RESTRICTEDWORLD  TRADE
ORGANIZATIONWT/TPR/S/65
4 January 2000
(00-0015)
Trade Policy Review Body
TRADE POLICY REVIEW
Iceland
Report by the Secretariat
This report, prepared for the  Trade Poli cy Review of Iceland, has been drawn up
by the WTO Secretariat on its own responsibility.  The Secretariat has, as
required by the Agreement establishing the Trade Policy Review Mechanism
(Annex 3 of the Marrakesh Agreement Establishing the World Trade
Organization), sought clarification from the Government of Iceland on its trade
policies and practices.
Document WT/TPR/G/65 contains the policy statement submitted by the
Government of Iceland.
Note: This report is subject to restricted circulation and press embargo until the end of the meeting
of the Trade Policy Review Body on Iceland.Iceland WT/TPR/S/65
Page iii
CONTENTS
Page
SUMMARY OBSERVATIONS vii
(1) O VERVIEW vii
(2) E CONOMIC ENVIRONMENT vii
(3) T RADE POLICY BY MEASURE viii
(4) T RADE POLICIES BY SECTOR ix
(5) T RADE POLICIES AND FOREIGN TRADING PARTNERS x
I. ECONOMIC ENVIRONMENT 1
(1) I NTRODUCTION 1
(2) M AIN ECONOMIC DEVELOPMENTS 1
(i) Structure of the economy 1
(ii) Economic growth and employment 3(iii) Prices and wages 5(iv) Monetary and exchange rate policy 6(v) Fiscal policy 8(vi) The balance of payments 8
(3) E
XTERNAL TRADE 9
(i) Composition of trade 11(ii) Direction of trade 11
(4) T
RENDS AND PATTERNS IN FOREIGN DIRECT INVESTMENT (FDI) 11
(5) O UTLOOK 14
II. TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES 16
(1) I NTRODUCTION 16
(2) G ENERAL CONSTITUTIONAL AND LEGAL FRAMEWORK 16
(3) D EVELOPMENT AND ADMINISTRATION OF TRADE POLICY 18
(i) Main trade laws 18(ii) Agencies involved in trade policy implementation 19
(4) T
RADE AGREEMENTS AND ARRANGEMENTS 19
(i) World Trade Organization 19(ii) Regional arrangements 20
(5) F
OREIGN INVESTMENT REGIME 22
III. TRADE POLICIES AND PRACTICES BY MEASURE 24
(1) I NTRODUCTION 24
(2) MEASURES DIRECTLY AFFECTING IMPORTS 24
(i) Customs procedures 24(ii) Tariffs 25
(iii) Tariff preferences
34
(iv) Tariff quotas 34
(v) Other charges affecting imports 35(vi) Customs valuation 36(vii) Rules of origin 37WT/TPR/S/65 Trade Policy Review
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(viii) Import restrictions and licensing 38(ix) Contingency measures 39(x) Government procurement 40(xi) State-trading enterprises 42
(3)
MEASURES DIRECTLY AFFECTING EXPORTS 44
(i) Procedures and charges 44
(ii) Export prohibitions, restrictions, and licensing 44
(iii) Export subsidies, duties, and tax concessions 44(iv) Export finance, guarantees, and promotion 45
(4)
MEASURES AFFECTING PRODUCTION AND TRADE 45
(i) Legal framework for businesses 45
(ii) Taxation 45
(iii) Incentives 46(iv) Standards and other technical requirements 51(v) Competition policy 55(vi) Intellectual property rights. 56
IV. TRADE POLICIES BY SECTOR 65
(1)
INTRODUCTION 65
(2) AGRICULTURE 65
(i) Features 65(ii) Border measures 67(iii) Internal measures 70
(3) F
ISHERIES 74
(i) Features 74
(ii) Sectoral policies 76
(4) ENERGY 81
(5) MANUFACTURING 82
(6) SERVICES 84
(i) Features 84
(ii) Banking, finance and insurance 85(iii) Telecommunications and information technology services 92(iv) Transport 95(v) Tourism 99
REFERENCES 100
APPENDIX TABLES 103Iceland WT/TPR/S/65
Page v
CHARTS
Page
I. ECONOMIC ENVIRONMENT
I.1 Merchandise trade by product, 1993 and 1998 12
I.2 Merchandise trade by partner, 1993 and 1998 13
III. TRADE POLICIES AND PRACTICES BY MEASURE
III.1 Frequency distribution of MFN tariff rates, 1999 30
III.2 Composition of Icelandic tariff, 1999 30III.3 Tariffs on manufactured products by HS chapter, 1995-2000 31III.4 Tariffs on agricultural products by HS chapter, 1995-2000 32
III.5 Tariff escalation by 2 digit ISIC industry, 1999 33
TABLES
I. ECONOMIC ENVIRONMENT
I.1 Share of Gross Domestic Factor Income by industry, 1973-98 2
I.2 Production changes by sector, 1997-99 2I.3 Basic macroeconomic indicators, 1993-2000 4I.4 Private consumption, 1993-98 4I.5 Balance-of-payments, 1993-98 10
I.6 Iceland's international investment position, 1993-98 14
I.7 Foreign Direct Investment net flows of non-residents in Iceland, by sector, 1993-98 14
II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVESII.1 Main trade laws and regulations 18
II.2 Iceland's membership in international organizations 20
II.3 Iceland's participation in free-trade agreements 21
III. TRADE POLICIES AND PRACTICES BY MEASUREIII.1 Summary analysis of Iceland's bound tariff, 1995-2000 26
III.2 Summary analysis of Iceland's tariff, 1998-99 28III.3 Other taxes on production and consumption (including imports), 1999 37III.4 Licences affecting imports, 1999 38
III.5 Estimated value of all government procurement in Iceland, 1993-98 41
III.6 Imports and national production of beer, wine and spirit drinks, 1992-98 43III.7 Taxation treaties and taxes applied, 1999 47III.8 Agricultural Agreements Programme Outlays, 1994-98 49III.9 Standards Iceland, 1996-98 52III.10 Number of patents granted and average pendency time, 1994-99 59
III.11 Number of designs and trademarks registered, 1994-99 60
IV. TRADE POLICIES BY SECTORIV.1 Production of main crops 66
IV.2 Production of meat and processed milk 66IV.3 Products subject to tariff quotas in 1999-2000 69WT/TPR/S/65 Trade Policy Review
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Page
IV.4 Product-Specific Aggregate Measurements of Support:  Market Price Support and
Direct Payments, 1995-98 71
IV.5 Measures exempt from the reduction commitment – "green box" 71IV.6 Export subsidies, allocation and commitment levels 73IV.7 Treasury income derived from taxes applied on agricultural activities, 1991-98 74
IV.8 Fish catch volume 1996-99 76
IV.9 Allowable catches (TAC) 1996-99 and recommended TAC for 1999-2000 78IV.10 Transfers of catch quotas between vessels, 1992-98 79IV.11 Summary of Article II (MFN) exemptions listed by Iceland 86IV.12 Financial sector indicators 88
IV.13 Passengers through Icelandic airports 96
IV.14 Iceland's bilateral air transport agreements 97
APPENDIX TABLES
I. ECONOMIC ENVIRONMENT
AI.1 Iceland's exports by commodity, 1992-98 103
AI.2 Iceland's imports by commodity, 1992-98 104AI.3 Iceland exports by main region and partner, 1992-99 105AI.4 Iceland imports by main region and partner, 1992-99 106
II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVES
AII.1 Selected notifications to the WTO, 1 January 1995 to 30 September 1999 107
III. TRADE POLICIES AND PRACTICES BY MEASUREAIII.1 Bound tariff averages by HS2, 1995-2000 110
AIII.2 Applied MFN tariff averages by HS2, 1999 114AIII.3 Iceland's preferential rates in agriculture to members of the
European Economic Area, 1999 118
IV. TRADE POLICIES BY SECTORAIV.1 Iceland tariff quota commitments under the WTO Agreement on Agriculture, 1995-1998 122
AIV.2 Summary of Iceland's specific commitments in services 128Iceland WT/TPR/S/65
Page vii
SUMMARY OBSERVATIONS
(1) OVERVIEW
1. Iceland is a prime example of the
benefits of international specialization, having
achieved high living standards through thedeft exploitation of its fish and energy
resources for export, while meeting many of its
domestic needs via imports.  Iceland has thus
traditionally maintained a generally liberal
trade regime, extended since its first TradePolicy Review in 1994 as a result of the
implementation of the Uruguay Round results
and the European Economic Area (EEA)
Agreement.  This and structural reforms,
disciplined macroeconomic policies, and afavourable external environment have all
contributed to increased investment and trade,
low unemployment and inflation, and strong
growth;  in this favourable conjuncture,
preventing the economy from overheating has
become the main short-term policy challenge.
2. Iceland's remarkable recovery from
the economic difficulties it faced at the time of
its first Review must be seen against the
historical background of a highly cyclical
economy.  The question of whether recent
reforms have made the economy sufficientlyflexible to ride out future external shocks thus
arises, particularly in view of a still high
foreign debt and current account deficit, high
protection of certain activities - notably
agriculture - and foreign investmentrestrictions in key sectors such as energy and
fisheries.  Further liberalization would help
reduce remaining distortions and enhance
competition in the domestic market;
undertaking this on an MFN basis andsecuring it in the WTO would prevent any
over-reliance on the EEA market, and trade or
investment diversion.
(2) E
CONOMIC ENVIRONMENT
3. Iceland has experienced economic
growth of over 5% per year since 1996.
Growth was initially supported by aninvestment boom, particularly related to the
aluminium industry, and subsequently by anexpansion in private consumption.  Strong
growth has been accompanied by a significant
reduction in inflation and unemployment,
which reached record lows in 1999, and by an
improvement in public finances, with a surplus
in both 1998 and 1999.
4. In the past, Iceland tended to meet
external shocks through credit expansion and
currency devaluations, resulting in high levels
of inflation.  Since the late 1980s,
macroeconomic stabilization policies havebeen geared at reducing inflation, using the
exchange rate as an instrument of monetary
policy restraint.  Capital controls were
removed in 1993-95.  Structural reforms have
included privatization and improved financialregulations and tax system;  better fisheries
management increased and subsequently
stabilized stocks, and reduced export-income
fluctuations.  Secular shifts in Iceland's
economic structure have continued, notably
the decline of the agriculture sector and the
growing importance of services.
5. The economy has shown signs of
overheating since early 1999, including higher
than expected GDP growth and inflation.  A
relatively large current account deficit of some
4.6% of GDP reflects expansion of domesticdemand, and indicates Iceland's low savings
rate and growing investment.  To maintain
price stability, check domestic demand, and
take some pressure off the current account,
monetary policy has been progressivelytightened and higher general government
surpluses targeted (equivalent to 3.5% of GDP
in 1999).
6. Benefiting from EEA membership and
WTO participation, trade has expanded fasterthan the economy as a whole; the merchandise
trade to GDP ratio was just over 50% in 1999.
Between 1994 and 1999, merchandise imports
expanded at an annual rate of over 12% in
value terms, while the equivalent rate for
exports was almost 6%. Trade in services has
also expanded at a brisk pace since 1994,exports growing at an annual rate of almost
10% and imports at some 11%.WT/TPR/S/65 Trade Policy Review
Page viii
7. Iceland has traditionally followed a
Europe-oriented foreign economic policy, the
lion's share of its trade being with EEA
countries.  Trade with North America, mostly
the United States, is relatively modest, at 16%
of the total ,but has increased considerablysince 1994.
8. Fish and fish products continue to be
the main export, accounting for 71% of all
exports; aluminium exports have increased
substantially in recent years, to over 13% ofthe total, reflecting the strong foreign direct
investment in the industry.  Nevertheless, the
balance of payments continues to be
vulnerable to changes in fish catches, and to
fish or aluminium prices.
9. Imports are dominated by
manufactures, with motor vehicles and other
equipment the main items.  Other important
imports include agricultural products, mainly
cereals and fruit, and liquid fuels, of which
there is no domestic production.
10. Like trade, foreign investment has
expanded considerably during the 1990s:  as a
proportion of GDP, in 1998 the stock of
foreign direct investment (FDI) in Iceland
reached 5%, while Icelandic direct investment
abroad was up to 4.5%.  Growth in FDI hasbeen propelled mainly by major projects in
electricity and aluminium production, while
direct investment abroad has expanded in the
wake of the entry into force of the EEA.
(3) T
RADE POLICY BY MEASURE
11. Iceland has continued to pursue a
liberal trade policy since its first Review, with
regional initiatives, particularly the EEA,
providing a strong impetus over the past six
years. Customs procedures are straightforwad, and increasingly computerized.  Since 1997,
Iceland has used the New European Rules of
Origin, a system of origin cumulation,
covering various free-trade agreements.
12. The average MFN tariff rate is low,
about 4% in 1999, with over two thirds of
tariff lines duty free.  Detracting from this,protection for agricultural products remains
substantial, the average MFN tariff rate
standing at 10.8% compared with 2.5% for
manufactured goods.  The entire tariff was
bound as a result of the Uruguay Round
negotiations.  The average preferential tariffin 1999 was 1.7%;  all manufacturing
products from preferential members enter duty
free.
13. Tariff quotas apply in principle to 320
lines in the agriculture sector;  in practice,however, they are used only for products for
which Iceland made minimum access
commitments in the Uruguay Round and for
live plants and flowers.  Out-of-quota tariff
rates are seldom used; imports generally takeplace at in-quota or lower tariff rates.
14. Imports as well as domestic
production are subject to a number of indirect
taxes, such as the value-added tax, the
commodity tax, and an excise tax on vehicles
(7.5 to 70% of the f.o.b. value).  Although non-
discriminatory in nature, in many instancesthese taxes fall exclusively on imports due to
the absence of domestic production, for
example, in the case of motor vehicles.  The
resulting tax burden is in many cases greater
than the tariff itself;  thus, while tariffcollections are equivalent to some 1.5% of the
total value of merchandise imports, tariff plus
other duties collected on imports are estimated
at some 18% of their value.
15. Iceland has largely shunned the use of
non-tariff trade barriers, although a number of
products, especially in agriculture, are subject
to licensing requirements.  The importation of
certain goods must comply with strict sanitary
and phytosanitary conditions, and in somecases importation may be restricted or
banned.  Although legislation regulating
contingency measures is in place, no such
measures have been used since the
establishment of the WTO.  Iceland is an
observer to the WTO Government
Procurement Agreement, and applied foraccession in June 1998.  Iceland's
procurement rules are designed to conform to
EEA standards.Iceland WT/TPR/S/65
Page ix
16. Iceland's standards and technical
regulations broadly fo llow those of the EEA;
there are only a handful of Icelandic
standards.  Certification and test data from
other EEA countries are accepted.
Competition policy also follows EEAguidelines.  Enforcement takes place at the
domestic level, when the effects of a practice
are limited to Iceland, or at the EFTA or EEA
levels.
17. Patent and copyright legislation have
been amended to bring them into conformity
with the WTO Agreement on Trade-Related
Aspects of Intellectual Property Rights.  Patent
protection to pharmaceutical products has
been fully granted since 1996.  In the sameyear, copyright protection was extended to
life, publication, or making plus 70 years.
Enforcement of intellectual property rights
takes place through the courts, includes both
civil and penal procedures, and may result in
seizure of imports, fines, and imprisonment.
18. Other than in agriculture, support
programmes are not sector-specific, instead
they are aimed at addressing market failure,
building comparative advantage or promoting
employment.  The network of support
programmes has been streamlined in recentyears, and growing emphasis is being placed
on the co-financing of projects, especially in
research and development.  Support for
sectoral restructuring is not provided.
19. National treatment is granted to
foreign investors but foreign ownership is
restricted or not allowed in some key areas,
such as airline operations, energy, and
fisheries (in contrast, much of the Icelandic
direct investment abroad takes place in thelatter).  Other restrictions to investment
regarding residency, establishment, and real
estate ownership apply only to non-EEA or
non-OECD nationals and companies.
(4) T
RADE POLICIES BY SECTOR
20. Although its importance has
diminished somewhat, fisheries remain themost important single economic activity inIceland, accounting for some 13% of GDP,
71% of merchandise exports, and 49% of
foreign currency earnings.  A system based on
individual transferable quota shares has
played a key role in ensuring the sustainable
exploitation of marine resources and inreducing overcapacity in the industry.  Since
1999, fishing permit applications are open,
unconditionally, to any registered shipping
vessel.  However, the allocation of quotas free
of charge remains a major topic of policydiscussion in Iceland both for creating
windfall profits for vessel owners, and forgone
public revenue.
21. In agriculture, Iceland's commitments
under the WTO and EEA Agreements providedfurther impetus for the replacement of price
support measures with direct income
payments. Nevertheless, such payments also
grant considerable support to domestic
producers, notably of lamb and meat.
Assistance to the agriculture sector is
equivalent to some 1.5-2% of GDP, thesector's GDP share amounting only to some
2%.  Agriculture is also protected by high
tariffs and seemingly strict sanitary measures.
22. Manufacturing activities other than
fish processing are concentrated in power-intensive industries taking advantage of
Iceland's low energy costs.  In 1998, the sector
contributed 12% of GDP, and 22% of total
merchandise exports.  Most foreign direct
investment in Iceland is concentrated in themanufacturing sector, the expansion of
aluminium  and ferrosilicon production, and
associated power-generating capacity,
accouned for much of the surge in investment
in recent years.
23. 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.  Iceland's
GATS offer grants unlimited market access
and national treatment for cross-bordersupply, consumption abroad, and commercial
presence of telecommunication services,
construction and related engineering services,WT/TPR/S/65 Trade Policy Review
Page x
distribution services, and transport services.
Market access through commercial presence
in banking and other financial services is
subject to conditions that generally also apply
to domestic firms.  Nevertheless, foreign
penetration in telecommunications andbanking remains limited.
(5) T
RADE POLICIES AND FOREIGN
TRADING PARTNERS
24. Given Iceland's considerable
dependence on foreign trade, access to foreignmarkets is a long-standing policy priority.
Iceland participates in EFTA and the EEA,
and is a founding member of the WTO.
Complying with WTO and EEA commitments
has required parliamentary passage of variousActs, as international agreements must be
incorporated into domestic legislation before
they may be invoked in Icelandic courts.
25. Iceland participated in the WTO
Negotiations on Financial Services and
submitted an offer in the Negotiations on Basic
Telecommunications.Iceland has not been involved as plaintiff or
defendant in any dispute in the WTO since its
inception.
26. As a member of the EEA, Iceland
grants largely unrestricted movement of
goods, workers, services, and capital to othermembers.  Companies domiciled in any other
EEA member country have the same rights to
operate in Iceland as an Icelandic registered
company, and citizens of other EEA countries
do not need a work permit in Iceland.
27. Iceland's participation in EFTA has
increased the complexity of its trade policies;
a large and growing number of preferential
agreements with European and Mediterranean
countries compounds the potentialdifferentiation among trading partners.  All
such agreements provide for free trade in all
goods except sensitive unprocessed
agricultural products;  they also contain
provisions in areas such as technical
regulations, public procurement, and
intellectual property.  Free-trade agreementswith Canada and Cyprus are under
negotiation.