RESTRICTEDWORLD TRADE
ORGANIZATIONWT/GC/W/356/Add.1
22 October 1999
(99-4596)
General Council Original:  English
PREPARATIONS FOR THE 1999 MINISTERIAL CONFERENCE
Interrelationship Between Trade and Debt
Communication from Ecuador
Addendum
Note on Trade, WTO and External Debt
The following communication, dated 18 October 1999, has been received from the Permanent
Mission of Ecuador.
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1. It is widely accepted that the integration of developing countries into the world trading system
and thus their position in the GATT/WTO pose special problems.  Although some of these problems
have been recognized and partially addressed within the WTO/GATT framework (through
Article XVIII of the GATT, the 1979 Decision on differential and more favorable treatment, etc.),
others have yet to be the subject of systematic analysis or negotiation, and these include relations
between trade, GATT/WTO, and external debt.1
2. Misalignments of exchange rates and trade imbalances are generally acknowledged to be a
major source of protectionist pressures which manifest themselves both in unilateral measures and in
tensions threatening the rules of the multilateral trad ing regime.  Similarly, it is generally agreed that
financial crises and exchange-rate instability are a major threat to the trading system.  These were
clearly recognized by the architects of Bretton Woods who designed a system of relatively stableexchange rates, capital controls and provision of international liquidity to finance external imbalances
in order to avoid deflationary adjustments.  With the breakdown of the Bretton Woods arrangements,
the increasingly frequent and virulent systemic breakdowns in the operation of international financial
markets and the associated external debt-servicing difficulties have been generating frictions in the
international trading system, not only by producing instability of exchange rates and frequently drasticshifts in international competitiveness, but al so by generating deflationary forces whereby
adjustments to crises take the form of economic contraction and import cuts rather than of export
expansion.
3. It is equally true that imbalances in the trading system are a major cause of financial crises,
currency turmoil and external debt servicing difficulties.  Some of these linkages are self-evident :
                                                     
1 As a distinguished scholar of the GATT/WTO has put it in this context, "…the whole question of debt
must be noticed.  Developing-country debt is an obvious and extraordinarily difficult problem, and of course it
relates to trade and the trade rules" (J.H. Jackson, The World Trading System: Law and Policy of International
Economic Relations, 2nd edition (Cambridge, Mass. and London : The MIT Press, 1997), p.322).WT/GC/W/356/Add.1
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- A country’s ability to service its debt clearly depends on its trade balance.  A
worsened trade balance as a result of terms-of-trade deterioration, stagnant export
markets or restrictions on market access can cause difficulties in servicing external
debt, thereby leading to financial instabil ity and currency turmoil, with attendant
consequences for growth and development.  It is, for instance, generally agreed thatterms-of-trade deterioration and increased trade deficits played an important role in
the outbreak of the East Asian crisis.
2
- Through its influence on the balance-of-payments, the trade balance will also be a
major determinant of the rate at which a country accumulates external debt.  It has,
for instance, been shown that in developing  countries trade deficits now tend to rise
much faster than incomes, resulting in increased dependence of economic growth on
capital inflows, whose consequences include  accumulation of external debt.  Rapid
trade liberalization in developing countries together with continued protectionism in
industrial countries in areas of export interest to developing countries appear to have
played an important role.3
- A country’s trade balance and influences on it such as relevant economic policies and
prospects for, and conditions in, its major export markets (via effects on its
creditworthiness) will affect the types and terms of external borrowing to which it has
access, and thus the structure, maturity and servicing costs of its external debt.  A
country suffering from declines in its export prices or restrictions on market accesswill experience considerable difficulties in access to international financial markets.
4. The growing integration of developing countries into international financial markets and their
consequent vulnerability to swings in capital flows have implications for the relation of external debt
to trade under all of the above headings.  But there are also other subjects less frequently raised herebut still deserving consideration in the context of rules and procedures likely to lead to more equitable
participation of developing countries in the WTO.  Amongst these is the question of the adequacy of
foreign exchange reserves.  The importance of this subject has been widely recognized in recent
discussion of ways to prevent and manage financial crises
4, but it also has implications for the
justification of the imposition or maintenance of import restrictions under GATT and GATS.
5. In considering the justification of the imposition, maintenance or intensification by a country
of exchange restrictions to safeguard its balance of payments, WTO Members are required – underArticle XV of GATT and Article XII of GATS – to take as a basis the assessment by IMF of the
country’s balance-of-payments and other aspects of its external financial situation, such as the
adequacy of its foreign currency reserves.  Much of the case history of the application of GATT
Article XV in this context relates to an earlier period, before the existence of the large international
capital flows which have accompanied growing global financial integration.  However, as implied byremarks above, in recent years payments pressures on a country can now be much greater as a result
of increased international financial integration and have a different character.  An approach to
assessing the adequacy of a country’s foreign exchange reserves should consequently make allowance
for these new circumstances.
                                                     
2 See UNCTAD, Trade and Development Report 1998, Part One, Chapter III.
3 See UNCTAD Trade and Development Report, 1999, Part Two.
4 See, for example, the new guidelines proposed for policy in this area by Pablo Guidotti, Deputy
Finance Minister of Argentina, and by Alan Greenspan, Chairman of the Board of Governors of the UnitedStates Federal Reserve System, to which attention is drawn in the context of crisis prevention in IMF, Statement
and Report of the Managing Director of to the Interim Committee on Progress in Strengthening the Architecture
of the International Financial System (Washington, D.C. : IMF, September 1999), p.7, and which are also
discussed at greater length in UNCTAD, Trade and Development Report, 1999, pp. 110-111.WT/GC/W/356/Add.1
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6. One approach proposed by UNCTAD would be to require the IMF for this purpose to take
account of the many different elements of external sector statistics specified in its own Special Data
Dissemination Standard (SDDS) for economic and financial data and of the volatility of several of the
categories of external obligations included in the SDDS.5  Under the heading of balance-of-payments
statistics, for example, the SDDS recommends a break down of relevant financial transactions between
direct and portfolio investment, presumably because of the difference in volatility between the two.
As regards the international investment position, it calls for a classification of external assets under
the headings of direct investment,  portfolio inve stment (with a breakdown between equity and debt),
other investment, and reserves; and in respect of ex ternal liabilities it distinguishes (within portfolio
investment) securities and loans according to the currency of issue and (for debt instruments) original
maturity.6  This classification is clearly intended to comprise categories relevant to the evaluation of
countries’ external payments and international investment positions in a global economy characterizedby large international capital movements.  As such it could also serve as a starting-point for evaluation
of reserve adequacy in the WTO.
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5 Ibid.
6 Clearly, with regard to loans of a medium- or  lo ng-term original maturity it would be preferable to
distinguish according to the residual maturity, which is a more important feature of the external payments and
the international investment position of a country threatened by, or experiencing, a financial crisis to difficulties
of obtaining refinancing, which can involve refinancing of medium- and  long-term debt as well as rolling over
short-term debt.