bidder receives two thirds of the cargo, and the lowest bidder from the other country is
allocated the remaining third.  Icelandic bidders are not required to employ Icelandic flag vessels.
144. Vessels are subject to a number of duties and fees levied by state authorities without regard to
country of registry.  Dues include inspection duties, port pilotage, stamp duties, quay dues, lighthousedues, and customs clearance dues.  Cargo duties were around US$1.50 per tonne  in 1999, and general
cargo duties were in the US$7-8 range. International cargo ships are exempted from stamp duties.
145. Services offered by the main ports include pilotage services, tug assistance, chandlery
services, fresh water, garbage and waste oil receivals, marine machine shops and repair services;
bunkers may be obtained in all main ports.  These services are provided to foreign and nationallyowned vessels on a non-discriminatory basis.  No ports involved in international traffic are closed or
restricted for entrance of vessels owned or operated by foreign nationals.  Agency services are
provided by all Icelandic merchant shipping companies, and by several independent agencies and
brokers in Reykjavík and other main ports.  An agency fee scale is published regularly.  Stores and
provisions are exempt from VAT.
                                                     
40 WTO document S/NGMTS/W/2/Add.37, 19 December 1995.Iceland WT/TPR/S/65
Page 99
(v) Tourism
146. The tourism sector has been one of the fastest growing industries in recent years.
Employment in the sector increased from 3.2% of the labour force in 1990 to 3.9% in 1998.  Foreign
visitors in 1998 numbered 232,000, compared with 142,000 in 1990.  In 1998, tourism generated
approximately 13% of total foreign exchange revenues.  Private firms play a leading role in the tourist
industry, but the State also participates through the Ministry of Communications, the National Tourist
Board, Ferðamálaráð Íslands, and a special loan fund.  Most hotels operate on a seasonal basis;  all are
open between May and the end of August.  In the peak of the 1998 tourist season 231 hotels provided
5,359 rooms and 10,713 beds.  Of these, 3,089 were in hotels of 60 beds and over.  The number of
overnight stays reached 991,683 in 1997, some 50% higher than in 1990.  Most tourists come from
northern Europe and the United States.
147. Iceland's GATS Schedule  guarantees full market access and national treatment for tourism
and travel related services provided through cross-border supply and consumption abroad.  Regarding
commercial presence, some tourism and travel related services are subject to minimum residency
requirements and deposit requirements.  For recreational, cultural, and sporting services, market
access and national treatment were granted in cross-border supply and consumption abroad with nolimitations.WT/TPR/S/65 Trade Policy Review
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