RESTRICTED  WORLD TRADE  
ORGANIZATION  WT/TPR/G/164 
3 May 2006  
 
(06-2006) 
Trade Policy Review Body Original:  English 
   
 
  
 
TRADE POLICY REVIEW 
 
Report by 
 
ICELAND 
 
  
 
Pursuant to the Agreement Establishi ng the Trade Policy Review Mechanism 
(Annex 3 of the Marrakesh Agreement Establishing the World Trade 
Organization), the policy statement by Iceland is attached. 
 
 
Note: This report is subject to restricted circ ulation and press embargo until the end of the first 
 session of the meeting of the Trade Policy Review Body on Iceland. Iceland WT/TPR/G/164 
 Page 3 
 
 
CONTENTS 
 
 
  Page 
I. INTRODUCTION 5 
II. THE ECONOMIC ENVIRONMENT 6 
 (1) E CONOMIC DEVELOPMENTS AND PROSPECTS  6 
 (2) F OREIGN TRADE  8 
 (3) S TRUCTURAL REFORMS  9 
 (i) Privatisation 9 
 (ii) Competition Policy 10 
 (iii) Deregulating Markets 10 
 (iv) Tax Reform 11  (v) Other Reforms in Review Period 11 
III. TRADE POLICY OBJECTIVES AND DEVELOPMENT 12 
 (1) T
HE WORLD TRADE ORGANIZATION  12 
 (2) T HE EUROPEAN ECONOMIC AREA (EEA) 14 
 (3) F REE TRADE AGREEMENTS  14 
  
 
 Iceland WT/TPR/G/164 
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I. INTRODUCTION 
1. International trade plays a key role in the Icelandic economy, accounting for a substantial 
proportion of the country’s GDP1.  Iceland imports a wide range of manufactured goods and 
commodities, reflecting both the small size of the economy and the limited range of natural resources.  
Although the mainstay of Iceland’s exports still rema ins fish and other marine products, the diversity 
of exports has increased significantly in recent y ears with a rapid growth in the importance of 
manufactured products and services.  The Icelandic government attaches great importance to the 
openness of markets for goods and services and the furt her liberalisation of trade at the multilateral, 
regional and bilateral levels. 
2. The objective of Iceland’s economic policy has b een to maintain economic stability and raise 
living standards.  The strategy of fiscal policy h as been to create a counter-cyclical impact on demand 
through automatic stabilisers and discretionary meas ures.  While growth rates of economic activity 
have been high in past years, fis cal policy has had an impact to restrain demand.  As a result of the 
restrictive fiscal policy stance, budget surpluses have been generated which have been used to reduce 
the public debt.  The monetary policy strategy, wh ich was reformed in 2001, aims to achieve an 
inflation target of 2,5% with a floa ting exchange rate.  In recent years, the interest rate has been raised 
sharply to counter the rapidly rising demand, par tly due to large-scale investment projects.  The 
monetary policy stance has resulted in an apprecia tion of the króna, which has helped contain price 
pressure in the economy. 
3. Significant structural policy reforms have been  implemented in recent years.  These have 
contributed to increasing economic growth, while also helping to reduce demand pressures in the 
economy.  The tax system has been simplified and ma de more efficient and neutral, notably through a 
significant reduction in tax rates.  Publicly owne d firms in the financial and communication sectors 
have been privatised, which has served to incr ease competition and activity in the economy and the 
proceeds have been used to fu rther reduce the public debt, whic h is now low by international 
standards.  In addition markets in electricity a nd telecommunications have been liberalised and the 
regulatory framework concerning competition and gove rnment procurement has been strengthened.  
These reforms have contributed to making the bus iness environment more favourable for domestic 
and foreign investors. 
4. The main challenge to policy makers in recen t years has been to manage the high economic 
growth.  Importantly, the inflow of foreign workers and low and stable prices  on international markets 
have helped to reduce the pressures in the economy.   Economic and structural policy reforms have 
thus combined to ensure a stable and flexible operating environment for Icelandic goods and services 
producers.  Importantly, the scope for flexible ad justment in an ever changing and globalising 
economic environment has ensured the viability of firms and their ability to manage a temporary deterioration of their international competitiveness due to a high exchange rate in recent years. 
5. Iceland’s trade policy is pursued along three main tracks: multilateral trade liberalisation 
through the WTO, regional liberalisation throug h the European Economic Area (EEA) with its 
EFTA/EEA partners and the European Union and finally, bilateral free trade agreements in 
cooperation with its EFTA partners  Norway, Liechtenstein and Swit zerland.  Iceland sees regional 
and bilateral trade agreements as complementary to  the multilateral regime.  They are essential for the 
expansion of trade and economic  cooperation as well as an important foundation on which to build 
Icelandic business opportunities.  However, regional and bilateral agreements cannot replace the need 
for a strong, rules based, multilateral trade regime  which is of particular  importance to smaller 
                                                     
 
1 Exports and imports of goods and services amounted to 41% and 36% of GDP respectively in 2004.  WT/TPR/G/164 Trade Policy Review 
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members like Iceland.  Iceland is furthermore st rongly committed to the Doha Development Agenda 
and a fair and equitable outcome that will benefit the entire membership. 
6. This report starts by describing the economic environment in which Icelandic trade has 
developed since Iceland’s last review.  It then set s out the main structural reforms that have taken 
place.  Finally the report describes Iceland’s trad e policy objectives and key developments during the 
review period. 
II. THE ECONOMIC ENVIRONMENT 
(1) ECONOMIC DEVELOPMENTS AND PROSPECTS  
7. Policies of market liberalisation, fiscal conso lidation, privatisation and other structural 
reforms have led to a turn around of the Icelandi c economy since the early 1990s.  After a period of 
slow or negative output growth in the late 1980s an d early 1990s, economic growth started to gain 
momentum.  During the second half of the 1990s, the liberalisation process continued, competition 
increased, the Icelandic financial markets and fina ncial institutions were restructured and the 
exchange rate policy became more flexible.  With the additional effects of increased foreign direct 
investment, notably in aluminium production capacity , Iceland experienced one of the highest GDP 
growth rates among OECD countries.  By 1999, however, signs of overheating became increasingly 
visible.  Inflation took off in the wake of a change in the monetary policy strategy.  The fixed exchange rate policy was abandoned and a flexible exch ange rate with an inflation target was adopted.  
This led to a sharp decline in the value of the exch ange rate with an associat ed inflation spike that 
reached a peak in January 2002.  The economy th en underwent rapid adjustment and the current 
account deficit disappeared in the space of two year s.  Due to increasing slack in the economy, the 
inflation rate came down relatively quickly to the 2,5 per cent inflation target.  In 2003 an economic 
recovery began which gained momentum in 2004  when GDP growth reached 8.2%.  Economic 
growth continued at 5.5% in 2005. 
8. Private consumption and large scale investment in energy intensive projects has been an 
important source of this recent growth.  Relative to the size of Iceland’s economy, investments in the 
aluminium and power sectors in recent years have b een very large, totalling a little over a quarter of 
Iceland’s 2005 GDP.  A second driver has been the sweeping change that took place in the mortgage 
market in 2004 when the banks raised their profile in the mortgage market by engaging in head-on 
competition with the state-run Housing Financing Fund (HFF).  
9. The Icelandic labour market has one of the highest participation rates among OECD 
countries.  Over the past 10 years it has consistently been well above 80%.  This is explained partly by 
the fact that the rate of unemployment has normally been one of the lowest in the OECD.  In 2004 the unemployment rate was 3.1%, considerably lower than  unemployment levels in the early 1990s and in 
2005 unemployment declined somewhat.  The participa tion rate of women has also been very high by 
international standards.  In 2004, female participa tion was one of the highest in the OECD countries, 
with women accounting for 47% of the labour force.   Participation rates among the young and the 
elderly have also been quite high.  Furthermore, I celanders tend to work long  hours.  The participation 
rate and number of hours worked are positively corr elated with economic growth, dampening cyclical 
movements in unemployment. 
10. Recent developments in the labour market have to some extent been contradictory.  Wage 
drift has been rather muted in historical terms, even  in sectors that have experienced labour shortages.  
Stronger competition in the product markets seems to have added a new dimension to the flexibility of 
the Icelandic labour market, as employers have chosen to import labour on a large scale rather than Iceland WT/TPR/G/164 
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bid up wages as in previous periods of labour shortages.  In 2004 approximately 4.7% of the Icelandic 
labour force was foreign, a modest figure, but re presenting a considerable increase in the number of 
foreign workers in recent years. 
11. A new monetary policy framework, granting the Central Bank of Iceland full independence to 
implement monetary policy in accordance with an in flation target, came into effect in 2001.  The 
target was defined as a twelve-month rate of change in the CPI of 2.5%.  After a spike in inflation 
caused by a substantial depreciation of the króna , as imbalances built up during the preceding fixed 
exchange-rate regime were corr ected, the inflation target was reached in November 2003.  
Subsequently, inflation was at or below the target until spring 2004.  Since then inflation has been 
above the target and was in 2005 on average 1,5% above target.  The recent rise in inflation has been 
the result of rapid expansion of domestic demand brought about by the combined effect of the 
investment projects and enhanced access of households  and firms to credit at lower interest rates.  
Inflation has stemmed  mostly from the rise in the price of housing.  Excluding housing, inflation was 
in fact scant in 2005.  The demand-driven nature of  inflation is most evident in rising prices of non-
traded goods and services and housin g, while other goods prices, with the exception of fuel prices, 
have fallen year-on-year, mainly due to a appreciation of the Icelandic króna.  
12. Although the current imbalances in the economy have posed challenges, the new monetary 
policy framework has enabled the Central Bank to react  more promptly than in previous episodes of 
imbalances.  In light of rising demand and the infl ation outlook, the Central Bank began to raise its 
policy interest rate as early as May 2004.  In September 2005 the Central Ba nk reiterated its ongoing 
commitment to bring inflation back to target, by  pursuing a tight monetary policy and maintaining it 
for longer than previously has been expected.  By January 2006 it had been raised by over 
5 percentage points to 10.75%. 
13. Compared to its neighbours, Iceland has a rela tively small public sector, with expenditures of 
around 47% of GDP in 2004.  This is lower than in the Nordic countries (53%) and the mainland countries of the European Union (49%), but higher than for the US, Japan or South Korea. 
14. General government expenditure as a share of GDP has risen in the last few years, from 
42,3% in 1998 to 45,7% in 2005, due mostly to in creased outlays on health, education and social 
protection.  Nevertheless, the budget balance has been mostly in surplus as general government 
revenues as share of GDP have over the same time risen from 42,8% to 49%.  In the past decade or 
so, the fiscal balance has been counter cyclical.  A thirteen-year string of general government deficits 
came to an end in 1997 after economic growth  picked up.  During the upswing from 1997 to 2001 
there was a return to surplus.  As the economy cooled down in 2002-2003 the surplus turned into 
deficit.  Renewed growth brought back a surplu s in 2004 and 2005.  The Government's restrictive 
fiscal policy led to a budget deficit in 2003 being tu rned into surpluses in 2004 and 2005.  The impact 
of the policy amounted to 5.5% of GDP over the peri od.  This achievement rests on the medium term 
target of the government to restrain expenditure growth while allowing revenues in the upswing to 
deliver a sizable surplus.  The outcome was realised  despite a 1 percentage point cut in the personal 
income tax rate in 2005. 
15. If the intentions of the 2005 budget are realised , the financial surplus from 1998 to 2005 will 
amount to 38 billion ISK.  This surplus is bein g used to strengthen the Government Employees 
Pension Fund and to further reduce Treasury debt, which has been reduced by nearly half since 1995. 
Total Treasury debt has declined from 52.3 per cent of GDP in 1995 to 20.2 per cent according to the 
2005 budget.  Net Treasury debt declined from 35.0 per cent of GDP in 1995 to an expected 7.7 per cent in 2005, due also to the use of pro ceeds from the sale of Iceland Telecom to reduce the 
debt still further.  A lower debt leads to lower inte rest payments.  If debt had remained at 1998-levels, WT/TPR/G/164 Trade Policy Review 
Page 8 
 
 
interest payments would be more than 11 billion ISK higher than estimated in the budget, not a 
trifling sum.  Total supplementary contributions  of the Treasury to the Government Employees 
Pension Fund - made to reduce future commitments to the Fund – amount to close to 80 billion ISK including interest for the period 1995-2005.  The position of the Fund has thus been strengthened 
accordingly and the need for direct payments of the Fund’s pensions out of the Treasury has thus been 
postponed for many years. 
16. In 2006, GDP growth is expected to continue to be robust, or 5 per cent.  Growth in domestic 
demand is expected to slow down but increased expor ts of aluminium products will begin to be felt. 
In 2007, economic activities are projected to slow down and continuing improvement in foreign trade 
will drive the growth of GDP, which is expected to  be 2.7 per cent.  The deficit on the current account 
reached a peak last year when it amounted to 15 per cent of GDP.  The current account deficit is 
expected to decrease this year and be 13 per cent of GDP and then decline sharply in 2007 when it is 
projected to be about 6 per cent of GDP.  Unemploym ent has declined sharply and is expected to be 
1.7 per cent of the labour force in 2006, but to in crease to 2.6 per cent in 2007, when activity is 
projected to slow down.  Some pressure is expected  to be felt in the economy this year but it is 
expected it will unwind quickly next year as major i nvestment projects are completed.  The rapid rise 
in housing prices has led to the consumer pri ce index increasing 4% in 2005, which is beyond the 
2.5 per cent inflation target of the Central Bank.  According to the projections inflation will be 
3.9 per cent in 2006.  There is an expectation that  housing prices may now have peaked and that the 
exchange rate of the króna will decline throughout th e year.  Inflation is expected to reach 4 per cent 
in 2007 due to the continued weakening of the króna. 
(2) F
OREIGN TRADE  
17. In 2004, imports and exports of goods a nd services amounted to 41% and 36% of GDP 
respectively.  Although Iceland can be seen as a fairly open economy, reflecting the small size of GDP, many larger economies have a considerably highe r ratio.  To some extent Iceland’s lower ratio 
than that of many larger economies can be explai ned by geographic distance from major population 
centres, but other factors may also be at work, including currency volatility and labour costs that are 
relatively high when compared in  a common currency.  The divers ity of Iceland’s exports has, 
however, increased significantly in recent years, due to  structural reforms and privatisation of state 
owned entities in finance and other sectors.  While fi sh and other marine products are still the largest 
part of merchandise exports their share has been dec lining over the past 12 years.  In 2004, fish and 
other marine products accounted for 60% of merc handise exports and 39% of total exports, down 
from 82% and 60% respectively in 1991.  Export s of manufactured products have been growing 
rapidly in importance, and accounted for 35% of me rchandise exports in 2004.  Services now account 
for 36% of total export revenues while in 1990 the share was 26%. 
18. Iceland imports a wide range of manufactur ed goods and commodities, reflecting both the 
small size of the economy and the limited range of natural resources.  Imports of capital goods 
accounted for 28% of total merchandise imports in 20 04.  Industrial supplies and consumer goods are 
each around one-third of imports.  Free trade arrange ments with Europe have stimulated Iceland’s 
trade with the region, causing the share of trade with  North America to fall.  In 2004, four-fifths of 
merchandise exports went to the member countries of  the EEA, which also were  the source of almost 
three-quarters of imports.  Currently, the largest trading partner countries are Germany, the UK, the 
Netherlands and the Nordic countries.  In terms of currency, the euro ar ea constitutes the largest 
trading area, accounting for 40% of imports and 48% of  exports.  Iceland has in recent years generally 
had a trade surplus with the UK, Germany, the Ne therlands and the Iberian countries, but a deficit 
with the USA, Japan and its Nordic neighbours. Iceland WT/TPR/G/164 
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19. Iceland’s ratio of services to total trade is one of the highest among OECD countries.  In 
2003, Iceland ranked third with a share of services to to tal trade of one-third.  Data on the direction of 
services trade are not as reliable as merchandise trade data.  However, just over 1/5 of Iceland’s 
services exports in 2004 used the euro and 2/5 used the USD as the vehicle currency. 
20. Since 1995, the only restrictions on investment by non-residents in Iceland apply to foreign 
direct investment in fisheries and fish processing, energy production and distribution, and aviation companies.  Restrictions on investment in the fi sheries sector apply equally to EEA residents and 
Non-EEA residents and have the purpose of protect ing the nation’s exclusive rights to the fishing 
grounds around Iceland.  Energy harnessing right s and production and distribution of energy are 
restricted to EEA entities and entities domiciled outside the EEA may not own more than 49% of the 
shares in Icelandic aviation companies.  Liberalisation of cross-border capital movements has led to a profound change in the composition of residents’ fina ncial asset portfolios.  Before full liberalisation 
in 1995 residents owned only approx imately €145 million (13 billion ISK)  in foreign securities.  Over 
the ten years to the end of 2004, foreign asset portfolios rose twenty-sev en-fold to €3.9 billion 
(344 billion ISK), the equivalent of 39% of GDP.  This  trend is expected to have continued in 2005. 
21. The economy began to respond to the large projects in 2003 and the exchange rate 
appreciated by almost 20% from the end of 2003 to the end of October 2005.  The strong Icelandic króna, buoyant private consumption and growing pace of aluminium-related investments have been reflected in substantial growth in imports.  Expor ts, however, after remaining virtually unchanged in 
2003, rallied in 2004, declined slightly in 2005 a nd are expected to increase by around 10% in 2006. 
The current account deficit has increased and reached  a peak of 15% of GDP in 2005.  However, the 
deficit is expected to decrease somewhat in 2006 and then decline sharply to 6% in 2007.  Imports in 
connection with investments in the aluminium and power sectors are estimated to account for half of 
the deficit in 2005 and 2006, and are then expected to subside once the investment period is over and 
plants come on stream. 
(3) S
TRUCTURAL REFORMS  
22. A number of structural reforms have been impl emented in Iceland during the review period. 
The main objective of these reform s has been to increase the effici ency and competitiveness of the 
economy.  An extensive programme of privatisa tion has been carried out.  Competition has been 
enhanced through liberalisation of the electricity  and telecommunications markets, structural 
adjustments in the agricultural sector as well as th e restructuring and strengthening of the regulatory 
framework.  Wide ranging tax reforms have been  carried out benefiting both individuals and 
businesses.  Generally, cooperation within the contex t of the EEA Agreement has led to reviews and 
reforms of a number of regulations. 
(i) Privatisation 
23. Over the last 15 years the Icelandic governme nt has pursued an extensive programme of 
privatisation, contributing to the transforma tion of the economy towards a more liberal and 
competitive environment.  After the most recent sale s, which include Iceland Telecom, the two state 
owned banks and several sectoral loan funds, the state’s most important business holdings are in the production and distribution of electricity, as well as the Housing Financing Fund, the Student Loan Fund and a few smaller financial ins titutions, altogether responsible for just under 20% of credit in the 
economy.  Additionally, the State owns a 100% of the shares in Iceland Post, which is the largest 
letter, parcel and product distribution service for consumers and businesses.  The government’s 
monopoly both on telecommunications and broadcas ting has been abolished and its competitive 
advantage diluted with new entrants. WT/TPR/G/164 Trade Policy Review 
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24. Local governments own more than half of all the electricity production capacity in Iceland, 
notably through holdings in the national power co mpany, Landsvirkjun and Reykjavik Energy as well 
as numerous small heating distributors, mainly geothermal power companies responsible for the 
central heating of most homes.  As of the beginni ng of 2006 no decision has been made on privatising 
the state’s holdings in energy companies.  Many m unicipalities own their local distributor of heat and 
electricity and they generally own operating companies for the harbours. 
(ii) Competition Policy 
25. A new Competition Act came into force in 200 5 implementing a 2003 EEA regulation.  The 
Act strengthens the structure of the Competiti on Authority (CA) which replaces the previous 
Competition and Fair Trade Authority (CFTA).  The CA’s function is to monitor competition 
restricting practices.  The new Act allocates increased resources to the policy area as well as giving the Authority stronger and clearer powers of inte rvention.  The new Act also removes consumer 
affairs from the CA’s portfolio so as to focu s its resources on competition issues.  A separate 
authority, the Consumer Agency, is to carry  out surveillance of unfair trade practices. 
(iii) Deregulating Markets 
26. Considerable deregulation has taken place in the energy sector.  Iceland’s phasing in of 
deregulation under an EU directive, relating to the separation of electricity transmission and 
distribution from electricity production and sale, is  now complete.  The current legal framework, 
adopted in 2003, designates generation and sal es as competitive activ ities and imposes accounting 
separation between transmission and other activ ities for the monopoly provider of transmission 
services.  Landsnet hf. (IceGrid) was launched in 20 05 with the main role of transmitting electricity 
from producers to consumers (municipal distributio n utilities and end-users such as the aluminium 
smelters).  Under the principal ownership of La ndsvirkjun and Rarik (Iceland State Electricity), 
IceGrid is also responsible for network administrati on, supervision and operation.  In addition, since 
the beginning of 2005 all large electricity consum ers (over 100 kW) have been able to choose their 
supplier.  From 1 January 2006, this freedom has b een extended to all consumers.  In 2005 a new Act 
was passed by Parliament which removed the ta x exemptions previously granted to energy 
companies. 
27. The telecommunications sector has expanded fast , following important legal reforms.  The 
Telecommunications Act, introduced in 1999, reflected the government’s aim to strengthen 
competition in the telecommunications market whil e ensuring efficiency and reliability.  The law 
ensures that all Iceland’s inhabitants have equal ac cess to telephone and data transmission services.  
The law stipulates that all operators are obliged  to provide their competitors with access to 
communications networks and services under their cont rol, thereby easing the access of new entrants.  
No specific restrictions apply to foreign ownershi p or activities in the telecommunications market.  A 
new Act introduced in 2003 takes further steps to wards increased competition and openness.  The new 
law makes provisions that facilitate the entry of ne w operators into the Icelandic market, abolishing 
the need for operating licences.  The Government ’s policy on telecommunications was further 
strengthened in 2005 by a long term telecommunicati ons plan that stipulates the continued expansion 
of the GSM system as well as the improved access of all Icelanders to the high speed network. 
28. The 1999 the monitoring role of The Post and Telecom Administration was considerably 
strengthened.  The Administration works together with the Competition Authority to ensure active 
competition and fair business practices within  the new open telecommunications market. Iceland WT/TPR/G/164 
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29. The agricultural sector has continued along the pa th of structural adjustment over the review 
period.  Government support to agricultural producers has inter alia  aimed to promote rationalization, 
efficiency and improved competitiveness.  The num ber of farms engaged in production has dropped 
markedly in recent years, while those which rema in have tended to increase in size and output.  
Nowhere is this more apparent than in dairy prod uction, where the number of farms has declined by 
over 40% over the last 15 years.  The production of  each remaining dairy farm has on average risen 
by 74% over the same period.  Production of poultr y and pig meat has concentrated significantly and 
only a handful of large producers remains. 
30. Quality control and environmental considerati ons feature more prominently in governmental 
policy, e.g. in support schemes in favour of sh eep meat production.  Administered prices and 
production quotas have been phased out in all but the dairy sector, where legislation has been 
amended to allow for the abolition of the former at any time by decision by the competent authorities.  
A new support scheme in favour of producers of tomatoes, cucumbers and peppers was launched in 
2002 following the abolition of applied tariffs on these and a number of other vegetable products. 
31. A number of institutional reforms have take n place over the review period, the most 
significant of which involve the creation of the Agricultural Authority in 2006 and the Agricultural 
University of Iceland in 2005.  The Agricultural Au thority supersedes the Chief Veterinary Office, the 
Directorate of Freshwater Fisheries, the Feed, Seed  and Fertiliser Inspectorate, the Plant Protection 
Service and the Meat Classification Board, in add ition to taking on a number of administrative duties 
formerly carried out by the Farmers Association.  The Agricultural University of Iceland was formed 
as a result of a merger between the Agricultural University of Hvanneyr i, the Horticultural College of 
Reykir and the Agricultu ral Research Institute. 
(iv) Tax Reform 
32. In accordance with the 2003 Policy Statement of the Coalition Government the first phase of 
personal income tax cuts took place in 2005 when the tax rate was reduced from 25.75 per cent to 
24.75 per cent.  The personal and company net wea lth tax was abolished in 2005 and will take effect 
at the time of the tax assessment in 2006.  The sec ond phase of income tax cuts will become effective 
in 2006 when the tax rate will be cut again by 1 pe r cent, to 23.75 per cent.  The final and largest 
phase will be implemented in 2007 when the tax rate will be reduced by 2 per cent, to 21.75 per cent.  
With these changes, personal income tax will ha ve been reduced by 8 per cent from 1997, from 
29.75 per cent to 21.75 per cent, or by more than  one-fourth.  Furthermore,  value added tax will be 
reviewed in accordance with the Government's Policy Statement. 
33. Wide-ranging tax reforms for businesses have al so been implemented during the review 
period.  In 2002 corporate income tax was reduced fr om 30 per cent to 18 per cent and corporate net 
wealth tax was reduced from 1.2 per cent to 0.6 and then abolished in 2006.  In 2003 stamp duty was 
reduced, both for corporations and individuals. 
(v) Other Reforms in Review Period 
34. In 2001 a full revision of the legislative e nvironment concerning public procurement was 
carried out, creating for the first time a concise le gal framework in one text.  The revision was based 
on the eight existing EU directives concerning public  procurement in force at that time.  The Act 
contains provisions on scope, both as regards conformity with the EU -directives, other domestic acts 
and threshold amounts.  Tender and purchasing pr ocedures were improved and a common definition 
was established concerning contracting authorities and contractors, especially in the area of new 
emerging methods, such as the negotiated procedures and public private partne rships.  Furthermore, WT/TPR/G/164 Trade Policy Review 
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framework contracts were improved in order to maintain a common trust in the system, between 
future tender participants, contractors and contrac ting authorities.  The selection procedures on bids 
were also revised and clarified.  The new legisla tion stipulated an indepe ndent Complaints Committee 
on public contracts.  In addition, a new Act on P ublic Projects Procedures came into force in 2001, 
setting provisions on planning, tendering, superv ision and construction of public projects. 
35. Iceland became a party to the WTO’s Governme nt Procurement Agreement (GPA) in 2001.  
Neither the existing Act on Public Procurement fro m 2001 nor affiliated regula tions limit participation 
of foreign suppliers in the public procurement ma rket.  This applies to goods, services and works 
contracts within the European Economic Area (EEA) but  also applies to countri es parties to the GPA.  
The legislation specifically stipulates that rights according to the present Ac t are enjoyed by both 
individuals and legal entities domiciled in any of th e states in the EEA as well as those who have such 
rights on the basis of international treaties to which Iceland is a party. 
36. In 2002 the Government issued a Policy on Public  Procurement, in conformity with the new 
Act, incorporating features such as “best-buy”, e-pr ocurement, life cycle cost, green-procurement, and 
a revision of tender procedures.  In 2006 it is fo reseen that Iceland will make a new revision of the 
existing domestic law on public procurement, based on new EU directives that were issued in 2004. 
37. In January 2006 a new Customs Act came in to force which further simplifies customs 
procedures.  With the introduction of EDI-customs cl earance, the role of operators who specialise in 
transmitting electronic data to Customs on behalf of importers and exporte rs has become more 
important.  The Act introduces new provisions regard ing the operation of customs brokers and their 
operation is subject to authorisation by the Minister of Finance.  In addition procedures for complaints 
have been simplified.  All rulings made by Directors of Customs can now be appealed to the State Customs Board.  The Act also introduces amendmen ts to the existing penal provisions and rules 
procedures.  Among other amendments are new provisions regarding increased responsibility of 
Customs authorities for investigations of infri ngements and violations of the Customs Law. 
III. TRADE POLICY OBJECTIVES AND DEVELOPMENT 
(1) T
HE WORLD TRADE ORGANIZATION  
WTO and the Doha Development Agenda 
38. Iceland is strongly committed to the multilatera l trade framework under the auspices of the 
WTO.  A strong rules based trading system is of particular importance for smaller members like Iceland.  Iceland is furthermore strongly comm itted to the Doha Development Agenda and is 
convinced that a fair and equitable out come will benefit the entire membership. 
39. Development cooperation is an important aspect of Icelandic foreign policy and it has been 
decided that the coming years will see a significan t increase in Iceland's official development 
assistance.  As a reflection of this a policy on Iceland's development cooperation for the years 2005-
2009 has been formulated.  The policy takes th e Millennium Development Goals as a point of 
departure and identifies areas where Iceland will cont ribute to global development.  An important part 
of the policy outlines Iceland's commitment to assi sting developing countries in benefiting from 
increased trade liberalization. 
40. Iceland supports the Doha Development Agenda  Global Trust Fund, which is intended to 
assist developing countries in taking advantage of the opportunities created by increased trade liberalization.  In 2005 Iceland substantially raised  its contribution to the fund, to 60 thousand CHF a 
year for the years 2005-2007.  In addition, I celand contributed 20 thousand CHF to support the Iceland WT/TPR/G/164 
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participation of developing country  delegates in the 2005 Hong Kong mini sterial.  Iceland is also one 
of the initiators of the Nordic-Africa Initiative (NAI), which aims to increase understanding of how 
trade, and trade policy, can benefit Africa.  As a part of NAI, a ministerial conference was convened 
in Dar-es-Salaam in 2005.  Participating, along with the Nordic countries, were twenty African 
countries, NGOs, as well as representati ves from international institutions. 
Non Agricultural Market Access 
41. Having witnessed firsthand the positive effects of  market liberalisation, Iceland is strongly 
committed to increasing market access for non-agricultu ral goods.  It is crucial for the interests of 
developed and developing countries alike.  The sect or of fisheries products continues to be of 
particular importance to Iceland but other sector s are constantly gaining in importance, like 
machinery, weighs and scales, plastic containers, me dicine and medical devices, to name only a few. 
Trade in agricultural products 
42. As a net food importer, Iceland is very depe ndent on international trade in agricultural 
products.  Iceland is thus fully committed to th e objectives of the ongoing reform process in the WTO 
and the establishment of a fair and market-oriente d agricultural trading syst em, in accordance with the 
provisions and principles of the WTO Agreement on Agriculture.  Government policy has in recent 
years placed considerable emphasis on structural adjustment and rationalization in agricultural 
production and processing in reaction to and prepar ation for multilateral commitments towards the 
liberalization of agricultural trade.  It is the Government’s stated objective to provide Icelandic 
agriculture with a realistic opportunity to adapt to changes in its operating environment, to the benefit 
of farmers and consumers alike. 
43. As a high-cost, low-potential activity, agricultural production in Iceland has been largely 
dependent on direct and indirect  government support.  This is inter alia  dictated by factors such as the 
harsh climate, difficult topography and low population density.  The viability of agriculture is closely 
interlinked with rural development policy and plays a key role in the provision and preservation of a 
number of non-trade concerns such as food security, environment and cultural heritage.  Iceland has 
as a result placed firm emphasis on the development of  multilateral rules to govern agricultural trade 
which take due account of such non-trade concerns. 
Trade in Services 
44. Iceland is strongly committed to real liberali sation in trade in services over a broad range of 
sectors including air and maritime transport, teleco mmunications and various other sectors.  Iceland 
has a very open and liberal regulatory environment fo r trade in services and is currently participating 
in the plurilateral request and offer process in accordan ce with the Hong Kong ministerial declaration.   
Rules 
45. In the rules part of the negotiations Icel and puts particular emphasis on strengthening 
disciplines on subsidies in the fisheries sector.  Th is objective is of fundamental importance, not only 
because subsidies distort free trade and competition, but  also for the direct relationship between such 
obstacles in the fishing sector and excess fishing capacity and overexploitation of fish stocks. 
TRIPS 
46. Iceland supports measures aimed at ensuring that the TRIPS Agreement is supportive of 
measures to protect public health.  Iceland s upported the decision by the General Council of WT/TPR/G/164 Trade Policy Review 
Page 14 
 
 
30 August 2003 waiving restrictions on exports on the basis of compulsory licences for 
pharmaceutical products.  The necessary provisions have been implemented in Iceland through Act 
No.127/2005, amending the Act on Patents No. 17/1991.  A regulation on the basis of this law is expected in the spring of 2006. 
(2) T
HE EUROPEAN ECONOMIC AREA (EEA) 
47. The Agreement on the European Economic Area (EEA) extends the internal market of the 
25 EU Member States to three European Free Trad e Association (EFTA) countries: Iceland, Norway 
and Liechtenstein.  The EEA Agreement covers the free movement of goods, persons, capital and 
services (the four “freedoms”).  As  it is one of the primary obliga tions of the Agreement to ensure 
equal conditions of competition, the substantive co mpetition rules of the Agreement correspond to the 
relevant acquis communautaire .  This covers the rules concerning cartels, abuse of dominant 
positions, merger control, state monopolies and st ate aid, as well as public procurement.  The 
Agreement also includes areas  that have an impact on the competiti ve position of enterprises, such as 
consumer protection, environment, social policy (i ncluding health and safety at work, labour law and 
equal treatment of men and women), statistics and cert ain elements of company law.  Other fields of 
co-operation include culture, education, info rmation services, and small and medium-sized 
enterprises.  
48. The scope of the EEA Agreement does not incl ude the EU’s Common Agricultural Policy or 
the Common Fisheries Policy, but it contains provisi ons on various aspects of trade in agricultural and 
fish products.  The EEA Agreement calls on the par ties to "continue their efforts with a view to 
achieving progressive liberalization of agricultural trade".2  To this end, the Agreement requires that 
the parties undertake biannual reviews of the conditions of trade in agricultural products.3  The last 
such review was concluded in Febr uary 2006 and is expected to come into effect on 1 January 2007.  
After that date tariffs on certain agricultural pr oducts mentioned in Annex I of the EEA Agreement 
will be abolished.  As the EEA Ag reement is not a customs union, trade policy towards third countries 
is also outside its scope. 
49. A key feature of the EEA Agreement, which distinguishes it from most other free trade 
agreements, is its dynamic character.  Its common rules are continuously updated by adding new EU 
legislation.  This aspect is essential, given the la rge output of Community legislation on the internal 
market.  Each month, a number of EEA-relevant pieces of legislation are incorporated into the Agreement by decisions of the EEA Joint Committe e.  The Agreement provides for information and 
consultation procedures at all stages of the Co mmunity’s decision-making process.  The EFTA-EEA 
states may ask for consultations on matters of con cern, and may also seek adaptations to Community 
legislation in its application to the EFTA countries wh en special circumstances call for this.  Since the 
Agreement entered into force, more than 5000 EC  legal acts have been incorporated into it. 
(3) F
REE TRADE AGREEMENTS  
50. Since the early 1990s, Iceland and its other part ners in the European Free Trade Association 
(EFTA) – Liechtenstein, Norway and Switzerland – have established an extensive network of 
contractual free trade relations in Central and E astern Europe, the Mediterranean region and with 
countries in other parts of the world.4  Free trade agreements with Mexico and Chile have extended 
                                                      
2 Article 19(2), EEA Agreement. 
3 Article 19(3), EEA Agreement. 
4 From 1 May 2004, the enlarged EEA Agreem ent replaced the FTAs with Estonia, the 
Czech Republic, Latvia, Lithuania, Poland, Slovakia, Slovenia, and Hu ngary following th ese countries’ 
accession to the EU. Iceland WT/TPR/G/164 
 Page 15 
 
 
this network across the Atlantic, and the free trad e agreement with Singapore was the first between 
European countries and an Asian country.  Since 200 0, Iceland with its EFTA partners has signed free 
trade agreements with Chile, Croatia, Jordan, Lebanon, Macedonia, Mexico, Singapore, Tunisia and 
South Korea and an agreement with  the South African Customs Union5 is awaiting signature.  At 
present, the EFTA network consists of fifteen fr ee trade agreements and six declarations on co-
operation.  Several agreements are currently unde r negotiation, including some with countries in 
America, Asia and Africa. 
51. It is the goal of EFTA third-country policy to  safeguard the economic interests of the EFTA 
States by complementing interregional European  trade co-operation and the WTO regimes and 
negotiations. 
52. EFTA's free trade agreements cover free trade in industrial products, fish and marine products 
and processed agricultural products.  In additi on, each EFTA country has concluded bilateral 
agricultural protocols with each of the third country partners.  The bilateral agricultural protocols are 
an integral part of EFTA's multilateral agreements.  The free trade agreements incorporate provisions 
on a number of new trade issues, including rules of competition, state aid and protection of 
intellectual property.  The scope of the agreements has been expanded during the last years to include 
services, investments and public procurement6, as the parties recognise the growing importance of 
these areas.  Other agreements contain evoluti onary provisions on these areas with the aim of 
achieving gradual liberalisation and mutual opening of markets for investments and trade in services, 
taking into account developments in European integration and the WTO. 
53. Many of the EFTA free trade agreements have b een drawn up in a way that takes into account 
the different level of economic de velopment in the partner countries by providing for an asymmetrical 
approach.  The EFTA States are required to abolish ba rriers to trade at the outset, while the partner 
countries can, for certain sensitive pr oducts, phase them out during a transitional period, leaving them 
the necessary time to adapt their economy to free trade conditions. 
54. In 2005, Iceland and the Faeroe Islands signed a Free Trade Agreement which is scheduled to 
be ratified by all parties in the fi rst half of 2006.  The Iceland-Faer oes FTA applies to trade in all 
goods, including agricultural goods.  It also extends  to trade in services with full market access and 
national treatment in all four modes.  Furthermore,  the Agreement also extends to investment and the 
Free Movement of Persons between the Contracting Parties. 
55. In February 2006 Iceland and China launched a study into the feasibility of establishing a free 
trade area between Iceland and China.  The study is scheduled to be concluded in the summer of 
2006.  Should the study conclude that a free trade agreement between Iceland and China is feasible, 
negotiations on such an agreement coul d be launched later in the year 2006. 
__________ 
                                                      
5 Comprising Botswana, Lesotho, Namibia, South Africa and Swaziland. 
6 This has been done for the EFTA free trade agreements with Singapore, signed on 26 June 2002, and 
Chile, signed on 26 June 2003.