WORLD TRADE  
ORGANIZATION   
WT/L/565 
7 May 2004 
 (04-2033) 
 Original:   English 
   
FUND SUPPORT FOR TRADE-RELATED BALANCE OF PAYMENTS ADJUSTMENTS 
 
Paper prepared by the staff of the International Monetary Fund
1 
 
  
_______________ 
 
                                                      
1 This paper is being circulated with the permission of the International Monetary Fund for the 
information of delegations. WT/L/565 
Page 2  
INTERNATIONAL MONETARY FUND 
 
Fund Support for Trade-Related Bala nce of Payments Adjustments 
 
Prepared by the Policy Development and Review Department 
(In consultation with other Departments) 
 
Approved by Mark Allen 
 
February 27, 2004 
 
 
 
EXECUTIVE SUMMARY ............................................................................................................. .....4 
 
I.
 INTRODUCTION .................................................................................................................. .. 5 
II. BALANCE OF PAYMENTS IMPLICATIONS OF A NEW MULTILATERAL 
TRADE AGREEMENT ........................................................................................................... 6  
A. SCOPE OF THE NEGOTIATIONS AND SOURCES OF BALANCE OF PAYMENTS 
SHORTFALLS  .............................................................................................................................. . 6 
B. IMPACT OF OWN LIBERALIZATION  ............................................................................................. 7  
C. ESTIMATING THE IMPACT OF ADVERSE SHOCKS TO THE BALANCE OF PAYMENTS  ................... 8  
D. ESTIMATING THE NET IMPACT OF A MULTILATERAL TRADE AGREEMENT  ............................. 10  
E. THE NATURE OF BALANCE OF PAYMENTS IMPACTS AND IMPLICATIONS FOR FUND 
SUPPORT  .............................................................................................................................. ...... 11  
III. TRADE INTEGRATION MECHANISM ............................................................................ 11  
A. OVERVIEW  .............................................................................................................................. .. 11 
B. ALTERNATIVE APPROACH  ........................................................................................................ 13  
C. OTHER ASPECTS OF FUND ASSISTANCE WITH TRADE -RELATED ADJUSTMENT NEEDS  ........... 13  
IV. MODALITIES OF THE PROPOSED TRADE INTEGRATION MECHANISM .......... 13  
A. QUALIFICATION  ........................................................................................................................ 13  
B. ACCESS  .............................................................................................................................. ........ 14  
C. CONDITIONALITY  ...................................................................................................................... 17  
D. TERMS AND PHASING  ................................................................................................................ 17  
E. REVIEW PROVISION  ................................................................................................................... 17  
F. RELATIONSHIP WITH WORLD BANK LENDING OPERATIONS  .................................................... 18  
V. IMPACT ON FUND LIQUIDITY AND RESOURCE IMPLICATIONS ......................... 18  
A. GENERAL RESOURCES ACCOUNT (GRA) .................................................................................. 18  
B. PRGF  TRUST  ............................................................................................................................. 19 
C. STAFF RESOURCE IMPLICATIONS  .............................................................................................. 19   WT/L/565 
 Page 3 
 
VI. CONCLUDING REMARKS ................................................................................................. 20  
 
Text Boxes 1.  Estimates of Preference Erosion............................................................................................ .....9 
2.  World Bank Program in Support of Trade............................................................................... 18  
Tables 
1.  Imports of Textiles and Clothing into the United States and EU.............................................10 2.  Schematic of Access Under Baseline and Deviation Feature ..................................................15 WT/L/565 
Page 4  EXECUTIVE SUMMARY 
 
Multilateral trade liberalization has been a major contributor to the world economy’s 
unprecedented growth over the past half century. In  tackling remaining restrictions on trade, the 
WTO’s Doha Development Agenda has the potential to benefit all countries. While overwhelmingly 
positive in its impact over time, opening the worl d trading environment further would require 
countries to adjust. Concerns over the costs of adjustment, in particular among developing countries, 
are further complicating the WTO negotiations. 
 The proposed IMF Trade Integration Mechanis m (TIM) aims to mitigate concerns that 
implementation of WTO agreements might give rise to temporary balance of payments shortfalls. A 
balance of payments need might result from the er osion of tariff preferences in important export 
markets, adverse changes in f ood terms of trade, or the expiration (in 2005) of quotas under the 
WTO’s textiles agreement. Shortfalls are unlikely to be large for most countries, and would eventually be dominated by the positive impact of  more open trade. Nevertheless, they could be 
significant in the short run for some countries.  
 
The proposed TIM details how the Fund would provide access to its resources to meet a 
balance of payments need associated with trade-re lated adjustments. In particular, the IMF would: 
 
 stand ready to discuss with countries facing su ch balance of payments shortfalls, new 
arrangements within its existing lending fac ilities (i.e., upper credit tranches, the Extended 
Fund Facility (EFF), or the Poverty Redu ction and Growth Facility (PRGF)); 
 
 take into account the anticipated impact of th e trade adjustment on the member’s balance of 
payments in determining the appropriate  size of access under both new and existing 
arrangements (the "baseline feature"); and  
 
 be prepared to augment arrangements under simp lified procedures if the actual balance of 
payments effect turns out to be larger th an anticipated (the "deviation feature"). 
 
The TIM is in line with existing Fund policy for balance of payment support and with the 
purpose of the Fund as set out in Article 1 of the Articl es of Agreement. It is not a special facility that 
would provide resources under special terms. Ra ther, it is a policy designed to increase the 
predictability of resource availability under existing facilities. A similar mechanism was established to 
enhance the predictability of financing for Debt a nd Debt Service Reduction Operations in the context 
of the Fund’s support of the Brady Plan. In that case, as is envisaged under the TIM, the financial terms were those of the underlying policy unde r which the access is granted (i.e., upper credit 
tranches, EFF, or PRGF). 
 The TIM is expected to create a modest increase in IMF financing, for two reasons. First, the 
explicit emphasis on trade adjustments will ensure that  they are carefully estimated and incorporated 
into the Fund-supported program. Second, the devi ation feature provides countries with a greater 
degree of certainty that larger-than-antic ipated adjustments can be accommodated. 
 
A member country could request consideration under the TIM if it expects a net balance of 
payments shortfall as a result of measures implemented by other countries that result in more open 
and nondiscriminatory market access for goods and services. Such measures would normally be introduced either (i) under a WTO agreement or (ii)  on a non-discriminatory basis. The implications 
of own liberalization measures would not be covere d by the TIM, although the Fund will, of course, 
continue to assist members in anticipating and ma naging the implications of domestic reforms that 
may be associated with Doha Round commitments, including by considering any necessary financing 
under the Fund’s existing policies. 
  WT/L/565 
 Page 5 
 
A Fund policy aimed at addressing financing needs arising from multilateral trade 
liberalization is justified on several grounds. Firs t, several members will pr obably face these needs. 
Even if only a subset eventua lly requires financial assistance, the TIM would help ensure that a 
common framework of analysis and financial suppor t is applied across the membership. Second, the 
events that are the subject of the policy are predic table and largely exogenous from the perspective of 
individual members. The policy would provide a focal  point for dialogue with the authorities that 
would help encourage the early identification of fi nancing needs and associated policy actions. Third, 
and most importantly, the TIM would represent a c oncrete expression of policy coherence, in the 
context of what is arguably the single most impor tant item on the multilateral economic policy agenda 
over the coming period. In addressing specific concerns expressed by members during the trade negotiations, the policy is designed to help  advance the Doha Development Agenda. 
 
Finally, it is important to note that Fund assistance to ensure that countries can take full  
advantage of the opportunities of multilateral trade li beralization is not limited to financial support. 
Fund experts provide significant and long-standing assistance for customs reform, tax and tariff reform—including to mitigate the revenue implications of liberali zation—and for data improvements. 
In the areas of its expertise, the Fund also cont ributes actively to the Integrated Framework process, 
which aims at strengthening consideration of trad e reforms in national poverty reduction strategies 
and at coordinating trade-related technical assistan ce. In the process of Article IV surveillance, Fund 
staff engage with country authorities in identifyi ng areas of opportunity and risk, and in devising 
appropriate policy responses to the challenges of international integration. The Fund has also 
strengthened its research capacity in the trade area, and is helping to develop methodologies for 
assessing the impact of Doha Round reforms on member countries. 
 
I. INTRODUCTION 
1. Multilateral trade liberalization has been a major contributor to the world economy’s 
unprecedented growth over the past half century. In tackling remaining  restrictions on trade, 
the current WTO round has the potent ial to benefit all countries.  With its development focus, the 
Doha Round offers particular scope for promoting the deeper integration of developing countries into 
the global economy, and thus to broaden their s ources of growth. A successful round would combine 
ambitious improvements in market access, for agricultu ral and industrial products as well as services, 
with a significant reduction in trade-distorting subsidies. 
2. While benefiting economies overall, op ening the world trading environment  further 
would require countries to adjust. Concerns over the costs of adjustment, in particular among 
developing countries, are adding further complex ity to the WTO negotiations. Adjustment can be 
promoted and its social impact mitigated by policies, investments, and institutional reforms aimed at stimulating a supply response and strengthening social safety nets. The Fund can help its members in this area by strengthening the focus on such issues in its policy dialogue with member countries in the 
context of Article IV consultati ons. Furthermore, both the Fund and the World Bank have a range of 
instruments available to assist countries in designi ng and implementing appropr iate responses through 
the provision of technical and financial assistance as well as analytical support. 
3. Implementation of Doha Round agreements may also give rise to temporary balance of 
payments shortfalls. Fears over external imbalances, as a result of terms of trade changes, the 
liberalization of imports or—especially—more intense competition in export markets due to 
preference erosion, have led a number of developi ng countries to question the wisdom of subscribing 
to an ambitious Doha Round. While the Fund has provided assurances of support within its existing 
policies and instruments, several members have calle d for a more tailored approach that addresses the 
balance of payments impact of trade adjustment and is sufficiently flexible to respond to unanticipated 
shortfalls.  
4. At an informal Executive Board meeting on September 3, 2003 Directors discussed the 
outline of a possible new policy framework, which would allow the Fund  to tailor its support to WT/L/565 
Page 6  all members to the particular demands of trade adjustment and, most immediately, under the 
Doha Round. Subsequently, the First Deputy Managing Director announced the Fund’s new 
proposed initiative at the WTO Ministerial Meeti ng in Cancún. At its meeting in Dubai, the 
International Monetary and Financial Committee e ndorsed the initiative, stressing its importance in 
helping countries address the transitional impact of trade reform. 
5. Section II outlines the rationale for the proposed policy. Sections III and IV discuss the main 
elements of the new policy instrument. Section V evaluates the implications for Fund liquidity and 
staff resources and Section VI summarizes.  
II. BALANCE OF PAYMENTS IMPLICATIONS OF A NEW MULTILATERAL TRADE 
AGREEMENT 
A. S
COPE OF THE NEGOTIATIONS AND SOURCES OF BALANCE OF PAYMENTS SHORTFALLS  
6. Negotiations under the WTO’s Doha Round, which was launched in 2001, will involve 
deeper commitments under a broad range of issues —including market access in goods and 
services, disciplines on trade-distorting supports and tr ade remedies, rules on a range of trade-related 
domestic policy measures, and special and differen tial treatment of developing countries and least 
developed countries (LDCs). Among others, the Doha  Declaration envisages significant reforms in 
agriculture, which has, so far, experien ced only modest de facto liberalization.2 
7. The successful conclusion of  the Doha Round negotiations will offer both developing and 
industrial countries new opportunities to integrate further into the  world trading system. On 
balance, the net effect of the multilateral liberal ization envisioned in the Doha Round should be 
significant and positive. Nevertheless, there may be ad justment costs and a temporary deterioration in 
the balance of payments for countries where the ne t impact of liberalization over the medium and 
longer term is favorable. The possibility of such imbalances is, in large part, associated with 
liberalization in exactly those areas where the D oha Round is meant to achieve meaningful progress 
for developing countries – in agriculture and labor-i ntensive manufactures, where levels of protection 
and trade-distorting supports remain especially significant. 
8. The negotiations have highlighted several implications of a Doha Round  agreement that 
might result in temporary balance of payments shortfalls : the erosion of the margin of tariff 
preferences under preferential trading arrangements (PTAs) as mostfavored- nation (MFN) tariffs decline; adverse changes in the terms of trade of  net food importers as agricultural subsidies are cut; 
and more intense competitive pressures in the ma rkets for textiles and clothing following the 
elimination of bilateral quotas in 2005 under the WTO Agreement on Textiles and Clothing (ATC). 
While the latter was agreed during the Uruguay Round,  it has nevertheless raised concerns during the 
current negotiations, where it has been linked to th e possible erosion of preferences for the same 
products. The Trade Integration Mechanism (TIM ) is intended to address these kinds of 
developments, which would be the result of th e—collectively agreed—liberalizing action by a 
country’s trading partners, rather than of policy measures taken by the country itself. 
9. While similar concerns were raised in past rounds of multilateral trade liberalization, 
the effects are potentially la rger under a Doha Round agreement.
3 The Doha Declaration sets 
ambitious goals for the liberalization of agricultu ral trade, where remaining tariff barriers remain 
especially high. Under the Uruguay Round, which was the first to cover agriculture comprehensively, 
tariff cuts were applied to rates some of which were  initially raised as a result of the "tariffication" of 
quotas, and the particular formula that was u sed allowed many important products to escape 
                                                      
2 See "Market Access for Developing Country Exports—Selected Issues," SM/02/280, Revision 1, 
September 26, 2002. 
3 For the reason explained in this paragraph, the Uruguay Round does not offer an appropriate "testing 
ground" to evaluate the possible impact of the proposed Trade Integration Mechanism.  WT/L/565 
 Page 7 
 
significant liberalization.4 Similarly for subsidies, where reductions in the Uruguay Round were 
applied to a base period in which s ubsidy levels far exceeded those at  the time of the agreement and 
led to only limited reductions in pr actice. Furthermore, preference margins were traditionally in the 
form of fixed or percentage reductions from MFN rates.5 With many preferential rates set at zero 
under recent schemes such as African Growth and Op portunity Act (AGOA), Everythingbut-Arms, or 
the European Union association agr eements, a cut in MFN rates transl ates directly into a loss of 
preference. Finally, as mentioned, the phasing out of textile quotas, while agreed previously, is for the 
most part becoming effective only in 2005. Textiles and agriculture together account for a large share 
of the value of preferential regimes for developing countries. 
B. IMPACT OF OWN LIBERALIZATION  
10. Temporary payments imbalances may also be associated with the implementation of a 
country’s own commitments unde r a multilateral agreement.  Thus, liberalization could 
conceivably lead to an import surge. A number of  developing country delega tions have also drawn 
attention to the expected loss of fiscal revenue from tariff reductions. In the absence of mitigating 
measures, it is possible that such revenue shortf alls would translate into balance of payments 
pressures. Trade liberalization in services, including financial services, could give rise to capital flows 
which—though potentially an important source of be nefits of a Doha Round agreement—might also 
result in increased volatility of reserves if the m acroeconomic or regulatory framework is weak. 
11. However, in these cases, the balance of p ayments impact, and indeed the occurrence of 
the negative event itself, cannot be considered separately from the  macroeconomic framework 
and the authorities’ policy response. Overall import surges can be avoided by proper 
macroeconomic management. Macroeconomic st ability, regulatory policies and appropriate 
sequencing can go a long way towards mitigating the volatility of capital flows. The erosion of tariff 
revenues depends on characteristics of the tariff and customs regimes and can often be contained by 
other fiscal measures, such as eliminating exemptions, improving the administration of tariffs and taxes, and strengthening domestic  taxation. Nonetheless, in countries that are vulnerable on any of 
these dimensions—for example, where tariff revenu es constitute a major share of total government 
revenues, or the prudential framework in banking is  weak—any liberalization has to be carefully 
monitored to ensure that supporting policies are in place. Technical assistance, including by the Fund, 
can play an important role in this respect.
6 
12. Own liberalization and the supporting policy framework have been a standard part of 
Fund-supported programs and are not speci fic to the multilateral negotiating  context. The Fund, 
of course, continues to stand ready to assist memb ers in anticipating and managing the implications of 
domestic reforms that may be associated with Doha Round commitments, including by considering 
any necessary financing under the Fund’s existing policies, where appropriate. Reforms to the 
domestic trade regime, including in services, are often an integral part of the design of the overall policy framework under Fund-supported programs and it would seem artificial, and might complicate 
program design and negotiations, if they were deal t with under a separate policy. It is therefore 
proposed that the implications of own liberaliza tion measures should not be covered by the TIM, 
whose purpose is to provide a procedurally simple way of meeting some of the concerns expressed 
about broader reforms associated with the current global trade talks. 
                                                      
4 The Uruguay Round formula set a simple average rate of tariff reduction of 36 percent, and a 
minimum for each tariff line of 15 per cent. Since only a small share of to tal tariff lines cover many of the 
relevant tariffs, the targeted average reduction did not require more than the minimum cuts in many of the 
highest and most important tariffs. 
5 Important exceptions were the successive Lomé Agreements of the European Union, which allowed 
duty-free entry for a broad range of goods, although pref erences were more limited for sensitive agricultural 
products. 
6 The Managing Director, in his address to the General Council of the WTO (May 13, 2003), expressed 
the readiness of the Fund to consider any requests for technical assistance in managing the implications of tariff 
revenue erosion as a result of trade liberalization. WT/L/565 
Page 8  
C. E
STIMATING THE IMPACT OF ADVERSE SHOCKS TO THE BALANCE OF PAYMENTS  
13. The specific impacts of the trade reform s are in many cases hard to measure and 
disentangle from other factors.  This is especially the case in the context of any reform where the 
supply response of third countries is both uncertain  and central to the assessment of impact. Trade 
data also tend to become available with a lag of  several months.  Nevertheless, modeling techniques, 
the analysis of historical data series and certa in economic characteristics can indicate orders of 
magnitude and help identify vulnerabilities. Work is  underway both at the Fund and in a variety of 
other institutions (World Bank, UNCTAD, OECD, among others) to refine methodologies for impact 
assessments, especially of preference erosion and the expiry of the ATC.7  As such methodologies are 
developed in the course of 2004, they will assist Fund staff and country authorities to better quantify the impact of trade reforms. Deta iled calculations will also require sound external trade data.  This 
underlines the need for authorities to carefully evalua te the quality of trade statistics without delay, 
and to make needed improvements, including throug h participation in the Ge neral Data Dissemination 
System. 
14. Model simulations suggest that the impact of preference erosion is unlikely to be large 
for most countries. However, for a mi nority of countries the impact could be  significant. Box 1 
reports on the distribution of preference erosion am ong beneficiary countries. In a fairly ambitious 
liberalization scenario, a reduction in export unit valu es of more than 2 percent would be limited to 
around two dozen countries. The associated loss of e xport income would tend to be larger to the 
extent that export volumes decline in response to the price competition. Nevertheless, using a simple 
partial equilibrium model, Subram anian (2003) estimates the aggregate loss of export income for 
LDCs from preference erosion to be le ss than two percent of total exports.
8 
15. Similar results obtain with regard to the imp lications of reduced agricultural subsidies, 
or a decoupling of these subsidies from production decisions, for the terms of trade of net food 
importers.9  As mentioned, the effective reduction of  subsidies under the Uruguay Round was fairly 
limited. The terms of trade loss for most countri es is likely to have been well below 1 percent,10 and 
price changes for individual products in the range of plus or minus 5 percent. Simulations of a full 
elimination of trade-distorting subsidies arrive at  a price impact of up to 20 percent for major food 
staples,11 but any Doha Round agreement is unlikely to  be quite that ambitious. Several net food-
importing developing countries (NFIDCs) are net exporters of some nonfood agricultural products, 
and price effects may partly cancel out in their im pact on the balance of payments. Finally, domestic 
production in some NFIDCs is likely to expand in  response to higher prices, thus improving the 
domestic food balance. 
 
  
                                                      
7 The World Bank is sponsoring a project aimed at measuring the extent to which preferences are 
actually utilized in the United States and the EU. An initial seminar will be held in Geneva on March 31, 2004 
to present methodologies and initial results.  
8 Arvind Subramanian, "Financing of Losses Fr om Preference Erosion," in "WTO Notes and Cover 
Letter from Ms. Krueger," EB/CWTO/03/2, January 27, 2003; subsequently issued by the World Trade 
Organization as WT/TF/COH/14, February 14, 2003.  
9 Based on FAO and IMF data, a total of 17 Fund member developing countries had net food imports 
exceeding 20 percent of to tal exports in 2001.  
10 James E. Anderson, 1997, "The Uruguay Round and Welfare in Some Distorted Agricultural 
Economies," NBER Working Paper 5923 (Cambridge, MA: National Bureau of Economic Research). 
11 For example, Stephen Tokarick, 2003, "Measuring th e Impact of Distortions in Agricultural Trade in 
Partial and General Equilibrium," IMF Working Paper 03/110.   WT/L/565 
 Page 9 
 
 
Box 1. Estimates of Preference Erosion 
 
The extent of preference erosion depends on the size of initial preference margins and the tariff reduction formulas agreed in 
the multilateral negotiations.  Both are highly product-specific and preference margins differ across bilateral trade 
relationships.  Moreover, effectively utilized preferences tend to be significantly lower than statutory preferences, either 
because exporters are unable to meet complex rules of origin  and other procedures, or because margins are too small to 
warrant the often considerable administrative effort associated with them.  UNCTAD has estimated that utilization rates of the 
GSP schemes of Canada, the EU, Japan and the United States average less than 40 per cent from all sources.1  Making the 
conservative assumption of a 100 per cent rate of utilization of  preferences, the table below reports the reduction in export 
unit values, by country, in a scenario where MFN liberalization results in a 40 percent cut in preferences and assuming 
homogeneous products and constant worl d market prices (only reductions gr eater than 2 percent are reported).2  In reality, for 
many commodities world prices are likely to rise as MFN liberal ization raises the level of gl obal demand, thus dampening the 
impact on export unit values.  The resulting change in expor t revenues will further depend on product-specific export supply 
elasticities. For illustrati on, an average export supply elasticity of 1 woul d result in a loss of export revenue of approximat ely 
twice the change in export unit values reported in the table. 
 
 Percentage Decrease in Average Export Unit Values Following a 40 Percent Cut  in Preference Margins as a 
Result of Multilateral Tariff Reduction (Estimate)  
 Least Developed Countries Other Developing Countries  
 Malawi 
Mauritania 
Cambodia 
Bangladesh 
Maldives 
Haiti 
Cape Verde 
São Tomé and Príncipe 
Tanzania 
Comoros 6.6 
4.8 
4.1 
3.9 
3.5 
3.3 
3.3 
2.7 
2.4 
2.0 Mauritius 
St. Lucia 
Belize 
St. Kitts and Nevis 
Guyana 
Fiji 
Dominica 
Seychelles 
St. Vincent and the Grenadines 
Jamaica 
Albania 
Nicaragua 
Swaziland 
Serbia and Montenegro 
Tunisia 
Côte d'Ivoire 
Morocco 
Dominican Republic 
 11.5 
9.8 
9.1 
8.9 
7.9 
7.8 
5.5 
4.2 
3.4 
3.3 
3.3 
3.2 
3.0 
2.9 
2.2 
2.2 
2.1 
2.1  
 Sources:  Export structure and direction:  COMTRADE  (United Nations).  Preference regimes:  WTO Trade 
Policy Reviews, TRAINS database. 
Note:  Only preference erosion vis-a-vis Canada, the EU, Japan, and the United States considered. 
Calculation of current preference margins uses tariff data per 2-digit tariff line for each preference 
scheme.  Direction of trade data are then applied to obtain a trade-weighted preference margin. 
__________ 
1UNCTAD, 2003, "Trade Preferences for LDCs: An Early Assessment of Benefits and Possible 
Improvements," New York and Geneva, September (draft). 
 2This would be the case, for instance, for a 40 pe rcent reduction in MFN rates (slightly more than 
the average under the Uruguay Round) in a market with zero-duty preferential access, as would be the case 
for many products exported under the EU’s Everyt hing-but-Arms Initiative and the United States’ AGOA.  
 
16. The impact of the phase-out of textile quotas is even harder to predict, but  potentially 
large for a subset of countries. In order to avoid abrupt adjustments, the ATC envisaged the 
liberalization of textiles and clothing trade in  four phases over the period 1995–2004. However, in 
practice the liberalization of restrictive quotas has been backloaded, with an estimated 80 percent 
remaining to be eliminated by the end of the im plementation period. Signs of shifting competitiveness 
have already begun to emerge and may provid e an indication of developments following full 
liberalization in 2005. In 2002, when approximately 15 percent of restrictive quotas were eliminated 
(Phase III of the ATC), China increased its exports of the liberalized products to the United States and 
EU by more than US$2 billion, while many other s uppliers experienced a contraction in value terms 
and import unit prices declined sharply (Table 1). 
 WT/L/565 
Page 10  
Table 1.  Selected Countries' Exports of Tex tiles and Clothing to the United States and EU 
(Products Liberalized in Phase III of the ATC, Percentage Changes Jan.-Sept. 2001 vs. Jan.-Sept. 2003) 
 
Exports to the United States  Exports to the EU1 
Origin Change in 
Value (US$) Change in 
Volume  Origin Change in 
Value (€) Change in 
Volume 
World 16.7 64.4  World 5.1 27.5 
       China 193.6 652.6  China 90.8 377.1 
Pakistan 13.2 27.7  Romania 19.9 27.2 
India 12.2 1.8  Czech Republic 7.8 1.3 Turkey -9.5 -9.2  Turkey -3.0 -22.8 
Egypt -20.0 -20.0  Tunisia -4.3 -18.0 
Mexico -20.5 -10.8  India -12.5 -9.5 Indonesia -35.7 -36.3  Morocco -12.7 -19.0 
Cambodia -43.2 -31.1  Sri Lanka -21.6 -0.6 
Bangladesh -43.6 -41.9  Bangladesh -41.2 -8.4 Philippines -57.9 -53.8  Thailand -44.8 -26.9 
Sri Lanka -57.9 -64.5  Vietnam -49.0 6.6 
Thailand -62.0 -64.7  Indonesia -50.1 -30.7 
Sources:  United States International Trade Commission and the European Community, respectively. 1/ Includes only those categorie s liberalized in Phase III of the ATC where China had quotas.  
 
 
17. The balance of payments implications can be larger where countries are subject  to 
several adverse developments at the same time. Using a simple set of indicators of vulnerability to 
the trade policy events identified above, however, it would appear that only a  relatively small number 
of countries might be subject to significant impacts from more than one source.12 
D. ESTIMATING THE NET IMPACT OF A MULTILATERAL TRADE AGREEMENT  
18. The adverse developments do not, of course,  represent the full impact of a Doha Round 
settlement on a country’s external trade position or its balance of payments . A full analysis 
would need to take account of changes in the tr ade profile as imports and exports more generally 
adjust to the new trade policy environment. Avai lable studies suggest that the net impact of a 
comprehensive agreement on expor t development, over time, is overwhelmingly positive for all 
country groups.13 For example, simulations with the Global Trade Analysis Project model of 
international trade demonstrate that any negative impact  tends to be more than offset by other factors 
(although estimates are very sensitive to parameter sp ecifications). These include the benefits of better 
access to markets in countries that do not at present offer preferential access, and particularly the 
positive effect on competitiveness of countries’ own liberalization efforts.14 
19. There may be immediate adjustment costs and a temporary deterioration in the balance 
of payments even when the long run net impact of liberalization is positive.  On the other hand, 
trade policy changes agreed in  the WTO are generally phased in over many ears. The economy 
                                                      
12 The indicators are: (i) an estimated 2 percent or larg er decline in export unit values associated with a 
40 percent erosion of pr eferences; (ii) net food imports  represent more than 20 percent of total exports; (iii) a 
composite measure of vulnerability based on the concentration of exports of textiles and clothing, quota 
utilization rates and capacity for adjustment. According to these, admittedly arbitrary, cut-off points, only one 
country would be vulnerable to all three of the adverse impacts (Cape Verde), while ten would be subject to two. In some cases, different trade events might have directly offsetting impacts on the balance of payments.  
13 This may not necessarily be true for every coun try individually, and considering trade"policies in 
isolation. However, open trade is closely intertwined with other aspects of growth- and export-promoting reforms and resolving exact causalities is of more interest academically than in policy practice. 
14 See Global Economic Prospects 2004: Realizing the Development Promise of the Doha Agenda 
(World Bank: Washington, DC).  WT/L/565 
 Page 11 
 
therefore has longer to adjust. The negative impacts in any one year will tend to be more modest and 
gradually offset by the positive impacts from market opening by trading partners. One exception may be the impact of the ATC quota phase-out, which h as been backloaded with most of the impact 
coming at the end of the 10-year implementation period on January 1, 2005. 
20. It is difficult to arrive at point estimat es of the balance of payments implications  of trade 
liberalization in practice. General equilibrium models with th e required product detail and reliable 
parameter estimates are unavailable for many count ries. Furthermore, a full assessment would also 
require examining the macroeconomic implicati ons of multilateral liberalization. Second-round 
macroeconomic effects might operate both throu gh the current account (where changes in real 
incomes or in income distribution may affect sav ings investment balances) and the capital account 
(where capital inflows may be encouraged). Th e worldwide real income gain from multilateral 
liberalization would be expected to strengthen trade performance more generally. Finally, the balance 
of payments implications would also depend on the fo reign exchange regime in place in the country in 
question. 
E. T
HE NATURE OF BALANCE OF PAYMENTS IMPACTS AND IMPLICATIONS FOR FUND SUPPORT  
21. In considering the merits and structure of a Fund financial response to these types of trade 
adjustment issues, it is important to note that the implications of a multilateral trade agreement 
differ from those of other shocks , such as commodity price volatility: 
 First, the changes in relative prices  and market access will be permanent . Member 
countries will need to adjust to these perman ent changes in the world trading environment 
and, during the period of adjustment, may face a temporary deterioration in their balance of 
payments. Nevertheless, the impact over time of the changes can be presumed to be positive, and any necessary adjustment would be largely structural, rather than macroeconomic in 
nature. 
 
 Second, the measures giving rise to th ese impacts are preannounced and can be 
anticipated, rather than being sudden and unpredictable. The impact on the balance of 
payments could therefore be incorporated into the baseline of a Fund-supported program. 
 
 Third, the practical difficulties in determining the exact size of the impacts ex ante mean 
that, of course, outcomes may differ from projections. This suggests that a clear-cut rule 
relating impacts to access (as under the Comp ensatory Financing Facility (CFF)) would not 
be workable in this case. It also implies th e need to build flexibility into any policy. 
 
22. The speed of adjustment and duration of any negative balance of payments impact will 
depend on the export supply response and the ability of affected countries to  diversify their 
export and domestic production base. Many of the policy measures to promote adjustment are 
microeconomic in nature—labor market policies, training programs, infrastructure, and institutional 
reform. Additional policy measures may be required to ease the social impact on population groups 
heavily exposed to the affected sectors. These issu es fall within the expertise of the World Bank and 
other institutions. Nevertheless, as has been the experi ence in past episodes of trade liberalization, the 
Fund’s role in supporting an appropriate macr oeconomic and fiscal framework and measures to 
enhance the overall environment for business development will often be important and 
complementary to such policies. 
III. TRADE INTEGRATION MECHANISM 
A. O
VERVIEW  
23. The proposed mechanism would detail how the Fund would provide access to its 
resources as necessary to meet a balance of p ayments need associated with the net effect  of WT/L/565 
Page 12  
specified trade measures .
15 Consistent with the principle of uniformity of treatment, the Trade 
Integration Mechanism would be available to all member countries whether or not they are also 
members of the WTO. More specifically, the Fund would:    
 stand ready to discuss new arrangements in the upper credit tranches, the EFF, or the 
PRGF, with countries facing balance of payments shortfalls as a result of specified trade 
events; 
 
 take into account the anticipated impact of th ese specified trade events in determining the 
appropriate size of access during discussions with the authorities on new Fund arrangements 
or within scheduled program reviews (the "baseline feature"); and 
 
 be prepared to augment arrangements for countries that have already incorporated a trade 
adjustment baseline into the program but where th e actual balance of payments effect is larger 
than anticipated (the "deviation feature").  
 
24. The TIM would not be a special facility that would provide resources under special 
terms. Rather, it is a policy designed  to increase the predictability of resource  availability under 
existing facilities. A similar mechanism was established to enha nce the predictability of financing for 
Debt and Debt-Service Reduction Operations in the context of the Fund’s support of the Brady Plan.16 
In that case, as is envisaged under the TIM, no special financial terms were made available. 
25. A Fund policy aimed at addressing financing needs arising from multilateral trade 
liberalization is justified on several grounds . First, several members w ill probably face these needs. 
Even if only a subset eventually requires financial as sistance, a special policy would help ensure that a 
common framework of analysis and financial suppor t is applied across the membership. Second, the 
events that are the subject of the policy are predic table and largely exogenous from the perspective of 
individual members. The policy would provide a focal  point for dialogue with the authorities that 
would help encourage the early identification of fi nancing needs and associated policy actions. Third, 
the TIM would represent a concrete expression of policy coherence, in the context of what is arguably 
the single most important item on the multilatera l economic policy agenda over the coming period.17  
In addressing specific concerns expressed by me mbers during the trade negotiations, the policy is 
designed to help advance the Doha Development Agenda. While the Fund has signaled its support 
within the framework of existing policies, these have provided insufficient comfort, and members 
have continued to question the desirability of meani ngful liberalization targets in light of the potential 
balance of payments implications. And fourth, countries may increase the size of their own commitments if they are assured of support, a result that would be expected to benefit their economic 
performance. 
26. At the informal meeting of the Executive Board on September 3, 2003, some Directors 
expressed concerns that the TIM migh t weaken the commitment to liberalize  trade rather than 
strengthen it, and that it might lessen incentives to adjust. However, qualification for the TIM 
depends on the specified trade events having occu rred. Therefore, the TIM does not substitute for 
liberalization commitments but would, on the cont rary, weaken one possible source of opposition to 
liberalization. Access under the TIM is linked to the implementation of an appropriate policy 
framework, thus ensuring that it is asso ciated with any necessary adjustment. 
27. The TIM would be consistent with the Fund’s evolving approach to low-income  
countries. The approach underlying the TIM would be fl exible; it would avoid a generalized increase 
                                                      
15 The measures are set out in Section IV. 
16 "Fund Support for Debt Reduction Operations—Preliminary Considerations," EBS/89/78, 
April 19, 1989. 
17 The commitment to coherence in international policymaking has been repeatedly underlined by the 
governing bodies of the Fund, the Bank, and the WTO.  WT/L/565 
 Page 13 
 
in access to all low-income memb er countries, and it would channel Fund assistance to countries that 
face exogenous changes in their economic environment.  
B. ALTERNATIVE APPROACH  
28. An alternative approach would be to allow individual purchases outside the context of 
an arrangement, but that would raise a number of difficulties.  Most significantly, financial 
support of this nature still needs to be associated with an appropriate macroeconomic environment, 
which may entail adjustment. This issue has come up in the implementation of the CFF, which was 
amended in 2000 to provide for stand-alone purchases without an accompanying arrangement only in 
cases where the balance of payments situation was ot herwise found to be satisfactory—a test which is 
not often met.  Moreover, a key benefit of the TIM is the enhanced predictab ility of access, which is 
well served through an arrangement that constitu tes an assurance of use of Fund resources under 
specified conditions. Another reason for rejecting th is alternative approach is that individual 
disbursements outside the context of an arrangeme nt are not contemplated for PRGF financing. 
C. OTHER ASPECTS OF FUND ASSISTANCE WITH TRADE -RELATED ADJUSTMENT NEEDS  
29. Fund assistance to ensure that countries can ta ke full advantage of the opportunities of 
multilateral trade liberalization is not lim ited to the proposed financial support . Technical 
assistance and capacity building are crucial aspects of the Doha Development Agenda given the 
increasing complexity of the trade talks and policy, administrative, logistical and other constraints on 
trade that can limit the supply response. Fund experts provide significant and long-standing assistance for customs reform, tax and tariff reform—incl uding to mitigate the revenue implications of 
liberalization
18—and for data improvements. In the areas of its expertise, the Fund also contributes 
actively to the Integrated Framework process, which aims at strengthening consideration of trade 
reforms in national poverty reduction strategies and at  coordinating trade-related technical assistance. 
In the process of Article IV surveillance, Fund st aff engage with country authorities in identifying 
areas of opportunity and risk, and in devising appropriate policy responses to the challenges of international integration. The Fund has also strengthe ned its research capacity in the trade area, in a 
step that will enhance its ability to cooperate in  developing methodologies for assessing the impact of 
Doha Round reforms on member countries. 
IV. MODALITIES OF THE PROPOSED  TRADE INTEGRATION MECHANISM 
A. Q
UALIFICATION  
30. Member countries would qualify for Fund support under the Trade Integration 
Mechanism if they have a balance of paymen ts need related to specified trade events  and have 
adopted a policy framework that supports adjustment . The TIM could be activated either with the 
approval of a new arrangement with upper credit tr anche-type conditionality or in the context of 
completing a review under an existing arrangement.  
31. More specifically, qualification would be limit ed to those countries experiencing balance 
of payments difficulties arising from trade liberalization measures introduced  by other 
countries that result in more open market access for goods and services or remove trade-
distorting subsidies. Qualifying liberalization measures would normally be limited to measures 
introduced either (i) under a WTO agreement or (ii) on a nondiscriminatory basis. While it is not the intention to formulate an exclusive list of qualifyi ng events, these would typically cover measures that 
result in the following: 
                                                      
18 Fund staff have prepared several studies of the revenue impact of trade liberalization, for example, 
Occasional Paper No. 180, "Revenue Im plications of Trade Liberalization"  by Ebrill and others (1999) and 
"Revenue Implications of Trade Liberalization" (SM/01/255, August 8, 2001). Further work is currently 
underway to address this issue and inform Fund surveillance and technical assistance. WT/L/565 
Page 14  
(a) the erosion of preference margins in key export markets; 
(b) a shift in the food terms of trade to the detriment of net food importers; or 
(c) intensified competition in markets for textiles and clothing due to the elimination of 
bilateral quotas. 
As noted above the liberalization measures would normally qualify if they are taken within the 
framework of the WTO. They would also qualify if ta ken in another context (e.g., unilaterally or on a 
regional basis), provided that measures benefit all Fund members on a nondiscriminatory basis. For 
example, the erosion of preferences for certain deve loping country exporters, as a result of a reform of 
agricultural markets in one of the major trading nati ons, could give rise to qualification irrespective of 
whether these reforms were legally bound in the WTO.  32. To help overcome balance of payments prob lems stemming from other negative trade-
related events, member countries would co ntinue to be eligible for Fund support  under the 
Fund’s other existing policies. Also, members would not be precluded from seeking financial 
support outside the TIM for the type of balance of payments problems the TIM is designed to address. 
B. A
CCESS  
33. Access under the TIM would be determined unde r the access policies applicable to the 
underlying facility from which access is provided (upper credit tranches, the EFF, or the 
PRGF). Under the baseline feature, the anticipated impa ct of the specified trade events would be 
considered in determining the ove rall financing gap and the appropria te balance between adjustment 
and financing. The deviation feature envisages si mplified procedures for augmenting access in the 
underlying arrangement under specified circumstances.  While trade-related shocks would also be 
considered in determining access under the Fund’s regular policies in the absence of the TIM, the 
existence of a dedicated policy would be expected  to result in a modest upward shift in access under 
otherwise comparable circumstances. This is lik ely because of greater attention to trade-related 
vulnerabilities and a shift in the balance between adjust ment and financing, particularly in the case of 
the deviation feature. Such a shift in balance woul d reflect the generally favourable impact of the 
trade reforms over time, and the benefits of cont ributing—by mitigating traderelated balance of 
payments concerns—to the broader liberali zation of the world trading environment. 
    
 
   
 
 
   WT/L/565 
 Page 15 
 
Table 2: Schematic of Access unde r Baseline and Deviation Feature 
 
 
 
   
 
Existing 
arrangement 
predating 
TIM 
 
TIM approved 
  
Scheduled 
review:  
Request for 
consideration 
under the 
TIM. 
Possible 
modification 
of access 
under 
baseline 
feature based 
on projected 
impact 
 
 
Trade adjustment 
impact on balance of payments  
Augmentation 
of access 
under 
deviation 
feature 
considered if 
actual impact 
exceeds 
baseline 
projection 
  
New 
arrangement 
following 
approval of 
TIM  
Projected 
impact under 
baseline 
feature 
factored into 
access at 
approval of 
arrangement  
Augmentation 
of access 
under 
deviation 
feature 
considered if 
actual impact 
exceeds 
baseline 
projection 
  Baseline feature 
 
34. The baseline feature of the TIM would address anticipated balance of payments  needs 
over the course of the Fund-supported program. Qualification for the baseline feature would be 
established as part of regular program design, either at the start of an arrangement or at the time of a scheduled program review. In the context of a request for the TIM, Fund staff would work with the 
authorities and other IFIs, as necessary, to identify th e expected balance of payments impact over the 
program period associated with the trade events speci fied in paragraph 31 ("baseline impact"). As new 
information becomes available,  the projection w ould be updated in subse quent program reviews. 
35. The baseline impact, defined as the direct expected impact
19 of the trade event  prior to 
any adjustment, would form the basis of a policy discussion with the authorities. The agreed 
adjustment effort would take account of the phasi ng of the impact and of any offsetting—though 
possibly delayed—implications of the more gene rally open trade environment for the balance of 
payments. The revised trade performance would be built into the medium-term balance of payments 
framework and factored into the access levels gran ted under the arrangement, either upon its approval 
or at the time of a program review (with the total amount of access normally remaining in line with general access policies).  
                                                      
19 The direct impact is a "net impact" in the narrow sense that it refers to the impact on exports or 
imports minus directly associated changes in other items. For example, the impact of a reduction in garment 
exports would be net of reduced imports of fabric used in the production process. WT/L/565 
Page 16  36. In the context of a program review, the Fund would consider a modification in access 
under the existing arrangement,  but only if a careful examination of expected changes in the trade 
environment established a revised net balance of pa yments shortfall and associated adjustment needs 
that exceeded earlier projections, and where the change  was attributable to the anticipated impact of 
the specified trade events.
20  
Deviation feature 
 
37. The Board could decide to augment an arrangement supported under the TIM when the 
actual balance of payments effect ( ex post) is larger than anticipated under the  established 
baseline (the difference is referred to as the "devia tion"). This policy acknowledges that, while 
reforms agreed for instance in the Doha Round—on ce signed—are themselves predictable, their net 
impact may be subject to significant uncertain ty. Augmentation would be done in light of net 
financing needs at the time, which are largely attrib utable to the specified trade reforms set out in 
paragraph 31. 
38. When approving the baseline feature, the Board would signal its willingness to consider 
an augmentation to cover the deviation, if and when the need arises . The deviation would be 
defined with reference to the original baseline established when the TIM was approved, except in 
cases where access had been modified in the contex t of a program review. In the latter case, the 
baseline underlying the revised access decision woul d be the relevant reference in identifying a 
deviation. Given the uncertainties involved in disentangling different contemporaneous causes of a 
shortfall, it would be difficult to tie the size of  the augmentation under the deviation feature to a 
precise estimate of the extent of the deviation from the baseline. Instead, staff recommend that 
members would qualify under the TIM for an augmentation of a capped amount (see below) if: 
(a) there was evidence that the member was expe riencing a larger than expected balance 
of payments need,  
(b) this was not due to a failure to implement agreed policies, and 
(c) in the Fund’s judgment, the shortfall was re lated to the specified trade events whose 
impact exceeded earlier expectations. 
Augmentation under the deviation feature of the TIM would thus require the underlying program to be 
on track with the exception of deviations, for exampl e from NIR targets, which could be linked to the 
trade-related events. Accordingly, augmenta tion would not normally involve any additional 
conditionality.  39. Augmentation under the deviation feature would be capped at 10 percent of  quota per 
arrangement.
21 Capping the standard augmentation at a rela tively modest level would make it easier 
to accept streamlined procedures for approving th e augmentation without unduly undermining the 
safeguards to the Fund. An augmentation review un der the deviation feature could take place outside 
the scheduled program review cycle, in which case it would normally be expected to take place on a 
lapse-of-time basis upon the determination that: (i ) the program is broadly on track and (ii) the 
additional financing is justified by the type of bala nce of payments need that the TIM was established 
to address. 
                                                      
20 Such a modification in access, which would be based on the projected impact of the trade events, 
must be distinguished from possible augmentation ex post under the deviation feature of the TIM (based on the 
actual impact of the trade event).  
21 The 10 percent is not a target and, in cases where the Fund approves shor t arrangements for the 
member in quick succession, the previous activation of th e deviation feature for a particular trade event may be 
taken into account in determining access.   WT/L/565 
 Page 17 
 40. To the extent that a member faced a shortfall compared to the baseline that could not be 
accommodated by a 10 percent of quota augmentation, the entire program  supported by the 
underlying arrangement would need to be re-evaluated. In particular, it would be important to 
recalibrate the appropriate mix of adjustment and financing. A reevaluation of the program of this 
kind in response to a much larger than anticipat ed shock could involve both higher access and new 
conditionality. 
C. C
ONDITIONALITY  
41. Conditionality would be devised in the context of access under the underlying   
arrangement. Conditionality associated with access under an arrangement incorporating the TIM in 
the baseline22 will not differ in substance from that envisag ed (in the hypothetical absence of the TIM) 
for the underlying arrangement inasmuch as the pr imary aims would be to ensure an orderly 
macroeconomic framework and an economic envir onment supportive of adjustment. Nevertheless, 
despite the expected temporary nature of any adve rse macroeconomic impact of liberalization, there 
may of course be cases where the trade events that  the TIM is designed to address are sufficiently 
large and their expected impact sufficiently durabl e that they would have a significant influence on 
the appropriate macroeconomic policy mix. Th ese changes, and associated conditionality as 
necessary, would be incorporated in the underlying a rrangement at the time of initial approval or in 
the context of a scheduled program review. 
42. Appropriate adjustment will require that sound macroeconomic policies are in place. 
Furthermore, adjustment calls for an overall policy framework that allows  consumers to 
respond to changing world prices and investment, production to adapt to changing comparative 
advantage, and social policies that provide  adequate safety nets for the poor. These requirements 
are in line with those for any Fund-supported progr am and do not exclude the possibility that trade-
related conditions would be included in the unde rlying program where appropriate. It would, 
however, be inappropriate for a member country receiving support under the TIM to introduce, or 
have in place, policies which prevented ad justment to the new trade environment. 
D. TERMS AND PHASING  
43. The financing terms under the TIM would be those of the underlying policy under 
which original access was granted (i.e., upper credit tranches, the EFF, or the  PRGF). Both low- 
and middle-income members may wish to use the ne w TIM and financing terms will need to reflect 
their different circumstances. Un like in the cases of other special policies and facilities such as the 
Supplemental Reserve Facility or the Y2K facility where the envisaged shoc k was expected to be 
short-lived, the trade events covered by the TIM may re quire structural adjustment that is no different 
in its duration from other adjustment processes unde r Fund-supported programs, suggesting that the 
repayment terms of the underlying facility would be appropriate. The phasing of disbursements under 
an arrangement incorporating the TIM would be set to reflect the overall profile of financing needs, 
including those related to the events that gave rise to qualification under the TIM. 
E. REVIEW PROVISION  
44. As the TIM is designed to ease adjustment  to specified trade-events, which will be 
implemented over a limited time horizon, the policy is envisaged to be temporary.23 An 
appropriate date for the policy to lapse will depend largely (though not exclusively) on the phasing of 
measures agreed during the Doha Round. Staff prop oses that an Executive Board review of the early 
                                                      
22 As mentioned, there is no expectation that access under the deviation feature would be associated 
with additional conditionality.  
23 While the impact of unilateral liberalization on third countries is covered by the definition in 
paragraph 31, the main purpose of the TIM is to address co ncerns that have arisen in  the current Do ha Round of 
the WTO.  WT/L/565 
Page 18  
experience with the policy be completed after three years, and a decision be taken at that time on the 
duration of the policy. 
F. R
ELATIONSHIP WITH WORLD BANK LENDING OPERATIONS  
45. Concurrent with the announcement of the Fund’s initiative at the Cancún Ministerial 
Meeting of the WTO, the World Bank an nounced a parallel initiative aimed  at addressing 
trade-related sectoral and institutional concerns (Box 2). The World Bank’s initiative could make 
resources available, for instance, for competitiv eness-enhancing policy initiatives, labor market 
mobility, public investments, trade facilitation and lo gistics and reforms of trade-related institutions. 
Countries that were to avail themselves of the TI M may also request assistance from the World Bank 
under its lending instruments. In so far as member s were to request concurrent support from both the 
Fund and the Bank under these new policies, the exp ectation would be that the two staffs would 
coordinate closely—in line with the establishe d framework for Fund/Bank collaboration—to ensure 
that policy advice was tailored to addressing underlying problems while at the same time taking care to avoid any cross-conditionality between the Fund’s and the Bank’s policy instruments. 
 
Box 2: World Bank Program in Support of Trade 
 
During the WTO Ministerial Meeting in Cancún, the World Bank announced that it will step up its analytical 
and lending activities to assist countries take advantag e of trade integration. The Bank’s program has two 
components: (a) new resources devoted to trade facilitation and logistics , including investment in ports, roads, 
customs, and reform of trade-related institutions; and (b) support for governments designing trade reform 
programs to increase international competitiveness, take  advantage of new trading opportunities, and mitigate 
any adjustment costs associat ed with reform programs. The second co mponent will provide bu dget resources to 
help workers move into internationally competitive activities and provide resources for income maintenance, 
retraining, etc. 
 The Bank is already active in supporting trade facilitati on and logistics development. There are a total of 73 
trade-related lending operations under preparation covering 42 different countries. Roughly half of these 
operations focus on trade facilitation, central to long-term competitiveness. 
 
Through the Trade Facilitation Initiative the Bank has developed new tools to help improve the quality of 
operations and disseminate best practice across the differen t regions. The Bank has increased staffing in critical 
areas such as customs, port management, and shipping security. 
 
To leverage impact, the Bank is collaborating with other agencies and the private sector in creating a world-
wide constituency for the implementation of trade logis tics and trade facilitation reforms through a Global Trade 
Facilitation Partnership for Transportation and Trade . This group is serving as a forum for over one hundred 
international partners to collaborate and share information, including distance learning activities, on global best 
practices and capacity building. 
 
 
V. IMPACT ON FUND LIQUIDITY AND RESOURCE IMPLICATIONS 
A. GENERAL RESOURCES ACCOUNT (GRA) 
46. Purchases under the TIM are expected to  remain within a manageable range  and are 
unlikely to strain the Fund’s liquidity position. With or without the TIM, the Fund may be called 
upon to fill (in part) members’ balance of payments  gaps. Nevertheless, as noted earlier, the TIM may 
cause an upward shift in access.  
47. Applying the criteria set out in footnote 11 above, 17 non-PRGF eligible members would 
be potentially vulnerable to at least one negative trade event giving rise  to qualification under 
the TIM (considering preference erosion, food terms of tr ade changes, and the elimination of bilateral  WT/L/565 
 Page 19 
 
textiles quotas). Five of these countries currently have programs supported by Fund arrangements. It 
is difficult to estimate the incremental access attributable to the TIM. While the impact of the trade 
events can be large in individual cases, it would be re flected in balance of payments projections and at 
least partly considered for Fund financing under a rrangements, even in the absence of the TIM. In a 
scenario in which additional access of 15 percent of q uota on average can be attributed to the TIM, the 
total claim on liquidity over the full period of the trade adjustment process would be in the range of 
SDR 300–825 million depending on whether only these fi ve or all vulnerable countries would avail 
themselves of the TIM in the context of one arrangeme nt. Note that there is a possibility that requests 
would cumulate around the expiry date of the te xtiles quotas in early 2005—seven non-PRGF eligible 
countries are considered vulnerable to incr eased competitive pressur es in textiles markets.24 
B. PRGF  TRUST  
48. The TIM could have a more significant effect on available PRGF Trust resources that 
would need to be monitored closely. As in the case of the GRA, the TIM could lead to an upward 
shift in access, especially in view of the rela tively low access levels in successor arrangements. 
49. Staff estimates that, of the 76 PRGF-eligible countries,25 31 are vulnerable to at least one 
of the trade events specified in paragraph 31 .26 Eighteen of these currently have PRGF 
arrangements. Again, under a scenario in which av erage incremental access of 15 percent of quota can 
be attributed to the TIM—under the baseline and/ or the deviation feature—additional demand for 
PRGF resources during the full period of the trade ad justment process would be in the range of SDR 
500–600 million (with each country drawing on the TIM in the context of one arrangement). The low 
end of the range reflects only those countries with  current PRGF arrangements receiving additional 
access, while the high end is the outcome if all count ries potentially subject to such shocks were to 
receive additional access. As additional demand for PR GF resources would span a period of several 
years, in line with the expected implementation sc hedule of trade liberalization commitments, it is 
currently projected  that the additional demand can be met from available resources for PRGF 
operations. However, a bunching of requests around the date of the elimination of textiles quotas in 
2005 could put some strain on meeting demand—e ight PRGF-eligible countries are considered 
potentially vulnerable to the increased competition.27  Available resources will, therefore, need to be 
reviewed regularly. 
C. STAFF RESOURCE IMPLICATIONS  
50. The implications for staff resources of the TIM are difficult to establish at  present but 
are not expected to be large. Sunk costs have been incurred in preparing this initiative and the 
proposed three-year review of the policy would add to work pressures both among the staff and at the 
Board. The work pressures of country missions woul d increase to the extent that staff, including in 
response to requests from authorities, would need to develop more detailed data and analysis 
regarding the impact of multilateral trade liberalizat ion than might otherwise have been the case. The 
resource implications will depend in part on the abilit y of staff to develop appropriate filters that 
allow a selective emphasis on the most releva nt countries while avoiding excessive resource 
allocation to less relevant cases. The support of th e functional departments, including PDR and RES, 
will be important in this respect. For arrangement s involving the TIM, staff reports and LOI/MEFPs 
would of course be expected to include a stronger focus on trade-policy issues and on the justification 
for any request, although the incremental time and e ffort is unlikely to be large. The phasing of 
                                                      
24 A decline of five percent in the textiles and clot hing exports of these countries would amount to a 
revenue loss of close to US$1 billion (based on exports in 2000).  
25 Excluding India, which has indicated that it does not envisage to draw on PRGF resources, and 
Zimbabwe, which has been declared ineligible to draw on PRGF resources in light of its overdue obligations to 
the Fund.  
26 Criteria of vulnerability as in footnote 12. 
27 A five percent decline in the exports of textiles and clothing of these countries would represent 
US$750 million in lost export revenue (based on exports in 2000). WT/L/565 
Page 20  
resource needs under the TIM is also dependent  on progress in bringing the Doha Round to a 
successful conclusion; nevertheless, some of the co ncerns that the TIM is designed to address, in 
particular those relating to the phasing out of textiles quotas, are independent of the Doha Round 
timetable. 
51. Staff proposes to return to the Board with  a firm costing as work progresses on 
developing methodologies of impact assessme nt and demand for the TIM becomes clearer.  
VI. CONCLUDING REMARKS 
52. The impetus for proposing the TIM stems from  concerns that developing countries have 
raised in the context of the Doha Round.   Many developing countries have been hesitant in their 
support for ambitious liberalization targets under th e Round, arguing that such liberalization may 
reduce their competitiveness in export markets, cause unfavorable changes in their terms of trade, and 
weaken their balance of payments. An initial analys is suggests that there are unlikely to be grounds 
for serious concerns in a majority of countries, but that multilateral liberalization may place temporary 
adjustment pressures on a minority. While there is little doubt that the eventual impact of a Doha 
Round agreement would be overwhe lmingly positive, the timing of impacts and the economic 
response, over which there is some uncertainty, ma y give rise to transitory balance of payments 
shortfalls.  
53. The proposed TIM is intended to provide  added assurances to Fund members that 
short-run financial imbalances need not stand in the way of ambitious  liberalization targets 
under the Doha Development Agenda.  
 
__________