INTERNATIONAL

MONETARY FUND

Trade Policies of IMF

Borrowers

United States General Accounting Office

GAO Report to Congressional Committees

June 1999

GAO/NSIAD/GGD-99-174

United States General Accounting Office National Security and

Washington, D.C. 20548 International Affairs Division

Page 1 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

June 22, 1999

Congressional Committees:

To facilitate congressional oversight of U.S. policy concerning the

International Monetary Fund (IMF),1 the Omnibus Appropriations Act for

1999 (P.L. 105-277) required us to report on the degree to which IMF

borrowers2 restrict free and open trade and whether their export policies

may adversely affect, or result in unfair trade practices against, U.S.

companies.3

 The 98 current IMF borrowers include a number of countries

that have received large-scale IMF financial assistance since the Asian

financial crisis began in 1997.

The specific objectives of this report are to (1) identify the extent to which

current IMF borrower countries restrict international trade and the

borrowers whose trade has the potential to affect the United States; (2)

describe the reported trade barriers and export policies 4 of four IMF

borrowers that are among those with the greatest capacity to affect the

United States—Brazil, Indonesia, the Republic of Korea (hereafter referred

to as Korea), and Thailand—and recent actions reported to have been

taken to reduce those barriers or modify policies; (3) identify actions, in

the context of their recent IMF financing arrangements, the four countries

have taken or are committed to take to liberalize their trading systems; and

(4) determine the extent to which the impact of the four countries’ export

 

1

 The IMF is an organization of 182 member countries that was established to promote international

monetary cooperation and exchange rate stability and to provide short-term lending to member

countries that experience balance-of-payments difficulties.

2

 With the exception of some financing for low-income countries, the IMF does not loan funds to a

country, per se. Rather, the country “purchases” the currency it needs from the IMF with an equal

amount of its own currency and then later “repurchases” its own currency on terms established by the

IMF. For the purposes of this report, we will use the terms “financial arrangement,” disbursement,” and

“loan” to refer to “purchases,” and “repayments” to refer to “repurchases.”

3

 The Omnibus Appropriations Act for fiscal year 1999 (P.L. 105-277, Oct. 21, 1998) appropriated about

$18 billion for the IMF and required us to report on a seven-point mandate for reviews of the IMF. We

have divided this mandate into three reports—this report on the trade policies of countries that borrow

from IMF, one on the terms and conditions of IMF financial assistance (International Monetary Fund:

Approach Used to Establish and Monitor Conditions for Financial Assistance GAO/GGD/NSIAD-99-168,

June 22, 1999); and a third that addresses the IMF’s financial condition, to be issued by September 30,

1999.

4

 For purposes of this report, “trade barriers” are broadly defined as government laws, regulations,

policies, or practices that protect domestic products from foreign competition. Trade barriers include

tariffs and other import charges; and nontariff import barriers such as quantitative restrictions, state

trade monopolies, restrictive foreign exchange practices that affect a country’s trade system, and

quality controls and customs procedures that act as trade restrictions. Export policies include exportrelated subsidies; export restrictions, such as export taxes; and performance requirements, such as the

requirement that companies export a certain percentage of their production.
B-282825

Page 2 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

policies on the United States can be predicted and measured and which

U.S. industry sectors might be affected by recent changes in trade from

these countries. We selected Brazil, Indonesia, Korea, and Thailand

because, in addition to being significant U.S. trading partners, they are

among the top 10 top current IMF borrowers and have current IMF

financing arrangements. Unless otherwise noted, data in this report are

current as of April 30, 1999.

Although the 98 current IMF borrowers all restrict trade to some extent,

only a few are large enough traders to affect individual sectors of the U.S.

economy. According to IMF and other measures of trade restrictiveness,

borrowers have generally reduced their tariff and nontariff barriers since

1990. However, according to the IMF measure, about one-half still maintain

moderate to restrictive barriers. Borrowers’ levels of trade restrictiveness

are similar to nonborrowers’. Few borrowers are large enough traders to

significantly affect even individual U.S. industry sectors—90 borrowers

accounted for 5 percent of U.S. trade in 1998 while the 8 other borrowers

accounted for 21 percent. However, a few borrowers are significant U.S.

trading partners and important competitors to U.S. producers in world

markets. We studied four of the eight countries—Brazil, Indonesia, Korea,

and Thailand. Average tariff rates in all four countries have fallen over the

past decade. According to the Office of the U.S. Trade Representative

(USTR) and other sources, in 1998 Thailand had an average tariff rate of

about 18 percent, Korea had an average tariff rate of about 8 percent, and

Brazil’s and Indonesia’s rates fell in between. In comparison, 1998 average

tariff rates for the United States, Japan, and European Union (EU)5

countries were between 3 percent and 7 percent.6 Also, each of the four

countries maintained nontariff import barriers that the IMF considers to be

significant. Like about two-thirds of current IMF borrowers, Brazil,

Indonesia, Korea, and Thailand are all members of the World Trade

Organization (WTO), which establishes rules for international trade and

provides a forum for resolving trade disputes. In recent years, the United

States and other countries have used WTO dispute procedures to challenge

restrictive trade policies in the four nations.

 5

 The European Union is a treaty-based, institutional framework that defines and manages economic

and political cooperation among its 15 European member states: Austria, Belgium, Denmark, Finland,

France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and

the United Kingdom.

6

 As the IMF pointed out in commenting on a draft of this report, these average tariff rates are only for

those products with tariffs that are a percentage of the value of the product (known as “ad valorem”

tariffs). Other tariffs are per unit (“specific”) or a combination of ad valorem and specific tariffs. When

these other types of tariffs are taken into account, a country’s average tariff rate increases.

Results in Brief
B-282825

Page 3 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

Brazil, Indonesia, Korea, and Thailand have experienced either rising trade

surpluses or falling trade deficits with the United States and other

countries since their recent financial crises began. The changes in the

countries’ U.S. trade balances were due primarily to a large decline in U.S.

exports to them. U.S. exports to these countries declined because the

countries’ currency devaluations made U.S. and other countries’ exports to

them more expensive and because recessions in the four countries

lowered their demand for imported products, including those from the

United States. Even before the crises, the U.S. government was particularly

concerned about certain trade practices in these countries, especially in

Korea. The United States continues to press such issues even as it gives

priority to restoring the overall health of crisis countries for their own and

the U.S.’ benefit. Korean trade policies of concern have included barriers

to imports and distribution of beef, automobiles, and distilled spirits;

discriminatory airport procurement practices; and possible subsidies that

support steel exports. Policies of U.S. concern in the other three countries

have included possible Brazilian subsidies to its steel industry, restrictions

on automobile imports in Thailand, and inadequate protection of

intellectual property rights, especially in Indonesia. The U.S. government

and others have reported some progress in the last 3 years in eliminating

or modifying some of these trade policies as part of the countries’

commitments to the WTO and other multilateral forums, and bilaterally,

through trade agreements with the United States.

Countries in an IMF financing arrangement sometimes have liberalized

their trade systems within the context of their arrangements, although in

many cases the liberalization has not been a condition of receiving

disbursements of IMF funds. As part of their recent arrangements, Brazil,

Indonesia, and Korea have made changes to trade policies.7

 For example,

under its IMF program, Korea has eliminated four subsidies. Indonesia has

reduced or eliminated some import tariffs and export restrictions that

encouraged local processing; it also has committed to phase out most

remaining nontariff import barriers and export restrictions by the time its

IMF program ends in the year 2000. However, the IMF programs in Brazil,

Indonesia, Korea, and Thailand focus primarily on macroeconomic and

structural reforms other than trade reform because, according to the

Treasury and the IMF, restrictive trade policies were not major causes of

 

7

 Thailand’s IMF program has no trade liberalization commitments because, according to the Treasury

Department, Thailand had fewer distorting trade policies than the other three countries in our review,

and because inadequate financial supervision and central banking errors were the root causes of its

financial problems, not trade-related policies or practices.
B-282825

Page 4 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

the countries’ financial crises.8 Further, the trade reforms that Brazil,

Indonesia, and Korea have undertaken are not intended to assist the

countries’ trading partners, though this may result from the reforms, but

instead are aimed at helping the countries’ economies operate more

efficiently. In addition to trade liberalization measures, as part of their IMF

programs, Korea, Indonesia, and Thailand have committed to further open

their economies to foreign investment and to substantially restructure

their financial and corporate sectors. These commitments, if fully

implemented, could lead to increased U.S. investment in and trade with

these countries.

The policies maintained by Brazil, Indonesia, Korea, and Thailand to

encourage exports could potentially distort trade and displace production

by U.S. producers, even though they may benefit other U.S. companies or

consumers. However, the large macroeconomic changes in these countries

caused by their recent financial crises greatly complicate predicting and

measuring the policies’ impact on the United States because the

macroeconomic changes have probably been a more important source of

recent changes in trade flows. Our analysis of 1997-98 trade data reveals

that overall U.S. imports from Brazil, Indonesia, Korea, and Thailand rose

moderately in 1998, but by less than U.S. imports from other trading

partners. However, products accounting for about 16 percent of the value

of U.S. imports from these four IMF borrowers registered large increases

and falling U.S. prices during this period. Some of these product sectors,

notably steel, have already been subject to petitions by U.S. industry for

relief from “unfairly traded” imports under U.S. trade law,9

 while the

executive branch is monitoring imports of others of these products,

including semiconductors, chemicals, and paper and paper products.

 

8

 See our report on IMF terms and conditions (International Monetary Fund: Approach Used to

Establish and Monitor Conditions for Financial Assistance GAO/GGD/NSIAD-99-168, June 22, 1999) for

more detail on the causes of the recent financial crises of Brazil, Indonesia, and Korea as well as

Argentina, Russia, and Uganda.

9

 For purposes of this report, allegations of “unfairly traded” imports refer to petitions for relief by U.S.

industry from harm as a result of imports that may be subsidized or dumped (unfairly priced). “Unfairly

traded” imports means imports that, after investigations resulting in affirmative determinations by the

Commerce Department and the International Trade Commission (ITC), are subject to outstanding

countervailing or antidumping duty orders.
B-282825

Page 5 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

Most IMF borrower countries have reduced important barriers to trade

over the past decade. Although progress has varied among countries and

over time, generally tariff and nontariff barriers have fallen. Despite this

progress, many policies remain that restrict free and open trade, and some

IMF borrowers still maintain very high restraints. However, borrowers’

restrictiveness levels are similar to those of nonborrowers, and about twothirds are WTO members. Only a few of the 98 IMF borrowers trade

enough to have much ability to significantly affect any individual sectors of

the U.S. economy.

We analyzed the import barriers of IMF borrower countries using several

available measures of restrictiveness, including average tariff rates;10

nontariff barriers; and indexes constructed by the IMF, the Heritage

Foundation, and the Fraser Institute.11 Although these indicators do not

comprehensively measure all the policies that countries may use to restrict

trade, they do reflect important barriers and provide information on the

relative restrictiveness of countries among one another and over time.

Overall, we found that these measures demonstrated growing trade

liberalization. The IMF conducted a study of 27 countries’ trade policies

during 1990-96, using its own restrictiveness measures. The study found

that during this period the number of countries labeled “restrictive”12 fell

from 63 to 41 percent, while the number of “open” countries rose from 11

to 33 percent. Taking the same 27 countries and reviewing their progress

through 1998, we found that the number of restrictive countries further fell

to 7 percent, and the number of open countries rose to 48 percent.13 Other

indicators also confirmed this liberalization trend across the full group of

98 IMF borrowers.

Despite the progress made in reducing trade barriers, many restraints

remain that inhibit imports into IMF borrower countries. According to the

IMF’s measure, about one-half of the 98 current borrowers maintain

moderate (38 percent of borrowers) or restrictive (14 percent of

borrowers) barriers. The Heritage Foundation and Fraser Institute

 

10 Average tariff rates are the average of the applied rates across the entire tariff schedule.

11 For more information on the indicators we used, see appendix IV.

12 The IMF overall index combines information on tariff and nontariff barriers to rank countries on a

10-point scale. From this ranking, it classifies countries as “open” (generally, average tariffs less than

10 percent and limited nontariff barriers); “moderate” (generally, average tariffs between 10 and 25

percent and significant but not pervasive nontariff barriers); and “restrictive” (generally, average tariffs

higher than 25 percent and pervasive nontariff barriers). For more information, see appendix IV.

13 Specifically, 17 out of the 27 countries studied by the IMF were initially labeled as restrictive. In

1996, 11 countries were, and by 1998, only 2 countries remained in that category.

Although Still

Somewhat Restrictive,

IMF Borrowers’ Trade

Systems Are

Liberalizing, and Few

Are Large U.S. Trade

Partners

Borrowers’ Trade

Restrictiveness Has Fallen

About One-half of

Borrowers Have Moderate

to Restrictive Trade

Barriers
B-282825

Page 6 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

indicators also show a range of restrictiveness, although the Heritage

Foundation’s measure reported less openness than either the IMF or

Fraser Institute indicator, placing over one-half of borrowers in its most

restrictive groupings. The tariff data we reviewed showed that average

tariffs for borrowers ranged from as low as 0.1 percent to over 40 percent,

but the majority fell between 7 percent and 24 percent. In comparison, the

United States, the EU, and Japan maintain average tariffs of approximately

3 to 7 percent.

Thirty of the 98 borrowers are listed in a March 1999 U.S. government

report14 that identifies the most significant foreign trade barriers that affect

U.S. exports. Most of the 30 countries listed were cited for having

inadequate intellectual property protection or for maintaining restrictive

import policies, such as setting investment barriers and creating barriers to

foreign participation in government procurement.

Our analysis shows that the 98 current IMF borrowers restrict trade to

about the same extent as the 78 IMF member countries that do not owe

funds to the IMF.15 As figure 1 shows, the IMF trade measure rates 48

percent of borrowers as open, compared with 53 percent of nonborrowers;

38 percent as moderate, compared with 33 percent of nonborrowers; and

14 percent as restrictive, compared with 14 percent of nonborrowers. Also,

lesser economically developed borrowers and nonborrowers alike tended

to have higher levels of restrictiveness. However, we did find that

borrowers and nonborrowers tend to use different types of policies to

restrict trade. Borrowers generally use higher tariff barriers, while

nonborrowers tend to use higher nontariff barriers such as import quotas.

 14 1999 National Trade Estimate Report on Foreign Trade Barriers (Washington, D.C.: USTR, Mar. 31,

1999).

15 The IMF did not calculate its trade restrictiveness indicator for 6 of its 182 members.

Borrowers’ Restrictiveness

Levels Are Similar to Those

of Nonborrowers
B-282825

Page 7 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

Source: IMF.

Of the 98 IMF borrowers, about two-thirds are WTO members.16 WTO

membership commits them to following WTO disciplines on their trade

policies, providing some degree of market access, and complying with

WTO dispute settlement procedures.17 Many IMF borrowers have also

undertaken additional WTO liberalization commitments, as well as made

commitments under bilateral agreements with the United States on

investment and other matters. For example, 37 IMF borrowers have signed

the WTO agreement on basic telecommunications services, and 51 have

reached bilateral accords with the United States on such matters as

investment and intellectual property.

 

16 The WTO was created as a permanent organization to oversee implementation of the Uruguay Round

Agreements, to provide a forum for multilateral trade negotiations, and to settle disputes.

17 The WTO dispute settlement process has four main stages: (1) consultation and conciliation, (2)

establishment and deliberation of panels, (3) appellate body review, and (4) implementation.

Figure 1: Percentage of IMF Borrowers

and IMF Nonborrowers in Each IMF

Restrictiveness Index Category

Most Borrowers Are WTO

Members, and One-fifth

Have Been Involved as

Respondents in Trade

Disputes
B-282825

Page 8 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

Despite greater integration into the world trading system and growing

trade, many borrower countries have been involved in trade disputes with

the United States. One-fifth (17) of the 98 borrowers have been subject to

formal market access complaints under the WTO’s dispute settlement

procedures.

Only a few of the 98 IMF borrowers are large enough traders to

significantly affect any particular sectors of the U.S. economy. Eight

borrowers accounted for 21 percent of U.S. trade in 1998, while the other

90 borrowers accounted for 5 percent. As figure 2 shows, of these eight

countries, Mexico traded the most with the United States in 1998,

accounting for about 11 percent of U.S. trade; followed by Korea with

3 percent; Brazil with 2 percent; and the Philippines, Thailand, Venezuela,

India, and Indonesia, with about 1 percent each. One of the other

90 borrowers could significantly affect U.S. companies or workers in

certain product sectors, however, if it comprised a large share of U.S. trade

of a particular product. For example, flat-rolled iron and nonalloy steel

imports from Russia account for approximately 26 percent of U.S. imports

of that product.

Few Borrowers Have Much

Potential to Affect the U.S.

Economy
B-282825

Page 9 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

a

 Next top five consist of the Philippines, 1%; Thailand, 1%; Venezuela, 1%; India, 1%; and Indonesia,

1%.

Source: U.S. Department of Commerce.

The eight largest U.S. trade partners generally maintain moderate barriers

to trade. According to the tariff and other information we analyzed, most

have average tariffs between 10 percent and 20 percent and are rated by

various indicators as having significant nontariff barriers. For example,

Thailand’s average tariff rate in 1998 was 18 percent, Brazil’s was

15 percent, and Indonesia’s was 10 percent. Exceptions include Korea,

which in 1998 had an average tariff rate of 8 percent; and India, with a 23

percent average rate. Mexico’s average tariff rate is about 13 percent for all

countries outside of the North American Free Trade Agreement (NAFTA),

but its average tariff rate on U.S. products is about 2 percent due to

NAFTA. All eight of these U.S. trade partners are members of the WTO,

and most have bilateral trade agreements with the United States.

Figure 2: IMF Countries’ Shares of Total

U.S. Trade, 1998 (Exports Plus Imports,

by Country)
B-282825

Page 10 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

We evaluated the import barriers and export policies of four of the eight

IMF borrowers that accounted for 21 percent of U.S. trade in 1998: Brazil,

Indonesia, Korea, and Thailand.18 These countries accounted for about

7 percent of U.S. trade in 1998.

Financial crises in Brazil, Indonesia, Korea, and Thailand have

substantially affected their trade with the United States, even as the U.S.

government has remained concerned about various trade policies in the

four countries. The four countries have experienced either rising trade

surpluses or falling trade deficits with the United States since their

financial crises began, due primarily to a large decline in U.S. exports to

them. Even before their crises began, however, the U.S. government had

been concerned about a number of these countries’ trade policies. Prior to

the crises, much of the executive branch’s attention had been focused on

import policies that affected U.S. exports to the four countries, especially

in Korea. Import policies of concern in the four countries have included

Korean barriers to imports and distribution of beef, automobiles, and

distilled spirits, government procurement procedures in airport

construction, and import clearance procedures; restrictions on automobile

imports in Brazil and Thailand; and inadequate protection of intellectual

property rights, especially in Indonesia. Export policies that the executive

branch has been concerned about include Korean government support to

its steel and semiconductor industries, and Indonesian government

subsidies to its automobile industry. The United States continues to press

these and other trade issues even as it places priority on restoring the

overall health of crisis countries for their own and the U.S.’ benefit.

Any analysis of import barriers and export policies in Brazil, Indonesia,

Korea, and Thailand must acknowledge the effects those countries’ recent

financial crises have had on their economies and trade. The crises that

began in 1997 dramatically reduced incomes and demand for domestic as

well as imported goods. The value of these nations’ currencies declined,

with each of the countries’ currencies depreciating by 30-50 percent or

more relative to the U.S. dollar in real (inflation-adjusted) terms. The

depreciations reduced the purchasing power of local currencies, making it

hard for these countries to buy U.S. exports. The depreciations also made

the affected nation’s exports more competitive on world markets. World

 

18 We selected these four countries because, in addition to being significant U.S. trading partners, they

are among the 10 top current IMF borrowers and have current IMF financing arrangements. Mexico is

the largest U.S. trading partner among these countries. We did not select Mexico because, although

Mexico currently owes debts to the IMF, it is not currently in an IMF financing arrangement (that is, it

is not eligible to borrow more funds from the IMF), and because a substantial share of U.S.-Mexican

trade consists of special arrangements provided for under NAFTA.

Trade Barriers and

Export Policies of

Brazil, Indonesia,

Korea, and Thailand

Financial Crises Have

Substantially Affected the

Four Countries’ Trade
B-282825

Page 11 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

prices for key commodities fell, particularly for oil, agricultural goods, and

electronic products. Outflows of foreign capital and domestic credit

crunches reduced output and stalled commerce, with direct implications

for trade accounts.19

Even without policy changes, such macroeconomic disturbances have a

major influence on overall trade levels and balances. Since their crises

erupted in 1997, Indonesia and Thailand have widened their trade

surpluses with other countries, Korea’s trade balance went from a deficit

to a surplus, and Brazil’s deficit has fallen. Most of the shift was caused by

a decline in these nations’ imports from abroad, rather than by increases in

their exports to other countries. Even though the volume of their exports

rose at a double-digit rate, the dollar value of exports from these nations

was actually lower in 1998 than it was in 1997 because dollar prices for

many of their goods were falling dramatically. The United States,

meanwhile, has seen a worsening of its trade deficit with all countries

worldwide, not only in absolute terms but also relative to the size of its

economy. From 1997 to 1998, the U.S. trade surplus with Brazil fell; for

Korea, a U.S. surplus changed to a deficit; and for Indonesia and Thailand,

U.S. deficits grew larger.

According to a March 1999 USTR report, U.S. government trade policy in

1999 remains centered on assuring recovery in the nations in financial

crisis. Stabilization and growth are necessary before customers in Brazil,

Indonesia, Korea, and Thailand can resume buying U.S. exports at levels at

or above those in the past. Healthy economies will also absorb more of the

output of local producers, easing pressures on U.S. firms competing with

these nations’ suppliers. Economists also suggest that the U.S. economy

will suffer more if crisis countries are unable to export as they recover.

For example, a 1998 Brookings Institution paper that analyzed the impact

of the Asian financial crisis on trade and capital flows reached this

conclusion.20 In essence, a downward spiral of falling production,

consumption, and imports would ensue, hurting both these four countries

and the United States.

At the same time, U.S. efforts to address trade policies of concern

continue. Items being actively pursued with Brazil, Indonesia, Korea, and

Thailand include long-standing import market access and export subsidy

 

19 Since foreign capital flows must balance the trade deficit, when foreign capital leaves, either the

trade deficit must fall or the trade surplus must increase.

20 Warwick J. McGibbin, The Crisis in Asia: An Empirical Assessment, Brookings Institution Discussion

Papers in International Economics, No. 136 (Washington, D.C.: The Brookings Institution, Apr. 1998).
B-282825

Page 12 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

issues, and the need to improve protection of intellectual property rights.

Since the crisis unfolded, two additional types of issues have been added

to the U.S. agenda: (1) ensuring that the countries do not reverse the

liberalization accomplished in prior years; and (2) more vigorously

addressing governmental and industry practices that the U.S. government

and industry believe may have contributed to the crisis, such as directed

credit and other privileges for industries deemed by these nations’

governments to be important for economic development.

The U.S. government has focused considerable attention in the last 3 years

on eliminating or modifying certain import policies in Brazil, Indonesia,

Korea, and Thailand that had restricted U.S. exports to those countries.

The United States has invoked WTO dispute settlement procedures over

some of these policies and has signed bilateral trade agreements to try to

resolve other policies. The United States has had more concerns about

Korea’s import policies than about the other three countries in our review.

The United States has invoked WTO dispute settlement procedures against

Korean policies concerning beef, distilled spirits, airport procurement

procedures, and import clearance procedures that have delayed or

impeded the entry of U.S. products into Korea. Other Korean import

policies that have been high priorities for the executive branch include

restrictions on imports and distribution of pharmaceutical products, motor

vehicles, agricultural and food products, and cosmetics. In Brazil, U.S.

concerns have included policies that allegedly discriminated against U.S.

automobile exports21 and that restrict the availability of import financing.

In Indonesia, the main U.S. concern has been over protection of

intellectual property rights. In Thailand, U.S. priorities have included high

import duties on certain agricultural and food products, high automobile

tariffs, inadequate protection of intellectual property rights, and inefficient

customs operations.

Appendix I contains more information on these and other U.S. priority

import policies in Brazil, Indonesia, Korea, and Thailand.

Since 1996, the United States has formally invoked WTO dispute

settlement procedures over a number of Brazilian, Indonesian, and Korean

subsidies and has found subsidies in Brazil, Korea, and Thailand to be

countervailable under U.S. trade law; that is, that the subsidies both were

being provided by their governments and were conferring a benefit to their

companies under the meaning of those laws, or were specifically

 

21 In March 1998, the United States and Brazil signed an agreement settling the auto dispute.

U.S. Concerns About Trade

Policies Have Focused on

the Four Countries’ Import

Barriers

U.S. Concerns Over the

Four Countries’ Export

Policies
B-282825

Page 13 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

prohibited by WTO agreements. In addition, the U.S. government has been

concerned about possible export policies, such as Korean governmentdirected lending and support to its steel industry and the Brazilian

government’s auto sector policies.

Korea is the largest economy of the four countries we reviewed and the

world’s seventh largest exporter. Korea was the U.S.’ ninth largest export

market in 1998, dropping from its position of fifth largest in 1997 due to its

financial crisis. The United States ran a $7.4-billion merchandise trade

deficit with Korea in 1998, compared to a $1.9 billion surplus in 1997. The

trade deficit resulted from a 34 percent drop in U.S. merchandise exports

to Korea, from $25.1 billion in 1997 to $16.5 billion in 1998, and a

3.4 percent increase in Korean merchandise exports to the United States,

from $23.2 billion in 1997 to $23.9 billion in 1998. Major Korean exports to

the United States in 1998 included machinery and transport equipment,

steel, manufactured goods, and chemicals and related products.

Over the last 30 years, Korea has pursued a strongly export-oriented

economic development model with considerable government involvement.

Under this model, the Korean government has worked closely with Korean

financial institutions and large corporate conglomerates to promote

exports in targeted sectors, such as heavy and chemical industries,

consumer electronics, and automobiles. The overinvestment in certain

sectors and excessive corporate debt that this development strategy

eventually produced contributed to Korea’s recent financial crisis.

Government assistance to exporters has consisted of providing a range of

industry-specific subsidies, tax benefits, export financing, export

marketing assistance, government-influenced lending, and research and

development assistance. In recent years, the United States has been

concerned over Korean subsidies and other export policies.

Korean Subsidies and Internal Supports—U.S.-initiated WTO Disputes and

Countervailing Duty Cases: In February 1999, the United States invoked

WTO dispute settlement procedures against Korean beef industry policies.

The United States alleged that Korean regulations discriminated against

and constrained opportunities for the sale of imported beef in Korea and

that Korea provided domestic support to its cattle industry in amounts that

exceeded its WTO tariff reduction schedule. The United States and Korea

engaged in formal consultations over this matter in mid-March, and a panel

to consider the matter was formed on May 26, 1999. Also, within the last

5 years, the Commerce Department has determined that a number of

Korean subsidies to its steel industry were countervailable under U.S.

Korea: U.S. Concern About Steel

Support and Several Export

Policies
B-282825

Page 14 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

trade law. 22 The three cases have involved stainless steel plate in coils;

stainless steel sheet and strip in coils; and certain cut-to-length, carbonquality steel plate. (App. II provides more details concerning U.S.

countervailing duty law, WTO subsidies rules, and these specific cases.)

U.S. Concerns About Other Korean Policies: In addition to policies that the

U.S. government has formally raised in the WTO or found to be

countervailable under U.S. trade law, the executive branch has been

concerned about other Korean export and subsidy polices in the last

3 years. These policies have involved government-directed lending,

government involvement in and support to the Korean steel industry,

restructuring of corporate conglomerates (particularly in the automobile,

steel, shipbuilding, and semiconductor industries), and semiconductors.

Government-directed Lending: The Commerce Department has reported

that it is monitoring whether the Korean government may be influencing

commercial banks to lend funds at preferential rates to targeted

industries—particularly to Korea’s steel and semiconductor industries. The

U.S. government has raised this issue with Korean government and

industry officials on numerous occasions. In addition, Korea’s IMF and

World Bank programs contain reforms to Korea’s financial system and

corporate sector that help to curtail the government’s ability to direct bank

lending on noncommercial terms. As previously mentioned, Commerce has

examined potential subsidies resulting from alleged government-directed

lending to the Korean steel industry in three recent countervailing duty

investigations of certain Korean steel products.

Steel Industry: The U.S. government and U.S. steel industry have been

concerned for some time about Korean government involvement in and

support for its steel industry, such as below-market-interest-rate loans

extended by government-owned banks to steel producers. Several actions

have taken place in addition to the countervailing duty cases previously

discussed. In June 1995, the U.S. Committee on Pipe and Tube Imports

filed a Section 301 petition23 alleging that Korea restricted exports of

 

22 Countervailing duties are only imposed if the Commerce Department determines that a

countervailable subsidy is being provided and if the International Trade Commission determines that

an industry in the United States is materially injured or threatened with material injury, or that the

establishment of an industry in the United States is materially retarded, by reason of the subject

imports.

23 Section 301 of the Trade Act of 1974 (19 U.S.C. 2411), as amended, provides the U.S. Trade

Representative with the authority to enforce U.S. rights under bilateral and multilateral trade

agreements and to respond to unjustifiable or discriminatory foreign government practices that burden

or restrict U.S. commerce. Section 301 investigations can be initiated by USTR or pursued by USTR in

response to a petition filed by a person, firm, or association.
B-282825

Page 15 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

domestically produced steel sheet, controlled domestic prices below world

prices, and diverted exports of pipe and tube products from the EU to the

U.S. market. The Committee withdrew its petition in July 1995 when Korea

agreed to establish a consultative mechanism with the United States to

provide information about Korea’s steel sheet, pipe, and tube production

and exports. The Korean government also agreed to notify the United

States of any measure to control steel production, pricing, or exports, and

to not interfere in steel pricing or production. Although the consultative

mechanism was extended for another year, and bilateral consultations

were held in 1996 and 1997, the United States continued to raise concerns

about Korean government influence over private-sector decisions

concerning steel. In 1997 and 1998, for example, the United States asked

the Korean government to respond to specific questions concerning Hanbo

(Korea’s second largest steel producer), which collapsed financially and is

now being sold. The United States was concerned that the Korean

government may have provided subsidies to Hanbo and directed Korean

banks to extend credit to the company—actions that may have contributed

to prices that undercut competitors and displaced U.S. steel exports to

Korea and other countries.

As a result of a 30 percent surge in steel imports into the United States

during the first 10 months of 1998 compared to the same period in 1997, of

which about 6 percentage points came from Korea (Japan and Russia were

other important suppliers), the United States initiated an extensive

dialogue with the Korean government to ensure that its steel sector would

operate on a market-driven basis rather than with Korean government

help. In 1998, the Korean government provided written assurances that it

would not support, or direct others to support, Hanbo and that the sale of

the company would be market based and managed by a reputable

international financial company. In addition, Hanbo temporarily shut down

production at one of its plants that was of particular concern to the U.S.

steel industry.

The Korean government also announced its intention to privatize Korea’s

largest and the world’s second largest steel producer, Pohang Iron and

Steel Company (POSCO). Since December 1998, the Korean government

has reduced its 33 percent stake in POSCO to 20.8 percent. The full

privatization of POSCO would serve to remove the Korean government’s

influence from the company’s pricing, production, and other business

decisions. In addition to monitoring POSCO’s privatization, the U.S.

government is continuing to monitor steel import trends and any potential

Korean government support to other steel companies. In addition, the U.S.

government believes that, if faithfully implemented, Korea’s financial and
B-282825

Page 16 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

corporate restructuring efforts—particularly those involving bank

oversight and lending limits—should help guarantee that Korea’s steel

corporations operate on a market-oriented basis.

Restructuring of Corporate Conglomerates: As part of Korea’s financial

arrangements with the IMF, the Korean government is trying to restructure

the five largest Korean industrial conglomerates, or “chaebol,” to make

them more commercially oriented and to reduce their debt levels. These

chaebol are swapping certain assets and subsidiaries, as part of the socalled “Big Deal.” The World Bank is taking the lead in assisting Korea with

its corporate sector restructuring. The U.S. government has flagged

corporate restructuring as a systemic change that could not only help the

Korean economy regain and sustain its stability but also enhance market

access. The U.S. government has submitted questions to the Korean

government on the specifics of certain restructuring efforts, including in

the semiconductor sector, and emphasized that as a whole the

restructuring should (1) yield more efficient, market-driven Korean firms

without uneconomic business lines that contribute to excess capacity; and

(2) be carried out in a manner that is consistent with Korea’s international

obligations, particularly under the WTO Agreement on Subsidies and

Countervailing Measures. The Commerce Department has reported that it

is monitoring whether the Korean government might provide certain

subsidies—such as tax breaks or drastic debt relief—as incentives to the

companies to participate in the restructuring.

In addition to these practices, the U.S. government in 1998 reported that

Korea uses various tax-related measures that benefit Korean exporters or

foreign investors in Korea. These include tax reserves for export losses

and overseas market development, exemptions or reductions in duties on

imported capital equipment to be used in exports, reductions in duties for

imported aircraft and vessel parts, tax concessions to encourage foreign

investment, tax concessions for overseas business losses, tax exemptions

for overseas business development, and tax credits for investment in

facilities. The Commerce Department also reported on Korean subsidy

practices that benefit specific industry sectors. These sectoral practices

include incentives to sustain steel companies; tax exemptions or credits

for firms in designated manufacturing industries (machinery, electronics,

aviation, defense, fine chemicals, genetic engineering, new basic materials,

and antipollution technologies); tax incentives for multinational

corporations in computer software and telecommunications; expense

deductions for firms in traditional industries; support to miners when

mines are closed; incentives to the stone industry; and assistance to small

and medium-sized enterprises.
B-282825

Page 17 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

Brazil was the U.S.’ 11th largest export market in 1998. In 1998, the United

States ran a $5-billion trade surplus with Brazil. Brazilian merchandise

exports to the United States totaled about $10 billion that year and

consisted primarily of machinery and other manufactured goods. The

Brazilian government does not provide many direct subsidies to exporters;

however, the United States has been concerned about several that it does

provide.

WTO Disputes and Countervailing Duty Cases: Since 1996, the United

States has participated in WTO cases involving two Brazilian subsidies.

The United States invoked WTO dispute settlement procedures and held

consultations with Brazil regarding various aspects of its automotive

regime in August 1996, including provisions in its WTO-notified subsidy

program for automobiles. In March 1998, the United States and Brazil

signed an agreement settling the dispute. (See app. I for more details on

this case.) The other WTO dispute was brought by Canada and involved

PROEX, a Brazilian government export financing program. The United

States reserved its rights as a third party in the dispute. In April 1999, a

WTO dispute resolution panel found that PROEX’s interest equalization

program was a prohibited export subsidy24 and that, because Brazil did not

meet the conditions that allow developing countries more time than

developed countries to remove prohibited export subsidies, the program

must be withdrawn immediately. In addition to these WTO cases, in the

last 3 years the U.S. government has found one Brazilian subsidy to

manufacturers of certain hot-rolled flat-rolled carbon-quality steel

products to be countervailable. (See app. II for more information about the

PROEX dispute and the steel case.)

Other Brazilian Subsidies of U.S. Concern: The U.S. government has been

concerned about other Brazilian export programs. These programs include

tax and tariff exemptions for equipment and materials imported for the

production of goods for export, excise and sales tax exemptions on

exported products, and rebates on materials used in the manufacture of

exported products. Exporters enjoy exemptions from withholding tax for

remittances sent overseas for loan payments and marketing, as well as

from the financial operations tax for deposit receipts on export products.

Exporters are also eligible for a rebate on social contribution taxes paid on

locally acquired production inputs.25 According to the Commerce

 

24 The interest equalization program subsidizes Brazilian exports so as to equalize domestic and

international interest rates for export financing.

25 In commenting on a draft of this report, the IMF stated that the subsidies described in this paragraph

include practices that any country with sales taxes based on the destination principle would follow. In

particular, the IMF said, the EU’s sales taxes rebate the entire value of the value-added tax levied on

Brazil: U.S. Focus Has Been on

Three Subsidies
B-282825

Page 18 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

Department, tariff concessions Brazil introduced under its auto regime in

December 1995 raised questions about the regime’s consistency with the

WTO’s Agreement on Subsidies and Countervailing Measures.

In 1998, Indonesia was the seventh largest U.S. trading partner among IMF

borrowers but accounted for less than 1 percent of U.S. imports and

exports. In 1998, the United States ran a $7.6-billion merchandise trade

deficit with Indonesia, an increase of $2.5 billion from 1997. The increase

in the merchandise trade deficit was mainly the result of a fall in U.S.

exports to Indonesia in 1998 of $2.2 billion. Indonesia is a significant U.S.

trading partner in some sectors, such as in U.S. imports of wood and

rubber products. Indonesia has notified the WTO that it maintains a small

number of subsidies.

In October 1996, the United States and the EU initiated WTO dispute

settlement procedures against two Indonesian subsidies to its automotive

industry. One subsidy granted import duty relief to certain automotive

parts and accessories for use in assembling or manufacturing motor

vehicles based on the percentage of local content in the finished vehicles.

The other subsidy permitted an Indonesian firm that was designated as a

“pioneer” company to import tariff-free finished automobiles designated as

“national cars” and to sell the national cars luxury tax-free for 3 years.26

Indonesia eliminated the subsidy to the pioneer company in January 1998

as a commitment to the IMF and, based on a June 1998 WTO appellate

body ruling, Indonesia has until July 1999 to eliminate the local content

subsidy. In addition to these automotive industry subsidies, in March 1999

the U.S. Commerce Department found that the Bank of Indonesia’s

rediscount export financing program was an export subsidy; however,

Commerce did not find it to be countervailable due to its small size. (See

app. II for more details.)

Thailand was the 26th largest export market for U.S. goods and 13th

largest supplier of goods to the United States in 1998. That year, the U.S.

trade deficit with Thailand increased by about $5 billion, reaching an alltime high of $8.2 billion; the value of U.S. merchandise exports decreased

by about $2 billion, while Thai merchandise exports increased by about

$840 million. Thailand maintains a number of programs aimed at

 exports as they cross the border, and a similar mechanism functions in the case of interstate trade in

the United States for certain products. Sales tax rates are considerably higher in Brazil than they are in

U.S. states, according to the IMF, and the burden that would be imposed on exporters in the absence of

such a rebate mechanism could be considerable.

26 Japan joined the United States and the EU in disputing this second Indonesian subsidy.

Indonesia: Concern About

Automotive Subsidies

Thailand: United States Has

Found Several Subsidies to Be

Countervailable
B-282825

Page 19 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

promoting exports in global markets, encouraging investment, and

establishing or expanding industrial development zones. These programs

include subsidies in the form of credits and tax exemptions on certain

exports, and reduced tariffs on raw materials for products intended for

reexport.

In the past, the U.S. government has found a number of Thai subsidies to

be countervailable, although in some cases no countervailing duty order

was issued because the ITC did not find material injury to the competing

U.S. industry. The countervailable Thai subsidies have included export

packing credits (short-term, preshipment export loans); tax and duty

exemptions that allow exporting companies to import machinery and

equipment free of import duties and business and local taxes; import duty

exemptions for raw materials that allow companies to import raw and

“essential “ materials used in the production, mixing, and assembly of

exports, free of import duties; and assistance for trading companies, which

provides certain incentives to eligible trading companies. (See app. II for

more details.)

In addition to programs found to be countervailable, the U.S. government

has identified several other Thai government export programs that are of

potential concern. These programs include subsidized credit on some

government-to-government sales of Thai rice, which benefit certain

processed agricultural products and manufactured goods.
B-282825

Page 20 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

Countries in an IMF financing arrangement sometimes have liberalized

their trade systems within the context of their arrangements, although in

many cases the liberalization has not been a condition of receiving

disbursements of IMF funds. As part of their recent arrangements, Brazil,

Indonesia, and Korea have liberalized their trade regimes to some degree.

Brazil has modified one subsidy program and pledged not to introduce any

new trade restrictions that hinder regional integration or are inconsistent

with the WTO. Indonesia has reduced or eliminated some import tariffs

and export restrictions and has committed to phase out most remaining

nontariff import barriers and export restrictions by the year 2000. Korea

has eliminated four subsidies and plans to make the operation of its

subsidy programs more transparent. Korea is also making several changes

to its import certification procedures. Thailand’s IMF program has no

direct trade policy commitments. One reason for this, according to the U.S.

Treasury, is that Thailand had fewer distorting trade policies than the

other three countries.

Although Brazil, Indonesia, and Korea are undertaking some trade reform,

their IMF financing arrangements focus primarily on macroeconomic and

other structural reforms rather than trade reform. According to the

Treasury and the IMF, restrictive trade policies were not major causes of

the countries’ financial crises. Further, while several of the trade policies

to be eliminated or modified under the three countries’ IMF programs have

been of concern to the United States and other countries, the stated

purpose of these measures is not to assist the four countries’ trading

partners but instead it is to make their economies operate more efficiently.

That said, measures taken in an effort to restore economic stability should

also contribute to market opening. In addition, as part of their IMF

programs, Indonesia, Korea, and Thailand plan to further open their

economies to foreign investment and to substantially restructure their

financial and corporate sectors. For example, Korea has committed to end

government-directed lending, which USTR views as a very significant

trade-related commitment. These commitments, if fully implemented,

could lead to increased U.S. investment in and trade with these countries.

A fundamental objective of the IMF’s mission, as embodied in article I of

its Articles of Agreement, is to facilitate the expansion and balanced

growth of international trade. According to the IMF, trade liberalization, at

both the national and global levels, is thus an integral part of structural

adjustment policies incorporated in IMF programs and surveillance

activities. As such, countries that have borrowed from the IMF sometimes

have liberalized their trade systems within the context of their financing

arrangements. Borrowers have eliminated or reduced tariffs or nontariff

Trade Liberalization in

Brazil’s, Indonesia’s,

Korea’s, and Thailand’s

Recent IMF Financing

Arrangements

Purpose of Trade

Liberalization in IMF

Financing Arrangements
B-282825

Page 21 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

barriers to imports, such as import quotas, licensing, or other restrictions.

They also have ended or altered export policies, such as subsidies and

export restrictions. In some cases, trade liberalization measures have been

IMF “performance criteria,” which are conditions that a borrower

generally must meet in order to qualify for future disbursements. In many

cases, however, borrowers’ trade liberalization measures were not

performance criteria, although this does not mean that the IMF or the

borrower considered the measures to be unimportant to achieving the

objectives of the financial arrangements. According to the IMF, for some

borrowers trade reform can be a critical element of structural reforms. In

addition, IMF financing arrangements typically require that countries

pledge not to impose or intensify import restrictions for balance-ofpayments reasons.

Brazil, Indonesia, and Korea have undertaken some trade liberalization

within the context of their recent IMF financing arrangements.

Nevertheless, their overall IMF arrangements focus on macroeconomic

and structural reforms other than trade reform because restrictive trade

policies were not major causes of their financial crises, according to U.S.

Treasury and IMF officials. Reflecting this reality, only one of the trade

liberalization measures is a performance criterion—the requirement that

Indonesia reduce export taxes on logs and sawn timber. Further, although

several of the import and export policies to be eliminated or modified

under their IMF programs have been of concern to the United States and

other countries, the stated purpose of these reforms is not to assist the

four countries’ trading partners but instead it is to make their economies

operate more efficiently and thus help achieve the IMF program objectives

of resolving the countries’ balance-of-payments problems and preventing

their recurrence.

Since December 1998, Brazil made several trade commitments within the

context of its IMF financing arrangements. As table 1 shows, Brazil has

committed to limit the scope of its interest equalization export subsidy

program to capital goods, and, according to the IMF, Brazil has kept its

pledge not to impose any new trade restrictions that hinder regional

integration, are inconsistent with the WTO, or that are for balance-ofpayments purposes.

Brazil Is to Modify Two

Export Programs and Not

Impose Additional Trade

Restrictions
B-282825

Page 22 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

Measure Description Status

I. Import-related

measures

 General Continue promoting economic integration with

MERCOSULa

 and other regional trading

partners.

Increase trade with countries outside the

region.

Do not impose trade restrictions that are either

WTO inconsistent or for balance-of-payments

reasons.

Tariffs were reduced on 98 products. No new trade restrictions

have been imposed that either hinder regional integration, are

inconsistent with the WTO, or that are for balance-of-payments

reasons.

II. Export-related

measures

 Subsidies a. Limit the scope of interest equalization export

financing program to goods with a long

production cycle (capital goods).

a. Measure was submitted to Brazil’s Congress in December 1998

but has not been approved. However, measure is in force

(Brazilian law allows president to enact provisional measures

before congressional ratification). Measure was submitted as part

of a major tax reform proposal that called for a national valueadded tax.

b. Suspend, for 1999, exporters’ rebates on

social contribution taxes

b. Rebate was suspended for 1999.

a

MERCOSUL is the largest preferential trade arrangement in Latin America and consists of Argentina,

Brazil, Paraguay, and Uruguay. Bolivia and Chile are associate members.

Sources: Brazil's letters of intent, IMF, U.S. Treasury Department.

Since November 1997, Indonesia has made many changes to its trade

policies in the context of its IMF financing arrangements. As table 2 shows,

Indonesia has reduced tariffs on a range of mainly agricultural products

and eliminated the government’s monopoly on importation and

distribution of agricultural products. Also, Indonesia has pledged to

eliminate all other import and export restrictions by the end of its IMF

program in the year 2000, except for those necessary for health, safety,

environment, or security reasons. In March 1999 testimony, a Commerce

Department official stated that the U.S. government has been satisfied with

Indonesia’s efforts to date in reforming its trade system.27 However, the

official also said that the true test of these reforms will come when

increased trade flows resume.

 27 Testimony of the Honorable Patrick A. Mulloy, Assistant Secretary of Commerce for Market Access

and Compliance, Before the House of Representatives, Committee on Banking, Housing, and Urban

Affairs (Mar. 9, 1999).

Table 1: Trade Liberalization in Brazil’s Recent IMF Financing Arrangements, December 2, 1998, through April 30, 1999

Indonesia Is to Remove

Unjustifiable Trade

Restrictions
B-282825

Page 23 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

Measure Description Status

I. Import-related

measures

Tariffs a. Reduce tariffs on all items currently subject to tariffs

of 15% to 25% by 5 percentage points by March 31,

1998.

a. Completed by deadline.

b. Reduce tariffs on all nonfood agricultural products to

a maximum of 10% by 2003.

b. A cut of 5 percentage points was made on February 1,

1998.

c. Reduce tariffs on all food products to a maximum of

5%.

c. Completed on February 1, 1998.

d. Reduce tariffs on chemical, steel/metal, and fishery

products to 5%-10% by 2003.

d. Chemical tariffs were reduced by 5 percentage points on

January 1, 1998.

Nontariff barriers a. Abolish import restrictions on new and used ships. a. Completed in February 1998.

b. Eliminate government monopoly on agricultural

commodity imports.

b. Completed as scheduled.

c. Eliminate government monopoly’s rice import

subsidy.

c. Completed by March 1999.

d. Abolish local content regulations on dairy products. d. Completed effective February 1, 1998.

e. Develop longer-term role for and restructure

government agricultural state trading enterprise.

e. To be done with World Bank assistance

f. Allow private traders to import rice. f. Completed in September 1998.

g. Phase out all remaining barriers, including

quantitative restrictions, by end-program, except for

those necessary for health, safety, environmental, or

security reasons.

II. Export-related

measures

Subsidies a. Discontinue special tax, customs, and credit

privileges to national car project.

a. National car project privileges were discontinued in

January 1998.

b. Phase out local content program by the year 2000.

Aircraft program Discontinue budgetary and extrabudgetary support. Completed in January 1998.

Export restrictions a. Reduce export taxes on logs, sawn timber, rattan,

and minerals to 10% by December 2000 and gradually

replace with resource rent taxes.

a. Begun. See (b)

b. Reduce export taxes on logs and sawn timber to

20% by December 31, 1998.a

b. Not completed by deadline. IMF waived performance

criteria. Completed in February 1999.

c. Abolish export taxes on leather, cork, ores, and

aluminum waste products.

c. Completed in February 1998.

d. Lift export bans on food commodities. Replace

quantitative restrictions on palm oil, olein, and stearin

exports with export tax of 40% by April 22, 1998, and

reduce tax to 10% by December 31, 1999.

d. Bans lifted September 1998 – April 1999. Export tax was

imposed by April 22, 1998. The tax went up from 40% to

60% in mid-summer 1998, but was reduced to 40% again in

February 1999.

e. Abolish provincial and local government export

taxes.

e. Completed in January 1998.

f. Eliminate all other export restrictions by endprogram, except for those deemed necessary for

health, safety, security, or environmental reasons. a

Performance criterion.

Sources: Indonesia's letters of intent, IMF, U.S. Treasury Department.

Table 2: Trade Liberalization in Indonesia’s Recent IMF Financing Arrangements, November 5, 1997, through April 30, 1999
B-282825

Page 24 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

As part of its recent IMF financing arrangements, among other actions,

Korea has reduced some import barriers, eliminated four trade-related

subsidies, and made improvements to the transparency of its subsidy

programs. Korea has met every deadline for implementing these measures,

although deadlines for completing some actions have not yet passed. Table

3 shows the implementation status of trade policy measures that Korea has

committed to the IMF to implement since its December 1997 IMF financing

program began.

Measure Description Status

I. Import-related measures

 Tariffs Reduce number of items subject to

adjustment (higher-than-normal) tariffs

used to protect domestic producers against

import surges.

Number of products covered was reduced

from 62 to 38.

Nontariff barriers a. Eliminate import diversification program,

which barred imports of 113 Japanese

products and affected U.S. exports to

Korea that contained substantial Japanese

content.

a. To be phased out by June 1999. Sixteen

items remain covered.

b. Review import certification procedures.

By August 15, 1998, present to IMF a plan

to streamline and bring procedures in line

with international practice.

b. Plan completed by deadline. Some

reforms implemented during 1998, and

others planned. Reforms involve a wide

range of products, government ministries,

and laws.

II. Export-related measures

Subsidies a. Eliminate four trade-related subsidies:

(1) reserves for export losses of exporters,

(2) reserves for exporters’ overseas market

development, (3) program to promote

exporters’ use of minicomputers, (4) tax

incentives for foreign investment.

a. All were eliminated by March 31, 1998.

b. Review all existing subsidy programs

and their economic rationale and, by

November 15, 1998, present to IMF a plan

for rationalizing programs.

b. Plan completed by deadline. Plan

proposed several measures to rationalize

programs by enhancing transparency,

tightening supervisory control of tax

benefits, and introducing in the long term a

more systematic and transparent budgeting

system for tax expenditures.

Sources: Korea's letters of intent, IMF, U.S. Treasury Department.

In addition to trade liberalization measures, as part of their IMF financing

arrangements, Korea, Indonesia, and Thailand have committed to further

open their economies to foreign investment and to substantially

restructure their financial and corporate sectors. These commitments, if

Korea Has Eliminated Some

Subsidies and Is Reviewing

Certain Import Policies

Table 3: Trade Liberalization in Korea’s Recent IMF Financing Arrangements, December 4, 1997, through April 30, 1999

Other IMF Conditions Could

Significantly Affect the Four

Countries’ Trade
B-282825

Page 25 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

fully implemented, could lead to increased U.S. investment in and trade

with these countries. For example, Korea has eliminated the aggregate

ceiling on foreign investment in Korean equities, as well as the foreign

investment ceiling on domestic bonds. Other measures would facilitate

friendly or hostile foreign mergers with, or acquisitions of, Korean

companies, while yet others would ease restrictions in corporate foreign

borrowing, the establishment of subsidiaries of foreign banks and

brokerage houses, foreign direct investment, foreign acquisition of land,

and foreign exchange transactions. Similarly, measures related to

restructuring the financial sector would liberalize restrictions on the ability

of foreign financial institutions to merge with, acquire, or invest in

domestic Korean financial institutions and would allow foreigners to

become bank managers. According to the IMF, the Korean economy has

become much more open to foreign investment since its recent financing

arrangements began. Indonesia, among other commitments, has pledged to

open more sectors of its economy to foreign investment and to remove

restrictions on permitting foreign banks to have branches in Indonesia.

Investment liberalization could lead to more U.S. or other foreign direct or

portfolio28 investment. This could increase trade, because trade tends to

follow investment.

In addition to liberalizing foreign investment, other structural reforms

being implemented by Brazil, Indonesia, Korea, and Thailand within the

context of their recent IMF financing arrangements could affect their

trade. For example, according to the U.S. Treasury Department, under its

IMF financing arrangements, Korea has agreed to a fundamental overhaul

of its weak and noncompetitive financial system. Korea also has

committed to end government-directed lending. Brazil, Indonesia, and

Thailand are further privatizing state-owned enterprises. If implemented

successfully in conjunction with foreign trade and investment

liberalization, these structural reforms could have a significant effect on

U.S. and other foreign trade and investment in these economies. Finally, to

the extent that their IMF programs as a whole lessen the duration and

severity of these countries’ economic crises, the prospects for increased

foreign trade and investment would improve. The success of these

programs depends on many factors, including their macroeconomic and

structural policy changes. But success also depends on factors that are in

part outside of the borrowers’ and the IMF’s control, such as investor

confidence in the four countries’ economies and macroeconomic

conditions in other countries.

 

28 Portfolio investments are assets held in the form of marketable equity or debt securities.
B-282825

Page 26 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

The policies maintained by Brazil, Indonesia, Korea, and Thailand to

encourage exports could potentially distort trade and displace production

by U.S. producers, even though they may benefit other U.S. companies or

consumers. However, the large macroeconomic changes in these countries

caused by their recent financial crises greatly complicate predicting and

measuring the policies’ impact on the United States because the

macroeconomic changes are likely a major reason for recent changes in

trade flows. Moreover, overall U.S. imports from these nations grew

modestly in 1998, and many sectors registered declines. Imports from

Brazil, Indonesia, Korea, and Thailand also grew at a slower pace than

overall U.S. imports and than they have in previous years. Nevertheless, in

certain sectors such as steel and chemicals, the United States faces

substantial and growing import competition from suppliers from one or

more of the four countries. Products accounting for about16 percent of the

value of U.S. imports from these four IMF borrowers registered large

increases in imports and falling prices over the past year. Mechanisms

exist to investigate and remedy situations, such as steel import surges,

where U.S. industry believes rising imports are attributable to foreign

government policy and harm its economic interests.

Export policies such as subsidies to producers and low-cost financing for

exports can harm U.S. companies by displacing U.S. sales in the United

States and other world markets. At the same time, they may benefit U.S.

consumers and other U.S. industries that use the imported products. Aside

from any direct economic impact, U.S. trade law and international trade

agreements such as the WTO agreements contain disciplines to limit the

use of subsidies and provide remedies for harmful effects of trading

partners’ export policies in specified circumstances.

In a prior section, we identified export policies maintained by Brazil,

Indonesia, Korea, and Thailand. Relatively few of the policies have been

major sources of U.S. industry or government concern. But some have

been, particularly Korea’s policies in the steel, automotive, shipbuilding,

and semiconductor sectors and Brazil’s policies in the steel and

automotive sectors. Brazil and Korea were among the top 10 countries

cited in U.S. countervailing duty investigations into complaints over

unfairly subsidized imports during 1980-97. Brazil was the top country

cited, accounting for about 11 percent of all cases filed.

However, accurately weighing the recent impact of export policies on U.S.

industries is difficult. First, as has been seen, the United States can expect

to face deteriorating trade balances and heightened competition from key

IMF borrowers because of their financial crises and the accompanying

Potential Impact of

IMF Borrowers’ Export

Policies on the United

States Is Difficult to

Measure

Export Policies Can Distort

Trade, but Assessing Their

Impact Is Difficult
B-282825

Page 27 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

sharp currency devaluations and shrinking demand in these markets. The

strong performance of the U.S. economy relative to that of other nations

also draws in imports. For now, U.S. output is rising, inflation is low, and

unemployment is at its lowest level in 30 years. These trends provide a

favorable backdrop for absorbing rising imports. Also, U.S. imports from

Brazil, Indonesia, Korea, and Thailand rose at a slower pace than overall

U.S. imports in 1998,29 and, for Brazil and Indonesia, rose by less in 1998

than they had in previous years. Indeed, substantial contractions were

recorded in U.S. imports from each of the four countries in many sectors.

Another factor that makes it difficult to determine the impact of export

policies is that such an investigation requires considerable legal, economic,

and industry information. Some of this information is readily available, but

much of it must be estimated or specially collected and analyzed on a caseby-base basis. For example, the U.S. government agencies responsible for

administering U.S. trade law, including the Commerce Department and the

ITC, conduct in-depth investigations regarding specific allegations of

improper subsidies and injurious effects on domestic industries. Still, as a

general rule, the larger the distortion and the greater the trade affected, the

more likely the policy could harm the U.S. industry.

Brazil, Indonesia, Korea, and Thailand are leading world exporters. The

U.S. market receives a substantial portion of their export shipments. Based

on IMF data, the four nations account for 35 percent of the total world

exports of current IMF borrowers, with Korea alone accounting for

16 percent of total exports from IMF borrowers. Recent WTO data reveal

that the four countries ranked among the world’s leading exporters in 1998

and that Korea was the world’s 7th largest exporter, while Thailand, Brazil,

and Indonesia ranked 15th, 16th, and 17th, respectively. Collectively, the

four sold $287 billion abroad in 1998, which is more than Canada, but less

than the United States and Japan. Figure 3 shows 1998 exports of Brazil,

Canada, Indonesia, Japan, Korea, Thailand, and the United States.

 29 Total U.S. imports from all sources rose by 5.36 percent from 1997 to 1998. U.S. imports from Brazil

rose by 4.40 percent; from Indonesia, by 3.04 percent; from Korea, by 4.22 percent; and from Thailand

by 6.87 percent.

The United States Is an

Important Market for Brazil,

Indonesia, Korea, and

Thailand, and Thus Stands

to Be Among Those Most

Affected by Their Export

Policies
B-282825

Page 28 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

Source: WTO.

The United States is an important market for these four countries, but its

importance as a buyer did not increase substantially relative to other

nations in 1998. In 1998, the United States accounted for an estimated

19 percent of Brazil’s exports, 18 percent of Indonesia’s exports, and

16 percent of Korea’s exports, according to the U.S. Department of State.

All of these shares were similar to those recorded in 1997 and 1996. (Some

20 percent of Thailand’s exports were shipped to the United States in 1997,

the latest year for which data are available.) In 1998, the four countries

together accounted for about 7 percent of both U.S. exports and imports,

according to Commerce statistics. Industry analysts report that U.S.

suppliers face head-on competition from all four countries in such sectors

as steel and chemicals; automobiles (Korea); orange juice (Brazil); wood

and paper products (Indonesia and Brazil); and poultry and pork (Thailand

and Korea). However, in many product sectors, these nations compete

more with each other and other nations than with U.S. suppliers. For

example, Brazil competes with China, Italy, Spain, Indonesia, and Korea in

footwear. Thailand competes with Mexico and the Philippines in the

supply of electric wire and cables. Korea and Japan compete with U.S.

producers in the United States and with each other in Asian markets for

semiconductor memory devices. In other industries, such as many

chemicals from Indonesia and semiconductors from Thailand, the imports

Figure 3: World Exports, by Selected

Nations, 1998
B-282825

Page 29 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

are raw materials or intermediate products used in final U.S. production of

higher value-added goods.

The executive branch has implemented programs to detect and deter

potentially harmful effects of export subsidies by these four nations (as

well as certain others). These programs were developed by the Commerce

Department to respond to concerns by U.S. industries. The industry

concerns were twofold: that nations could use subsidies to export their

way out of their financial crisis and that the IMF stabilization programs

could allow these countries to resume financial practices that had

previously benefited strategic industries to the possible detriment of U.S.

firms and workers.

Commerce’s special efforts involve (1) tracking existing and prospective

policies (export or production-related subsidies) by key nations; and (2)

monitoring U.S. imports in selected sectors—including steel,

semiconductors, autos, paper, and chemicals—that are vulnerable to

import penetration and that have faced unfair trade practices in the past.

Commerce staff report that they identify import surges by examining the

value, quantity, and price of imports; the share of the U.S. market that has

been captured by imports (import penetration); and the level of industry

concern. The result is an early warning mechanism to flag potential

problems for further analysis and action, if appropriate.

To shed light on whether the export policies of Brazil, Indonesia, Korea,

and Thailand could pose a potential threat to U.S. producers, we

supplemented the information on export policies presented in a prior

section with an analysis of imports from the four IMF borrowers that

showed large increases in U.S. imports in 1998.30 Textiles, apparel, and

steel were the product categories that experienced the largest increases in

imports from these countries. Other important categories were certain

primary or processed agricultural and fishery products, chemicals, rubber

products, wood and paper products, and electric and nonelectric

machinery.

The results of the multistage analysis revealed that products accounting

for $9.4 billion, or 16 percent, of U.S. imports from Brazil, Indonesia,

Korea, and Thailand both increased substantially and registered price

declines in 1998. Table 4 shows the 62 product categories that met all of

our criteria and, for each product, the percentage increase in imports from

 

30 Specifically, we identified items that met certain value, import market share, and import increase

criteria. We then examined whether prices were falling for these imports. See appendix IV for details.

Commerce Is Monitoring

Policies and Import Surges

to Detect Potential Problem

Areas

Some U.S. Imports From

the Four Countries Have

Increased Markedly in the

Past Year
B-282825

Page 30 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

the four countries. (An additional 300 items at a more disaggregated level

also met our criteria and showed substantial import increases and price

declines; these items accounted for $5.3 billion in imports from the four

IMF borrowers.) For example, imports of radio transmission apparatus

from Korea rose by nearly 90 percent to reach a value of $788.4 million,

while imports of one category of flat-rolled steel from Korea rose by

36 percent, to $355.8 million. Paper and paperboard imports from

Indonesia were up by 284 percent, amounting to $40.8 million.
B-282825

Page 31 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

Product class Product name

Change

1997-98

1998

Imports

Brazil

Sugars and Sugar Confectionary Sugars (nesoia) including Lactose, Caramel 913.6% $33,077

Inorganic Chemicals; Precious & Rare Earth Metals Titanium Oxides 648.8 3,204

Misc. Edible Preparations Extracts of Coffee, Tea or Mate, Roast Chicory 179.5 41,591

Salt, Sulfur, Earth & Stone, Lime & Cement, etc. Kaolin and other Kaolin Clays (including Calcined) 171.1 7,479

Coffee, Tea, Mate & Spices Pepper, Genus Piper, Genus Capsicum or Pimenta 68.7 30,353

Edible Preparations of Meat, Fish, Crustaceans, etc. Prepared Meats, Meat Offal & Blood (nesoia) 63.0 104,753

Leather Art, Saddery, Handbags, etc. Articles of Gut (nesoia), Goldbeater's Skin, etc. 58.0 6,754

Plastics, etc. Cellulose and Chemical Derivatives (nesoia) 49.5 9,667

Iron and Steel Flat-rolled Iron and Steel (600mm wide, cold rolled) 47.0 71,052

Rubber, etc. Unvulcanized Rubber Forms (nesoia) and Articles 36.2 3,344

Iron and Steel Pig Iron & Spiegeleisen in Pigs, Blocks, etc. 33.6 366,229

Oreas, Slag & Ash Aluminum Ores and Concentrates 25.5 66,712

Misc. Chemical Products Rosin & Resin Acids, Rosin Spirit, Run Gum, etc. 22.4 3,755

Iron and Steel Flat-rolled Iron and Steel (600mm wide) 22.0 10,555

Salt, Sulfur, Earth & Stone, Lime & Cement, etc. Natural Graphite 20.2 6,481

Indonesia

Paper & Paperboard, etc. Paper, Paperboard, etc. 284.2 40,777

Dairy Products, Birds' Eggs, Honey, etc. Edible Products of Animal Origin (nesoia) 221.1 2,301

Aluminum, etc. Household Articles (pot scour, aluminum, etc.) 71.5 45,730

Misc. Chemical Products Rosin & Resin Acids, Rosin Spirit, Run Gum, etc. 69.7 2,469

Apparel Articles and Accessories (not knit), etc. Men's or Boys' Undershirts (not knit or crochet), etc. 57.0 25,465

Essensial Oils, Perfumery, Cometics, etc. Essential Oils Resinoid 50.4 36,057

Electric Machinery, Sound and TV Equipment, etc. Primary Cells & Batteries, parts 36.5 52,522

Musical Instruments (parts and accessories) Musical Instruments with Sound Electric Products, etc. 32.8 20,070

Coffee, Tea, Mate & Spices Pepper, Genus Piper, Genus Capsicum or Pimenta 32.1 95,108

Edible Preparations of Meat, Fish, Crustaceans, etc. Fish, Caviar and Caviar Substitutes 22.7 35,031

Feathers, Down, Artificial Flowers, Hair Art, etc. Wigs of Hair and Articles of Human Hair (nesoia) 20.3 38,076

Korea

Iron and Steel Angles, Shapes & Sections of Iron and Steel 2980.1 139,776

Articles of Stone, Plaster, Cement, Asbestos, etc. Millstones for Grinding Various Materials 348.8 6,816

Inorganic Chemicals; Precious & Rare Earth Metals Cyanides, Cyanide Oxides and Complex Cyanides 266.0 5,073

Iron and Steel Wire of Alloy Steel (nesoia) 92.0 7,965

Electric Machinery, Sound and TV Equipment, etc. Transport Appar. for Radio, TV, TV Camera,

Recorders

89.9 788,375

Misc. Articles of Base Metal Wire, Rods for Soldering and Metal Spray, etc. 82.7 12,143

Misc. Edible Preparations Ice Cream and other Edible Ice, with Cocoa or Not 80.5 1,615

Textile Articles (needlecraft, worn textile), etc. Blankets and Traveling Rugs 71.4 16,221

Salt, Sulfur, Earth & Stone, Lime & Cement, etc. Pumice, Emery, Natural Corundum and Garnet, etc. 70.7 951

Beverages, Spirits and Vinegar Fermented Beverages (nesoia) (Cider, Perry, Mead,

etc.)

61.6 1,161

Explosives, Pyrotechnics, Matches, etc. Ferrocerium & other Pyrophoric Alloys, etc. 59.5 1,716

Products of Straw, Basketware and Wickerwork Plaits and Products of Plaiting Materials, etc. 47.3 1,955

Articles of Iron or Steel Nails, Tacks, Drawing Pins, etc. of Iron or Steel 37.8 118,946

Table 4: U.S. Imports from Brazil, Indonesia, Korea, and Thailand That Increased by More Than 15 Percent While Their Prices

Fell, 1997-98 (thousands of dollars)
B-282825

Page 32 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

Product class Product name

Change

1997-98

1998

Imports

Misc. Articles of Base Metal Safes, Cash or Deed Boxes of Base Metals 36.3 4,108

Iron and Steel Flat-rolled Iron and Steel (600mm wide, hot rolled) 36.1 355,824

Plastics, etc. Polymers of Styrene, in primary forms 35.6 44,316

Rubber, etc. Soft Vulc. Rubber Plates, Sheets, Profile Shapes, etc. 33.6 5,081

Wadding, Felt, Yarn, Twine, Ropes, etc. Metal Yarn, Textile Yarn, or Strip w/Metal 32.3 1,947

Mineral Fuel, Oil, Bitumin, Mineral Wax, etc. Pitch and Pitch Coke from Coal Tar or other Mineral

Tars

30.9 16,730

Electric Machinery, Sound and TV Equipment, etc. Electric Water, Space and Soil Heaters and other

Dryers

25.2 502,387

Musical Instruments (parts and accessories) Pianos, Harpsichords and other Keyboard Stringed

Instruments

24.8 68,416

Tools, Cutlery and Parts of Base Metals Articles of Cutlery (nesoia), Manicure Sets, etc. 24.0 23,042

Photographic or Cinematographic Goods Motion-Picture Film (exposed and developed) 23.2 23,966

Misc. Manufactured Articles Molded Resin, etc. and Carving Material (nesoia) 19.8 12,126

Rubber, etc. Hygienic or Pharmaceutical Articles of Vulcanized

Rubber

17.8 1,743

Woven Fabrics, Tufted Fabric, Lace, Tapestries, Etc. Labels, Badges, etc. of Textiles 17.2 4,676

Pearls, Precious Stones, Precious Metals, Coins, etc. Imitation Jewelry 15.2 136,031

Thailand

Ceramic Products Ceramic Sinks, Washbasins, Water Closet Bowls, etc. 359.4 8,039

Photographic or Cinematographic Goods Motion-Picture Film (exposed and developed) 238.9 8,374

Rubber, etc. Hygienic or Pharmaceutical Articles of Vulcanized

Rubber

126.6 3,603

Rubber, etc. Articles of Apparel and Accessories of Vulcanized

Rubber

51.9 222,510

Gums, Resins, and Other Vegetable Saps and

Extracts

Natural Gums, Resins, Gum-Resins and Balsams 51.1 4,062

Aluminum, etc. Household Articles (pot scour, aluminum, etc.) 44.5 63,675

Electric Machinery, Sound and TV Equipment, etc. Electric Water, Space and Soil Heaters and other

Dryers

23.4 166,568

Apparel Articles (knit or crochet), etc. Men's or Boys Shirts (knit or crochet), etc. 17.8 137,651

Musical Instruments (parts and accessories) Percussion Musical Instruments (drums, etc.) 17.6 6,129

Total $4,082,327

Total (all products)b$9,370,226 a

nesoi stands for "not elsewhere specified or indicated."

b

additional products at a more detailed level also met the criteria.

Sources: U.S. Department of Commerce statistics and GAO calculations.
B-282825

Page 33 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

Though we did not separately collect production statistics for these items,

our examination of analyses prepared by outside industry experts suggests

that the United States produces most of these fast-rising import items,

although notable exceptions include certain primary products (for

example, rubber) and certain machinery and consumer electronic goods.

We then assessed whether U.S. industries that compete with the surging

imports are particularly vulnerable to import competition. For example,

we examined the tariff treatment of different import categories, including

under the U.S. Generalized System of Preference (GSP) program.31 Under

the program, certain imported products are not eligible for duty-free

treatment because they are import sensitive. Most textiles and apparel,

leather goods, and glass have been deemed import sensitive by statute. For

other product sectors in which imports are surging, we examined industry

reports and discussed the factors contributing to the increases and

potential vulnerability of the U.S. industry with staff at the Commerce

Department and the ITC. According to these industry sources, some of the

import surges we identified are in industries where foreign unfair trade

practices do not appear to be an issue, while other import surges are in

industries where allegations of foreign unfair trade practices already exist,

and still other import surges have a more tenuous relationship to policy or

adverse impact.

In some cases, the industry sources we consulted cited factors other than

“unfair imports” as the primary cause of surging imports:

• Market factors, such as a slight increase in U.S. coffee consumption and

the need for more natural rubber for the larger tires being used in U.S.

motor vehicles appear to be the primary factors in increased U.S. imports.

• In the fishery sector, rising imports of shrimp from Indonesia and Thailand

appear to be tied to the strong U.S. economy; virtually all shrimp imported

into the United States is destined for restaurant consumption, which has

risen with U.S. incomes.

• Other increases are explained by resource endowments; for example, the

United States is consuming more natural dyes and fragrances that are only

available from nations with rain forest conditions, such as Brazil.

Industry reports also suggest that a variety of factors are at play in many

sectors that heighten competitive pressures on U.S. firms, including the

ongoing globalization of production, the emergence of new competitors in

 

31 The GSP program provides duty-free treatment for specified nations and products as part of an

overall effort to help developing nations diversify and increase their exports.

Some U.S. Industries

Appear to Be Vulnerable to

Increased Imports; Others

Are Less so
B-282825

Page 34 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

Asia and elsewhere, and the price pressures that ensue from falling

demand and excess capacity (some of which preceded the crisis). Some

industries are calling for forceful action and strong enforcement of U.S.

trade laws. Other industries, such as chemicals and forest products, say

the most helpful U.S. government response would be pursuit of lowered

trade barriers in these countries to provide new opportunities to U.S.

exporters.

Some investigations into complaints over harm from export policies by

Brazil, Indonesia, Korea, and Thailand are currently underway under U.S.

trade statutes. In addition, export policies of Brazil and Indonesia have

been subject to dispute settlement procedures in the WTO. Steel is the

sector with the largest number of cases pending under U.S trade law.

Overall U.S. imports of steel were up by 9 million metric tons in 1998, and

imports captured 30 percent of the U.S. market, up from 24 percent in

1997. Various cases involve Brazilian, Indonesian, and Korean suppliers, as

well as suppliers in Russia and Japan. Korea’s POSCO is the world’s

second largest steel firm, and Brazil is among the top five U.S. import

suppliers of steel. On January 7, 1999, the President outlined a seven-point

action plan for responding to the rise in steel imports. Various plastic and

rubber goods and textiles are also under investigation. Semiconductors

and other microelectronic products have been subject to dumping and

intellectual property right infringement in the past; the executive branch

continues to monitor imports, and Korea is among the top five U.S. import

suppliers of microelectronics (including semiconductors). In addition,

Brazil’s aircraft subsidies were recently found to be inconsistent with WTO

rules. The United States is a major consumer, not a producer, of these

regional jets but has had long-standing concerns over Brazil’s export

financing program, which applies to other sectors.

In some recent countervailing duty cases, the U.S. Commerce Department

determined the magnitude of the subsidies provided to be fairly small.

Within the past 9 months, Commerce has found subsidies to Indonesian

producers of rubber thread to be less than 3 percent of the thread’s value,

and countervailable subsidies of 6.62-9.45 percent for Brazilian hot-rolled

steel. Subsidies for Korean stainless steel and strip were somewhat larger,

up to 29 percent. In certain cases, the ITC has determined that imports

were not causing injury to U.S. industry. In April 1999, for example, the

ITC made a negative injury determination regarding synthetic rubber from

Korea, Brazil, and Mexico, and in May 1999 the ITC made a negative injury

determination in a case involving stainless steel round wire from Korea

and other countries.

Investigations Into Industry

Complaints Over Export

Policies Are Underway in

Some of the Sectors Having

Major Increases in Imports
B-282825

Page 35 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

The ITC is conducting fact-finding investigations of imports of forest

products at the Congress’ request.32 ITC analysts suggest that U.S. suppliers

face competition from hardwood plywood, and printing and writing paper

from Indonesia; our data show paper imports are rising rapidly and prices

are down. Commerce analysts report that the forest product industry

employs more workers than the steel industry and some mills in the

Northwest have recently closed in the face of weak demand and falling

prices. Industry has reportedly expressed concern that rising imports from

Indonesia may be due to unfair trade practices but has yet to file a formal

case. Pulp imports from Brazil are also up but are reportedly from the

Brazilian production facilities of U.S. firms.

Textiles and apparel imports are increasing sharply, even though U.S.

limits on the quantity imported (quotas) are in place.33 A few instances of

investigations into “unfair trade” in textiles have occurred, including

textile products from Thailand and a recently filed petition alleging

dumping of polyester staple fiber from Korea. However, Commerce

analysts report that in general the surges that occurred in the past 2 years

appear to be caused by market forces and exacerbated by the financial

crises that began in mid-1997, rather than government policies. Brazil,

Indonesia, Korea, and Thailand are all WTO members and have bilateral

quota agreements with the United States that establish comprehensive

limits on virtually all categories of their textile and apparel exports to the

United States. While these limits apparently had considerable room for

growth,34 imports from Indonesia have fallen sharply in recent months as

shipments approached the upper limits associated with such quotas.

Sugar from Brazil and imports of rice from Thailand are among the

agricultural and fishery products with rising imports and falling prices.

Governmental policies exist in these two sectors but do not appear to be

major factors in the rise. (In Brazil’s case, other factors are at work, and in

Thailand’s case, the program involves government-to-government sales,

which do not occur for the United States). However, the United States has

identified Thailand’s subsidies on some government-to-government sales

of rice in its annual inventory of foreign trade barriers. Orange juice

 32 The investigations are fact finding in nature, as opposed to investigations into unfair trade practices.

33 Total U.S. imports of textiles and apparel rose by 20.1 percent from 1996 to 1997 and by 13.3 percent

in 1998. Imports from three of the four IMF countries rose: by 14 percent from Indonesia, the U.S’ 10th

ranking import supplier; by 27.8 percent from South Korea, the 7th ranking supplier; and by 29.7

percent from Thailand, the 9th-ranked supplier.

34 Korea, for example, had fairly low “fill rates” for U.S. quotas on textiles and apparel items. The

double-digit growth registered in the last several years has brought those fill rates close to 90 percent

in certain categories.

Concerns Exist in Other

Sectors, too, but Rising

Imports May Be Primarily

Due to Other Factors
B-282825

Page 36 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

imports from Brazil also rose considerably in 1998, but much of the rise

appeared to be due to weather, which contributed to a bumper crop in

Brazil and a poor crop in Florida, where 90 percent of U.S. orange juice is

produced.35

Chemical imports are causing price pressures on U.S. producers in the

United States and other country markets. The 70-year record of U.S.

surpluses in the chemicals trade was unbroken in 1998 but fell by nearly a

third from 1997 levels, largely as a result of lower U.S. exports to Asia and

other developing regions and higher U.S. imports from the EU. Industry

analysts attribute most of the worsening to collapsing demand in Asia,

which depressed U.S. and EU sales there. (U.S. exports of chemicals to

Asia fell by more than 15 percent from 1997 to 1998.) However, capacity

expansions that reflect both ongoing globalization of production activity

by U.S. and other firms and government policies in such nations as Korea

and Thailand preceded the onset of the crisis. For example, the chemical

industry is the leading manufacturing sector recipient of loans from the

Korean Development Bank, and Korea’s production capacity in the

chemical industry rose by more than 27 percent between 1995 and mid1998. Even so, Korea supplied just 1.3 percent of total U.S. imports of

chemicals in 1998.

In autos, competition to U.S. firms from Korean auto exports is rising. The

25 percent plunge in domestic demand in Korea in 1998 halved domestic

shipments. Production fell by 30 percent, and Korean auto makers were

forced to turn increasingly to overseas markets for sales. According to

statistics by the Korean Automobile Manufacturers Association, fully

75 percent of Korean cars were exported in 1998, versus 50 percent the

year before, and the total number of units exported rose slightly. The U.S.

market is Korea’s second largest for car exports, but Commerce officials

report that competition with U.S. makers is particularly intense in

European markets.36 Meanwhile, despite Korea’s compliance with a

bilateral agreement with the United States on Korean market access for

autos, there has been a virtual halt of import purchases in Korea’s

shrinking market.

 

35 However, the ITC recently determined that removing an existing antidumping duty order on Brazilian

orange juice would mean a continuation or recurrence of material injury to the U.S. industry from such

imports.

36 Passenger cars were among the leading U.S. imports from Korea in 1998, but the number of units

imported fell by 5 percent.
B-282825

Page 37 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

Auto parts imports from Brazil are also increasing and could in principle

be related to government policies, which require firms that make cars in

Brazil to meet minimum export performance and local content levels in

order to receive tax and other benefits. However, in accordance with a

bilateral agreement with the United States, the Brazilian government

policy is due to change by January 1, 2000, and Commerce officials we

contacted were unaware of current complaints by U.S. industry. The few

products that show substantial import increases appear to be original

equipment parts made in Brazil and destined for their U.S. auto

manufacturing facilities.

Imports of pianos, string, and other musical instruments also show large

increases. The ITC recently released a report analyzing factors

contributing to rising imports from Asian suppliers.37 However, the ITC

reports that there were no claims that the rising imports were due to

export policies of those countries.

The situation in the tire and synthetic rubber industries shows how firm

structure, customers’ responsiveness to price, and the globalization of

sourcing affect industry attitudes toward surging imports. Three of the

four companies making tires in the United States are multinational firms

that produce and sell tires globally; the three control 65 percent of the

world tire market and reportedly have increased production and imports

from such countries as Indonesia since mid-1997, when the rupiah

(Indonesia’s currency) plummeted. A fourth firm sells all of its production

in the larger U.S. retail (consumer) market, where Korean, and to a lesser

extent, Brazilian firms, compete largely on the basis of price. This firm is

concerned about the 60 percent increase in imports of Korean tires. The

firm has, however, filed briefs opposing findings of dumping against

Brazilian and Korean suppliers of synthetic rubber38 because it needs such

low-cost inputs to remain competitive with tires from Korea, Indonesia,

and Brazil.

We requested comments on a draft of this report from the Departments of

the Treasury, Commerce, and State; the IMF; the Office of the U.S. Trade

Representative; and the ITC. The Treasury provided written comments on

a draft of this report, which are reprinted in appendix III. The comments

characterized the report as balanced and informative. All six organizations

 

37 U.S. International Trade Commission, Pianos: Economic and Competitive Conditions Affecting the

U.S. Industry (investigation No. 332-401), USITC publication 3196 (Washington, D.C.: May 1999).

38 At the time, emulsion styrene-butadiene rubber was the subject of a dumping investigation, which has

since been terminated.

Agency Comments and

Our Evaluation
B-282825

Page 38 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

also provided technical and clarifying comments, which we incorporated

as appropriate. For example, the IMF and USTR asked that we clarify the

role that trade liberalization plays in IMF financing arrangements. At the

IMF’s suggestion, we have pointed out that facilitating the balanced growth

of international trade is part of the IMF’s core mission as embodied in its

Articles of Agreement, and that, according to the IMF, trade liberalization

is an integral part of IMF programs and surveillance activities. At USTR’s

request, we have noted that, in addition to trade and investment

liberalization, other policy measures that Brazil, Indonesia, Korea, and

Thailand are taking under their IMF financing arrangements to restore

economic stability should also contribute to market opening; for example,

Korea has committed to end government-directed lending.

We are sending copies of this report to Senator Connie Mack, Chairman,

and Senator Charles Robb, Ranking Minority Member, Joint Economic

Committee; Senator William Roth, Chairman, and Senator Daniel

Moynihan, Ranking Minority Member, Senate Committee on Finance;

Senator Phil Gramm, Chairman, and Senator Paul Sarbanes, Ranking

Minority Member, Senate Committee on Banking, Housing, and Urban

Affairs; Representative Benjamin Gilman, Chairman, and Representative

Sam Gejdensen, Ranking Minority Member, House Committee on

International Relations. We are also sending copies of this report to the

Honorable Robert Rubin, the Secretary of the Treasury; the Honorable

Madeleine Albright, the Secretary of State; the Honorable William M.

Daley, the Secretary of Commerce; the Honorable Charlene Barshefsky,

the U.S. Trade Representative; the Honorable Jacob Lew, Director, Office

of Management and Budget; the Honorable Allan Greenspan, Chairman of

the Federal Reserve; and the Honorable Michel Camdessus, the Managing

Director of the IMF. Copies will be made available to others upon request.

This report was prepared under the direction of Harold J. Johnson,

Associate Director, International Relations and Trade Issues, and Susan S.

Westin, Associate Director, Financial Institutions and Markets Issues.
B-282825

Page 39 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

Please contact either Mr. Johnson at (202) 512-4128 or Ms. Westin at (202)

512-8678 if you or your staff have any questions about this report. Other

GAO contacts and staff acknowledgements are in appendix V.

Henry L. Hinton, Jr.

Assistant Comptroller General

National Security and International

Affairs Division

Nancy Kingsbury

Acting Assistant Comptroller General

General Government Division
B-282825

Page 40 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

LIST OF CONGRESSIONAL COMMITTEES

The Honorable Jesse A. Helms

Chairman

The Honorable Joseph R. Biden, Jr.

Ranking Minority Member

Committee on Foreign Relations

United States Senate

The Honorable Ted Stevens

Chairman

The Honorable Robert C. Byrd

Ranking Minority Member

Committee on Appropriations

United States Senate

The Honorable Jim Leach

Chairman

The Honorable John J. LaFalce

Ranking Minority Member

Committee on Banking and Financial Services

House of Representatives

The Honorable C.W. Bill Young

Chairman

The Honorable David R. Obey

Ranking Minority Member

Committee on Appropriations

House of Representatives
Page 41 GAO/NSIAD/GGD-99-174 IMF Borrowers’ Trade Policies
Page 42 GAO/NSIAD/GGD-99-174 IMF Borrowers’ Trade Policies

Contents

1 Letter

44

Korean Import Policies 44

Brazil 51

Indonesia 55

Thailand 56

Appendix I

Priority Import

Policies of Korea,

Brazil, Indonesia, and

Thailand

59

Mechanisms Available to Anticipate and Remedy Adverse

Effects of Foreign Export Policies

59

U.S. WTO and CVD Cases Involving Korea 61

Brazil 63

Indonesia 64

Thailand 65

Appendix II

WTO Disputes and

U.S. Countervailing

Duty Cases Involving

Export Policies of

Brazil, Indonesia,

Korea, and Thailand

Appendix III 67

Comments From the

Department of the

Treasury

68

Assessing Borrowers’ Trade Restrictiveness 68

Four Countries’ Import Barriers and Export Policies 69

Trade Liberalization in Four Countries’ IMF Programs 70

Assessing the Potential U.S. Impact of the Countries’

Export Policies

70

Appendix IV

Objectives, Scope, and

Methodology

Appendix V 73

GAO Contacts and

Staff

Acknowledgments
Contents

Page 43 GAO/NSIAD/GGD-99-174 IMF Borrowers’ Trade Policies

Table 1: Trade Liberalization in Brazil’s Recent IMF

Financing Arrangements, December 2, 1998, through

April 30, 1999

22

Table 2: Trade Liberalization in Indonesia’s Recent IMF

Financing Arrangements, November 5, 1997, through

April 30, 1999

23

Table 3: Trade Liberalization in Korea’s Recent IMF

Financing Arrangements, December 4, 1997, through

April 30, 1999

24

Table 4: U.S. Imports from Brazil, Indonesia, Korea, and

Thailand That Increased by More Than 15 Percent

While Their Prices Fell, 1997-98 (thousands of dollars)

31

Tables

Figure 1: Percentage of IMF Borrowers and IMF

Nonborrowers in Each IMF Restrictiveness Index

Category

7

Figure 2: IMF Countries’ Shares of Total U.S. Trade, 1998

(Exports Plus Imports, by Country)

9

Figure 3: World Exports, by Selected Nations, 1998 28

Figures

Abbreviations

ASEAN Association of Southeast Asian Nations

CVD Countervailing duty

EU European Union

GPA Government Procurement Agreement

GSP Generalized System of Preferences

IMF International Monetary Fund

IPR Intellectual property rights

ITC U.S. International Trade Commission

MERCOSUL South America's common market

NAFTA North American Free Trade Agreement

OECD Organization for Economic Cooperation and Development

POSCO Pohang Iron and Steel Company

SEO Subsidies Enforcement Office

TRIPS Trade-related Aspects of Intellectual Property Rights

USTR U.S. Trade Representative

WTO World Trade Organization
Appendix I

Priority Import Policies of Korea, Brazil,

Indonesia, and Thailand

Page 44 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

The U.S. government has focused considerable attention in the last 3 years

on eliminating or modifying certain import policies in Brazil, Indonesia,

Korea, and Thailand that had restricted U.S. exports to those countries.

The United States has had more concerns about Korea’s import policies

than about the other three countries in our review. For example, the

United States has invoked World Trade Organization (WTO) dispute

settlement procedures against Korean policies concerning beef, distilled

spirits, airport procurement procedures, and import clearance procedures.

In Brazil, the United States was involved as a third party in a WTO dispute

over Brazilian policies that allegedly discriminated against automobile

imports and that restrict the availability of import financing. In Indonesia,

the main U.S. concern has been over protection of intellectual property

rights (IPR). In Thailand, U.S. priorities have included high import duties

on certain agricultural and food products, high automobile tariffs,

inadequate protection of intellectual property rights, and inefficient

customs operations.

Korea has historically been considered one of the most difficult export

markets in the world because of its many market access barriers. Even

before its 1997 financial crisis and the establishment of financial

arrangements with the International Monetary Fund (IMF), however,

Korea had already begun to address some of its trade barriers because of

its growing international trade links. These links, which implied a stronger

reliance on international trade rules and principles, have gradually

encouraged a more active role for Korea in international trading

organizations that require greater market openness and trade liberalization

among their members, particularly the WTO and the Organization for

Economic Cooperation and Development (OECD), which Korea joined in

1996.

The United States has identified a wide range and number of barriers that

impede the import of U.S. goods and services into Korea. Within the last

3 years, U.S. government agencies have been particularly active in

reporting on and trying to address Korean import barriers related to the

following practices:

Pharmaceuticals: Korea’s treatment of foreign, research-based

pharmaceuticals is one of the top priorities on the U.S. trade agenda with

Korea. The Office of the U.S. Trade Representative (USTR) named

pharmaceuticals trade issues as a bilateral trade expansion priority in a

1999 report to Congress. Under its national health insurance system, Korea

Korean Import Policies
Appendix I

Priority Import Policies of Korea, Brazil, Indonesia, and Thailand

Page 45 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

does not give national treatment1 to imported drugs in terms of listing and

pricing on the system’s reimbursement schedule. The current system

discourages medical providers from dispensing imported drugs by

allowing them a higher profit margin from reimbursement for domestic

drugs and by requiring additional administrative procedures for

reimbursement from imported drugs. According to USTR, U.S.

pharmaceutical producers also face nonscience-based requirements for

clinical testing, inadequate and ineffective protection of test data against

unfair commercial use, and lack of coordination between Korean health

and IPR authorities that allows patent infringement. In response to highlevel bilateral consultations and correspondence, the Korean government

has indicated that it is taking steps to address some of the U.S.

government’s and industry’s concerns. According to a U.S. Commerce

Department official, Korea has also agreed to reimburse medical providers

for imported drugs in the near future. The executive branch is continuing

to work with the Korean government to address concerns related to trade

in pharmaceuticals.

Beef Market Access: Korea restricts the quantity, distribution, and display

of imported beef through a variety of measures, including requirements

that imported beef be sold in separate retail establishments and be

imported by certain designated entities. Since 1990, the U.S. government

has negotiated several agreements with Korea that provide for annually

increasing market access levels for beef imports; guarantee direct

commercial relations between foreign suppliers and Korean retailers and

distributors; and ensure that increasing volumes of beef would be sold

through commercial channels instead of through a quasi-government

agency. Korea has also pledged to remove all nontariff barriers on beef by

2001. In 1997 and 1998, however, Korea did not meet its quota

commitments on the importation of foreign beef. In February 1999, after

failing to reach agreement with Korea on reforming its beef importation

practices, the United States initiated WTO dispute settlement procedures

alleging that Korean regulations discriminate against and constrain

opportunities for the sale of imported beef in Korea. The United States also

alleged that Korea imposes sale markups on imported beef, limits import

authority to certain groups, and provides domestic support to the Korean

cattle industry in amounts that cause Korea to exceed its aggregate

measure of support as reflected in Korea’s WTO tariff reduction schedule.

A panel to consider the matter was established in May 1999. Australia also

 

1

 National treatment is a commitment to treat imported goods no less favorably than domestically

produced goods.
Appendix I

Priority Import Policies of Korea, Brazil, Indonesia, and Thailand

Page 46 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

initiated WTO dispute resolution procedures against Korean beef practices

on April 13, 1999.

Airport Procurement Procedures: Foreign companies had traditionally

been limited in their opportunities to bid on government procurement

contracts until Korea became a signatory to the WTO Government

Procurement Agreement (GPA). During negotiations over Korea’s

accession to this agreement, the U.S. government reportedly received a

commitment from Korea that entities responsible for airport construction

would be subject to GPA disciplines. However, soon after negotiations

were concluded, Korea created another entity--the Korea Airport

Construction Authority--to manage procurement for the new Inchon

international airport, one of the largest public works projects in Asia. The

Korean government has subsequently changed the construction authority

to the Inchon International Airport Corporation. Korea now asserts that,

because neither the airport construction authority nor the airport

corporation are expressly listed as covered entities in its GPA schedule of

concessions, procurement for the Inchon international airport is not

covered by the GPA. USTR reports that U.S. firms have repeatedly faced

discriminatory tendering practices that hamper their ability to compete

effectively for related procurement practices in the airport project. In

February 1999, the United States requested consultations with Korea under

WTO dispute settlement procedures. In May, the United States requested

the establishment of a WTO dispute settlement panel on Korea’s

procurement practices after WTO consultations held on March 17 failed to

resolve the issue.

Anti-import Activities: Over the years, the U.S. government has reported

that frugality campaigns by Korean civic groups and media organizations

have encouraged Koreans to avoid imported products and services and

that the campaigns may have involved some Korean government support.

In addition, the U.S. government has identified some Korean government

practices that have specifically targeted imports. For example, in the past,

the Korean government selected Korean lessors of imported automobiles

for tax audits. Since the spring of 1997, the Korean government has

publicly announced that it does not support anti-import activities and has

promulgated guidelines to its officials on ensuring nondiscrimination

against imports. In addition, the Korean president has urged Koreans to

base their purchasing decisions on price and quality, rather than on the

country of origin of the goods, and a 1998 U.S.-Korean auto memorandum

of understanding states that the Korean government will effectively and

expeditiously address all instances of anti-import activity associated with

motor vehicles. The U.S. government, however, continues to watch for
Appendix I

Priority Import Policies of Korea, Brazil, Indonesia, and Thailand

Page 47 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

reports of anti-import activity, and raises instances of such activity with

the Korean government.

Motor Vehicles: As a result of market access barriers in the automotive

sector, foreign automobiles comprised less than 1 percent of the Korean

motor vehicle market in 1998, compared to about 6 percent in Japan, over

25 percent in the European Union (EU), and about 30 percent in the United

States. In an October 1997 report to the Congress, the United States

identified Korean barriers to motor vehicles as a priority foreign country

practice, the elimination of which is likely to have the most significant

potential to increase U.S. exports. Although the United States and Korea

had already signed a memorandum of understanding on improving market

access for foreign motor vehicles in September 1995, the United States had

subsequently failed to reach agreement with Korea over remaining market

access concerns. The concerns involved tariff and tax disincentives on

imports, onerous and costly auto standards and certification procedures,

automobile financing restrictions, and a pervasive anti-import climate for

imported vehicles. After a U.S. Section 301 investigation2

 and bilateral

negotiations over these concerns, the United States and Korea concluded a

memorandum of understanding in October 1998 to improve market access

for foreign motor vehicles in Korea. Under the agreement, Korea agreed to

broaden coverage of the 1995 memorandum of understanding to include

minivans and sport utility vehicles; streamline Korean standards and

certification procedures and adopt self-certification procedures by 2002,

lower and/or eliminate taxes on automobiles, bind Korean tariffs on

vehicles in the WTO at 8 percent (formerly, Korea’s tariff was 80 percent),

introduce secured automobile financing, and implement a program to

improve public perceptions of foreign automobiles. The executive branch

is monitoring Korea’s compliance with the agreement.

Distilled Spirits Taxes: Korea applies lower taxes to its domestically

produced distilled spirit, called “soju,” than to imported alcoholic

beverages. As a result of various Korean taxes and tariffs on foreign

distilled spirits, the tax burden on imported liquor is higher than that for

soju. In fact, according to the U.S. government, the tax burden on U.S.

whiskey in Korea is more than four times greater than that on soju. In

1997, the United States and the EU brought the matter to the WTO, arguing

that Korea levied discriminatory taxes against imported distilled spirits.

 

2

 Section 301 of the Trade Act of 1974 (19 U.S.C. 2411), as amended, provides the U.S. Trade

Representative with the authority to enforce U.S. rights under bilateral and multilateral trade

agreements and respond to unjustifiable or discriminatory foreign government practices that burden or

restrict U.S. commerce. Section 301 investigations can be initiated by USTR or pursued by USTR in

response to a petition filed by a person, firm, or association.
Appendix I

Priority Import Policies of Korea, Brazil, Indonesia, and Thailand

Page 48 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

Both the WTO dispute settlement panel in July 1998 and the WTO appellate

body in January 1999 ruled in favor of the United States and the EU in the

case. In March 1999, Korea informed the WTO that it was considering

options for implementing the WTO’s recommendations. In April 1999, the

United States and Korea requested that the period of time for Korea to

implement these recommendations be determined by arbitration. Korea

requested 15 months, which the United States and the EU opposed. The

arbitrator subsequently determined that Korea had 11.5 months to comply

with its WTO commitments in this case.

Movie Screen Quotas: By requiring Korean movie theaters to show

domestic Korean films at least 106 or 146 days each year, Korea in effect

imposes a quota on foreign films, thereby deterring trade in films and

cinema construction and the expansion of theatrical distribution in Korea.

The U.S. government has repeatedly raised this issue with the Korean

government, including during a March 1999 trade mission to Korea.

Currently, this issue is under discussion in negotiations over a bilateral

investment treaty.

Intellectual Property Rights: IPR-related concerns in Korea have involved

limited retroactive copyright protection, incomplete trademark laws;

inconsistent interpretation and implementation of patent laws; software

piracy; production and export of counterfeit goods; and deficient laws on

countering unfair competition and protecting trade secrets. Although

Korea remained on the U.S. government’s Special 3013

 “watch list”4 in 1997,

1998, and 1999, the U.S. government acknowledges that Korea has made

significant efforts to strengthen its IPR laws and enforcement. For

example, pursuant to its obligations under the WTO Agreement on TradeRelated Aspects of Intellectual Property Rights (TRIPS), Korea passed four

acts on patents, utility models, designs, and trademarks in 1995 and

implemented new copyright, computer software, and customs laws in

1996. In March 1998, Korea’s revised trademark law became effective and a

new patent court was established. Nevertheless, in negotiations over a

bilateral investment treaty, the U.S. government has asked Korea to

resolve some remaining inconsistencies involving its TRIPS obligations.

 3

 Under the “Special 301” provision of the Omnibus Trade and Competitiveness Act of 1988 (19 U.S.C.

2242), USTR performs an annual review to identify countries that do not provide adequate or effective

protection for intellectual property rights. If a country is designated as a “priority foreign country,”

USTR must decide within 30 days whether to initiate a Special 301 investigation into the country’s IPR

practices.

4

 USTR has created a “priority watch list” and a “watch list” under Special 301 provisions to indicate

countries where particular problems exist with respect to IPR protection or enforcement or market

access for persons relying on intellectual property.
Appendix I

Priority Import Policies of Korea, Brazil, Indonesia, and Thailand

Page 49 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

For example, according to USTR, Korea still does not provide full

retroactive protection to existing copyrighted works. Similarly, Korea’s

trademark law still does not protect some famous U.S. cartoon characters

because they have not been registered with Korean authorities. Also, the

U.S. government has raised Korea’s failure to provide TRIPS-consistent

data protection and full coordination between Korea’s IPR and health

authorities to preclude patent infringements.

Telecommunications: U.S. equipment and services companies have

traditionally encountered a range of market barriers in the Korean

telecommunications sector. The United States first cited Korea in 1989 as a

priority foreign country for trade barriers in the telecommunications field

involving discriminatory procurement practices, “buy local” policies, lack

of transparency (openness), and inadequate trade secret protection.

Despite a 1992 bilateral agreement and a 1993 exchange of letters

addressing Korea’s telecommunications trade barriers, in July 1996 the

United States designated Korea as a “priority foreign country” under

Section 1374 of the Omnibus Trade and Competitiveness Act of 1988.

Subsequent bilateral negotiations resulted in a July 1997 agreement in

which Korea agreed to implement a range of policies to address remaining

U.S. concerns and enhance U.S. market access. These policies included

national treatment for foreign companies; government nonintervention in

private sector procurement; increased transparency in criteria and

procedures relating to services licensing, equipment certification, and type

approval; increased foreign ownership in domestic service providers;

enhanced protection of intellectual property and proprietary information;

clear guidelines for technology transfer; transparent procedures for

satellite services authorization; procompetitive regulatory measures; and

an enhanced independent regulatory role for the Korean Communication

Commission. Korea also agreed to eliminate tariffs on information

technology products and to increase limits on foreign ownership of

domestic telecommunications services companies. As a result of the

agreement, the United States revoked Korea’s priority foreign country

designation as of August 1997. The United States is continuing to monitor

Korea’s implementation of the agreement as well as U.S. industry concerns

over possible Korean government involvement in promoting the

consolidation of private cellular telecommunications operators and wireline companies under current conglomerate restructuring plans.

Financial Services: Korea has traditionally restricted foreign participation

and involvement in its insurance, banking, and securities sectors.

However, Korea has been liberalizing many of these restrictions in recent

years, particularly in the context of its WTO, OECD, and IMF
Appendix I

Priority Import Policies of Korea, Brazil, Indonesia, and Thailand

Page 50 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

commitments. According to the U.S. Treasury Department, under its IMF

financing arrangements, Korea has agreed to a fundamental overhaul of its

weak and noncompetitive financial system. The prudential regulatory

framework is being strengthened and restructured, and banks and other

financial institutions are now expected to operate in a more transparent

and financially sound manner. Additionally, Korea committed to the IMF to

make its OECD commitments on financial services liberalization part of its

WTO commitments, which would make them subject to the WTO’s binding

dispute settlement mechanism. For the insurance industry, Korea included

expanded market access and national treatment of foreign insurers in its

WTO schedule of liberalization measures as part of the 1997 WTO financial

services agreement. Similarly, in consultation with the IMF and the World

Bank, Korea is implementing considerable structural reform in its banking

sector to ensure that it operates on a fully commercial basis. The Korean

government has also committed to the IMF to refrain from interfering in

bank lending or managing decisions, to open its capital markets

significantly to foreign participation, to permit foreign financial institutions

to participate in mergers and acquisitions of Korean financial institutions,

to allow foreign banks to establish subsidiaries or branches in Korea, and

to liberalize foreign exchange controls. Under its IMF financial

arrangements, Korea is also implementing considerable liberalization of its

securities market by removing or lifting ceilings on foreign investment in

Korean stocks, bonds, or commercial paper.

Import Clearance Procedures: The U.S. government reports that Korea’s

import clearance procedures often delay entry of U.S. imports into Korea.

For example, certain sanitary and phytosanitary5

 barriers frequently delay

some U.S. agricultural and food exports from entering Korea for 2 to

4 weeks, and sometimes up to 2 months, except for perishable fruits and

vegetables, which take a maximum of 5 days. Problems with import

clearance procedures involve Korea’s ingredient listing requirements,

sanitary and phytosanitary rules, standards and conformity assessment

procedures, and arbitrary actions by Korean inspectors. Korea has

addressed some of these issues in response to U.S.-initiated WTO dispute

settlement procedures. Specifically, Korea agreed to expedite clearance

procedures for fresh fruits and vegetables, to use the concept of scientific

risk assessment in developing a quarantine pest list and setting fumigation

requirements, to revise some of its food additive standards to bring them

closer to international standards, and to eliminate sorting requirements

 

5

 Phytosanitary measures refers to various regulations governments may adopt to protect human,

animal, or plant life or health. Although phytosanitary measures may result in trade restrictions,

governments generally agree that in certain cases they are necessary and appropriate. However,

governments may disagree about the need for or appropriateness of particular phytosanitary measures.
Appendix I

Priority Import Policies of Korea, Brazil, Indonesia, and Thailand

Page 51 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

and requirements on ingredients listing by percentage for all ingredients.

Under its IMF financial arrangements, Korea also presented a plan in

August 1998 to streamline various import certification procedures and

bring them in line with international practices.

Cosmetics: The U.S. government has identified several impediments to the

entry and distribution of foreign cosmetic products in Korea. These

include requirements for the Korean Food and Drug Administration to

approve imports of the same cosmetic products if they have different

countries of origin, the Korean government’s delegation of authority to the

domestic industry association to screen advertising and information

brochures, the mandatory provision of proprietary information on

imported cosmetics to Korean competitors, redundant testing, restrictions

on sales promotions involving gifts with purchases, and burdensome

import authorization and tracking requirements. The executive branch

cited Korea’s cosmetics-related trade barriers as a bilateral priority in a

1997 report to the Congress because the Korean government had not fully

addressed U.S. concerns despite consultations between the two

governments. In January 1998, the Korean Food and Drug Administration

abolished the annual testing requirement for imported cosmetics and

authorized importers to perform the required self-testing. Nevertheless,

significant delays still remain for final government approval for the local

sale of products developed outside of Korea, and cosmetics are still

subject to the same rigorous and time-consuming approval process as

pharmaceuticals and nutritional supplements. The U.S. government is

working in conjunction with the EU to address cosmetics trade issues with

the Korean government.

According to the Brazilian government, trade liberalization is a key

element in its efforts to consolidate the country’s economic stabilization

process. Brazil’s economic liberalization—initiated in 1990 and accelerated

with the Real Plan in 1994—has resulted in a more open trade regime with

generally lower tariffs and reduced nontariff barriers. Alongside its

liberalization efforts, Brazil has pursued further economic integration

through MERCOSUL (South America’s common market) and negotiations

to establish the Free Trade Area of the Americas. The 5-year-old Real Plan,

introduced after nearly a decade of economic stagnation and periods of

hyperinflation, was the key element underpinning Brazil’s efforts to

stabilize its economy.

Access to Brazilian markets in a significant number of sectors is

characterized as generally good—with competition and participation by

foreign firms through imports, local production, and joint ventures.

Brazil
Appendix I

Priority Import Policies of Korea, Brazil, Indonesia, and Thailand

Page 52 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

However, some key liberalization measures introduced by the government

of Brazil since 1995 have not been fully implemented—including some

measures to eliminate government monopolies and to remove the

distinction between foreign and national investors. In addition, the

Brazilian government implemented temporary restrictive measures during

1996-98 to slow increasing trade deficits. Since 1990, Brazil has relied

primarily on tariffs to regulate imports, rather than on nontariff barriers.

Although Brazil’s average import tariff increased from about 12 percent in

1996 to about 15 percent in1998, it remained significantly below the

1990 level of 32 percent.

Within the last 3 years, U.S. government agencies have been particularly

active in reporting on and addressing trade barriers related to Brazilian

protection of IPR, import financing restrictions, phytosanitary restrictions

on wheat, discriminatory automobile policies, and customs valuation

practices and import licensing system.

Intellectual Property Rights: In April 1993, USTR identified Brazil as a

priority foreign country under “Special 301” because Brazil failed to

provide adequate and effective intellectual property rights protections.

Later that year (May 1993), USTR initiated a Section 301 investigation of

Brazil’s IPR regime and requested consultations. As a result of Brazil’s

commitment to improve the protection of intellectual property and provide

greater market access for intellectual property products, USTR terminated

its investigation in early 1994 and removed Brazil’s designation as a

priority foreign country. However, because of Brazil’s lack of progress in

implementing changes to its IPR regime, Brazil was placed on the priority

watch list in April 1995. Subsequent improvements in IPR protection

resulted in Brazil being first moved down to the watch list in 1996 and

eventually being removed from the list entirely in 1997, when a series of

IPR laws was promulgated.

While the new laws represent progress in Brazil’s IPR regime, deficiencies

in the TRIPS-consistency and enforcement of some of these laws resulted

in Brazil being placed back on the watch list in 1999. Specifically, USTR

has identified problems with Brazil’s Industrial Property Law, which

includes a domestic working requirement for patents that is not consistent

with TRIPS. In addition, USTR reported that Brazil’s uneven enforcement

of copyright laws is a serious and growing concern. Deficiencies in the

Brazilian government’s efforts to improve copyright enforcement have

contributed to increasing piracy rates. Problems were particularly acute

with respect to sound recordings and videocassettes—with virtually all

audiocassettes sold in 1998 being pirated copies. Overall, the sound
Appendix I

Priority Import Policies of Korea, Brazil, Indonesia, and Thailand

Page 53 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

recording industry saw its piracy losses double in 1998. The U.S.

government contends that the Brazilian government’s efforts to patrol its

border and ports have been inconsistent (a significant amount of the

pirated material enters Brazil through Paraguay) and that the Brazilian

government has not provided police the tools or training to enforce the

laws. Furthermore, proposed legal changes that could reduce criminal

penalties for intellectual property crimes and remove police authority to

initiate some searches and seizures have become a particular concern for

the U.S. government. According to USTR, Brazil’s generally inefficient

courts and judicial system have complicated the enforcement of

intellectual property rights. The U.S. executive branch believes that Brazil

should increase fines so as to create a true deterrent to copyright

infringement, increase the effectiveness of the criminal enforcement

system, and decrease delays in the judicial process.

Import Financing Restrictions: In April 1997, Brazil-imposed requirements

effectively prohibited import financing for less than 180 days on purchases

from non-MERCOSUL countries and raised costs for any import financing

of less than 1 year. Specifically, Brazil required importers to purchase

foreign exchange for financing purposes at least 180 days in advance of the

due date for short-term supplier credit (that is, less than 360 days in

duration). Brazil also prevented export credit agencies such as the U.S.

Export-Import Bank from offering short-term credits for certain categories

of purchases (for example, raw materials, spare parts, and others).

According to a Commerce Department official, these restrictions were

implemented as a reaction to Brazil’s burgeoning trade deficit and to

combat currency speculation. It is estimated that these measures added

3 to 5 percent to the cost of affected imports. The U.S. government raised

its concerns bilaterally with the Brazilian government regarding the WTOconsistency of this policy and joined as a third-party observer in the March

1998 WTO dispute settlement consultation between Brazil and the EU. The

EU requested consultations with Brazil in January 1998. Although WTO

consultations are still pending, Brazil eliminated its import finance

restrictions in March 1999 for most practical purposes, according to the

Commerce Department.

Phytosanitary Restrictions on Wheat: The access of U.S. wheat to the

Brazilian market was removed in September 1996, when the government of

Brazil effectively banned U.S. wheat imports due to concerns about the

wheat fungus Tilletia controversa Kuhn. Prior to 1996, U.S growers

exported about 750,000 tons of wheat to Brazil—a leading importer of

wheat. However, the United States and Brazil reached agreements on U.S.

hard red winter wheat after Brazil eliminated its phytosanitary restrictions
Appendix I

Priority Import Policies of Korea, Brazil, Indonesia, and Thailand

Page 54 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

on this type of wheat in April 1998. Brazil’s decision was based on strong

scientific evidence presented in a pest risk assessment. Although Brazil’s

government published an executive order to allow entry of U.S. hard red

winter wheat into Brazil in November 1998, the United States has not made

any wheat sales to Brazil since the executive order was signed. The United

States continues to work bilaterally with Brazil to resolve outstanding

issues that restrict market access for other types of wheat as well as other

U.S. exports such as poultry.

Automobile Program: In December 1995, Brazil enacted an auto program

that offers automobile manufacturers reduced import duties on

automobiles and automobile parts, and other benefits if they export certain

quantities of parts and vehicles and meet local content targets in their

Brazilian plants. This program adversely affects U.S. exports of autos and

auto parts to Brazil by distorting investment, sourcing, and production

decisions. The United States also believes that the program violates the

WTO’s provisions on trade-related investment measures. As a result, the

United States requested WTO dispute settlement consultations with Brazil

on these measures in August 1996. In October 1996, USTR initiated a

Section 301 investigation of Brazil’s practices. In January 1997, USTR

requested additional consultations with Brazil in the WTO, focusing

specifically on new aspects of its auto regime that were introduced

following the earlier consultations. These included tariff rate quotas6

 for

Korea, Japan, and the EU, and incentives to establish production facilities

in specific regions of Brazil.

The United States and Brazil signed an agreement settling the dispute in

March 1998, and USTR terminated its investigation. In this regard, Brazil

committed to eliminate the trade- and investment-distorting measures in

its auto regime by December 31, 1999, and agreed not to extend the WTO

trade-related investment measures to MERCOSUL partners when they

unify their auto regimes in the year 2000. Currently, USTR is monitoring

Brazil’s implementation of the March 1998 agreement, and Brazil is

negotiating with its MERCOSUL partners to establish a new auto regime.

The U.S. government is monitoring Brazil’s MERCOSUL negotiations.

Customs Valuation and Import Licensing: In January 1997, Brazil’s

Secretariat of Foreign Trade implemented a computerized trade

documentation system to handle import licensing. According to USTR, as

 6

 Tariff rate quotas allow a set quantity of a commodity to be imported at a guaranteed low tariff rate

called the “in-quota” duty. Imports in excess of this quantity are subject to an agreed higher tariff rate

called the “out-quota duty.”
Appendix I

Priority Import Policies of Korea, Brazil, Indonesia, and Thailand

Page 55 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

of January 1, 1999, the system charged a fee of Real$30 per import

statement and Real$10 per product added to the statement. An increasing

number of products are exempt from automatic licensing. In addition,

beginning in October 1998, Brazil issued a series of administrative

measures that required additional sanitary and phytosanitary, quality, and

safety approvals from various Brazilian government entities for products

subject to nonautomatic licenses. The October measures and the use of

minimum price lists in conjunction with licensing have been characterized

by Brazil as a deepening of its existing import licensing regime and as part

of a larger strategy to prevent under-invoicing. However, according to

USTR, the use of minimum price lists raises questions about whether

Brazil’s regime is consistent with its obligations under the WTO, and these

practices have proven to be a barrier to U.S. exports.

According to U.S. government and WTO sources, in recent years Indonesia

has liberalized its foreign trade and investment systems and has taken a

number of important steps to reduce protection. The Indonesian

government has done so by issuing periodic deregulation packages that

have incrementally reduced overall tariff levels, simplified the tariff

structure, replaced nontariff barriers with more transparent tariffs, and

encouraged foreign and domestic private investment. According to USTR,

Indonesia’s average unweighted tariff7

 has fallen to 9.5 percent from

20 percent in 1994, and about 160 tariff lines remained subject to

restrictive import licenses, down from 1,112 lines in 1990. A November

1998 WTO report on Indonesia’s trading system commended Indonesia for

its trade and investment liberalization. However, the report noted that the

pace of trade and investment liberalization had slowed during 1994-96. It

added that, prior to its financial crisis, Indonesia had made limited

progress in removing nontariff import barriers and export restrictions and

that liberalization in agriculture and forestry had lagged reforms in other

sectors.

Despite this progress, Indonesia still maintains a number of restrictions to

imports and foreign investment, according to the U.S. government and the

WTO. In recent years, Indonesian barriers to imports included high tariffs

on certain items; quantitative restrictions on some agricultural and other

goods; and barriers to service imports, including restrictions on wholesale

and retail distribution. Barriers to foreign investment have included

restrictions and prohibitions in certain sectors, such as film and video

distribution and forest concessions. Since 1996, the most prominent import

 

7

Unweighted tariffs are the simple average applied tariff rate across the entire tariff schedule

unadjusted for trade volumes.

Indonesia
Appendix I

Priority Import Policies of Korea, Brazil, Indonesia, and Thailand

Page 56 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

barrier issue between the United States and Indonesia has concerned

Indonesia’s IPR protection. Since April 1996, Indonesia has been on the

U.S. government’s priority watch list for inadequate intellectual property

protection. The U.S. executive branch has cited the following reasons for

this designation: (1) trademark infringement, including software, book,

video, videocassette disk, drug, and apparel piracy; (2) audiovisual market

access barriers; (3) inconsistent enforcement and ineffective legal system;

and (4) amendments to the copyright, patent, and trademark laws that the

U.S. government believes are not fully consistent with Indonesia’s

obligations under the WTO TRIPS agreement. In June 1998 the U.S.

executive branch presented to the Indonesian government a plan for

improving IPR protection that could result in Indonesia’s removal from the

priority watch list. However, according to USTR, Indonesia has not been

able to devote significant resources to improving or enforcing its IPR

regime due to its severe economic crisis.

Thailand’s average tariff rate in 1998 was about 18 percent. In addition, as

one of the 10 members of the Association of Southeast Asian Nations

(ASEAN), Thailand has pledged to reach and maintain tariffs on trade with

its ASEAN partners of between 0 and 5 percent by 2003. Generally, the

Thai government has continued to lower tariff rates pursuant to goals

established in 1994. However, USTR and other U.S. government agencies

have identified several of Thailand’s trade policies and practices that affect

U.S. exports to Thailand, such as weak IPR enforcement. These barriers

include the following:

Inadequate Protection of Intellectual Property Rights: This is the leading

trade issue between the United States and Thailand. In this regard, USTR

initiated Section 301 investigations in 1990 and 1991 regarding Thailand’s

lack of adequate protections over intellectual property. Both investigations

found Thailand’s copyright and patent protections to be unreasonable and

burdensome to U.S. commerce. Thailand made significant improvements

to its IPR legal regime and enforcement efforts in the 1990s. Despite this

progress, Thailand has remained on the U.S.’ Special 301 “watch list” since

November 1994 because of long-standing IPR enforcement weaknesses.

According to USTR’s 1999 National Trade Estimate report, the U.S.

copyright industry estimates it lost nearly $200 million from intellectual

property rights infringements in Thailand. In response to these concerns,

the Thai government implemented a series of legal reform initiatives,

established a special Intellectual Property and International Trade Court,

and concluded an intellectual property enforcement action plan with the

United States. However, U.S. government officials maintain that significant

enforcement problems remain, piracy rates continue to climb, and

Thailand
Appendix I

Priority Import Policies of Korea, Brazil, Indonesia, and Thailand

Page 57 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

monetary penalties or jail sentences are rarely imposed to deter such

crimes. In February 1999, a new enforcement strategy was implemented,

but at the time of our report no information regarding the success of this

effort was available.

High Tariffs on Automobiles: In addition to currently applied domestic

auto sector protections (local content restrictions), which must be

removed by January 1, 2000, pursuant to Thailand’s commitments under

the WTO agreement on trade-related investment measures, Thailand

imposes significantly high tariffs on automobiles. While Thailand’s overall

average tariff rate is relatively low when compared with its ASEAN

neighbors, its tariffs on automobiles remain high at 80 percent. However,

Thailand’s automobile tariffs have never risen to an actionable level, in

part because Thailand’s tariffs are bound in the WTO, and Thailand

actually applies lower tariffs ranging from 42.5 to 68.5 percent.

Furthermore, some U.S. car manufacturers assemble automobiles in

Thailand, thus avoiding the higher tariffs. These manufacturers, however,

pay tariffs up to 35 percent on automotive parts imports. Thailand recently

announced its latest plans to bring its national car policy into conformity

with its agreement on trade-related investment measures obligations as

required by January 1, 2000. The plans are being studied by U.S.

government officials.

Inefficient Customs Operations: USTR and the State Department report

that Thailand’s customs clearance processes are arbitrary, irregular, and

inefficient. In 1997, the United States and nine other chambers of

commerce, including Japan’s, vigorously and publicly complained about

Thailand’s customs procedures. The U.S. government is concerned about

excessive paperwork and formalities, lack of coordination between

customs and other import-related agencies, and lack of modern

computerized processes. However, Thailand has made progress in

reforming some areas of its customs operations, such as express shipment

handling, payment procedures, and document simplification. The U.S.

embassy in Bangkok, the U.S. Customs Service, the IMF, and others have

provided the Thai government with technical assistance to improve the

customs clearance process.

High Duties on Certain Agriculture and Food Products: Specific duties for

most agricultural and food products, with the exception of wine and

spirits, no longer exist, but import duties on high-value fresh and

processed foods remain high at about 60 percent. As a signatory to the

WTO, Thailand committed to reduce tariffs and began to do so in 1995.

However, by the end of the tariff reduction phase-in period in 2004, duties
Appendix I

Priority Import Policies of Korea, Brazil, Indonesia, and Thailand

Page 58 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

will still be in the 30 to 40 percent range for most consumer-oriented food

products, with the notable exception of apples and raw tree nuts. In

addition to high tariffs, time-consuming and cumbersome licensing and

registration procedures can delay the entry of new products into the Thai

domestic market.

Investment Restrictions: Thailand’s agreement with the IMF contains a

commitment to accelerate privatization of state holdings in the areas of

energy, public utilities, telecommunications, and transportation. Progress

in this regard has been slow, but the Thai parliament has recently passed

significant bankruptcy, foreclosure, and privatization laws that are aimed

at expediting the privatization process. This, in turn, is expected to

increase opportunities for U.S. investors to gain market access to those

service sectors. Under the 1966 Treaty of Amity and Economic Relations,

with the exception of a few sectors, the United States is exempted from

restrictions on foreign equity investment in Thailand. However, there are

still Thai government restrictions in the communications, transport, and

banking sectors; the exploitation of land and natural resources; and the

trade of domestic agricultural products.
Appendix II

WTO Disputes and U.S. Countervailing Duty

Cases Involving Export Policies of Brazil,

Indonesia, Korea, and Thailand

Page 59 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

U.S. countervailing duty (CVD) laws and the WTO Agreement on Subsidies

and Countervailing Measures provide redress mechanisms against the

adverse effects of subsidization. U.S. companies may file CVD petitions

directly with the Commerce Department. Commerce and the International

Trade Commission (ITC) separately determine if the subsidies are

countervailable and have harmed U.S. industry. To obtain redress through

the WTO’s subsidies agreement, a U.S. firm informally brings its concerns

to the U.S. government, which investigates the matter and then, if

warranted, raises the issue in the appropriate WTO forum.

We reviewed the export policies of four current IMF borrowers: Brazil,

Indonesia, Korea, and Thailand. Since 1996, the United States has formally

invoked the WTO’s dispute settlement procedures over a number of

Brazilian, Indonesian, and Korean subsidies and has found subsidies in

Brazil, Korea, and Thailand to be countervailable under U.S. trade law. For

example, the United States invoked dispute settlement procedures against

Korean subsidies to its beef industry and a Brazilian subsidy to its auto

industry, and determined that both countries were providing

countervailable subsidies to their steel industries. Among other actions,

the United States invoked WTO dispute settlement procedures against

Indonesia’s automotive subsidies and determined a variety of Thai

subsidies to be countervailable.

Under the Tariff Act of 1930, as amended, U.S. firms that are materially

injured by foreign subsidized goods in the U.S. market can obtain relief

from certain actionable subsidies by seeking to have countervailing duties

levied on the subsidized imported goods.1

 CVD laws are administered

jointly by the Department of Commerce and the ITC.

An interested party may file a CVD petition with Commerce alleging that a

U.S. industry is materially injured, or is threatened with material injury, by

reason of imports that are being subsidized by foreign governments. If the

petition demonstrates a reasonable indication that a subsidy exists and is

causing material injury, Commerce and the ITC conduct separate but

parallel investigations. The Commerce Department determines whether

the imported product is being subsidized, either directly or indirectly. An

actionable subsidy exists when the foreign firm making or exporting the

product (1) receives a “financial contribution” by a government or public

body, (2) receives a “benefit” from that contribution, and (3) receives a

financial contribution that is “specific” (that is, it is based upon export

performance or limited to a certain industry or group of industries).

 

1

 19 U.S.C. 1671, et seq.

Mechanisms Available

to Anticipate and

Remedy Adverse

Effects of Foreign

Export Policies
Appendix II

WTO Disputes and U.S. Countervailing Duty Cases Involving Export Policies of Brazil,

Indonesia, Korea, and Thailand

Page 60 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

The ITC determines whether a U.S. industry is materially injured, or

threatened with material injury, or that the establishment of an industry in

the United States is materially retarded, by reason of imported subsidized

products. Material injury is defined as a harm that is not inconsequential,

immaterial, or unimportant.2

 In determining the threat of material injury,

the ITC considers whether the subsidy practice indicates the likelihood of

substantially increased imports and whether such an increase would result

in material injury to U.S. industry.

If the Commerce Department finds an actionable subsidy and the ITC finds

material injury, Commerce will then issue a CVD order instructing the U.S.

Customs Service to collect additional duties on the imported product in an

amount equal to the subsidy margin determined by Commerce in its

investigation.

While U.S. CVD law addresses foreign subsidized imports in the United

States, under the WTO’s Subsidies and Countervailing Measures

Agreement, U.S. industries have a redress mechanism against foreign

subsidies that affect U.S. business in markets outside the United States,

including the subsidizing government’s market. Under the subsidies

agreement, a subsidy is defined as a financial contribution that imposes a

cost on the government providing it, and confers a benefit to certain

enterprises. The subsidy must be causing serious prejudice to a U.S.

industry.3

In 1995, the U.S. Commerce Department created the Subsidies

Enforcement Office (SEO) to assist U.S. businesses by monitoring foreign

subsidies and identifying subsidies that can be remedied under the WTO’s

subsidies agreement when they adversely affect U.S. business interests.

One of the focuses of the SEO’s subsidies monitoring program is to ensure

compliance with the subsidy-related conditions of the IMF stabilization

packages and to uncover subsidy practices that are actionable under the

WTO’s subsidies agreement.

Unlike U.S. CVD law, a concerned U.S. business does not file a formal

petition with the SEO to allege a foreign subsidy in violation of the WTO

subsidies agreement. Instead, the SEO receives information concerning

foreign subsidy practices through informal contacts with U.S. businesses,

trade associations, U.S. embassies, and the SEO’s own monitoring efforts.

 

2

 Section 771(7) of the act (19 U.S.C. 1677(7)).

3

 Article 6.1 of the Agreement on Subsidies and Countervailing Measures.

The WTO Subsidies

Agreement
Appendix II

WTO Disputes and U.S. Countervailing Duty Cases Involving Export Policies of Brazil,

Indonesia, Korea, and Thailand

Page 61 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

Once the SEO has evaluated all available information on the particular

alleged subsidy, SEO will confer with USTR on how to proceed. In many

cases, an effective way to proceed is through informal channels, bilateral

meetings, and in WTO subsidies agreement committee meeting

discussions. However, formal enforcement mechanisms are also provided

for under the WTO subsidies agreement, including dispute settlement

action in the WTO.

The WTO Committee on Subsidies and Countervailing Measures also

provides regular surveillance. In May 1999, the United States participated

in review by the committee of the full notifications submitted to the WTO

by countries that were due on July 1, 1998. Korea’s notification was among

those that were discussed at that review. Over the past 2 years, the United

States has posed a series of questions to all four IMF borrower countries in

our review regarding their WTO subsidy notifications. In addition, it

invited the three Asian borrowers to discuss their IMF financing

arrangements at a special meeting held in April 1998.

The U.S. government tracks export and domestic policies of various

countries for possible subsidization and routinely examines subsidies

notified to the WTO for conformity with the subsidies agreement. The SEO

also has created a “Subsidies Enforcement Library” that contains such

WTO notifications, Federal Register notices associated with past U.S. CVD

cases, and other information. Commerce and USTR jointly prepare an

annual report to Congress on the WTO subsidies agreement. In addition,

USTR, State, and Commerce include export policies in their regular

reports on trade barriers. Finally, an interagency task force under the

leadership of the U.S. Department of the Treasury is reviewing trade

policies of key IMF borrower countries, including export policies. All of

these rely heavily on industry to identify and make known potential

problems.

In February 1999, the United States requested consultations under the

WTO dispute settlement mechanism concerning Korean government

support to its beef industry. The United States alleged that Korean

regulations discriminated against and constrained opportunities for the

sale of imported beef in Korea. The United States also alleged that Korea

provided domestic support to its cattle industry in amounts that exceeded

its WTO tariff reduction schedule. The United States contended that such

support amounts to domestic subsidies that contravene the WTO

Agreement on Agriculture. A panel was formed to consider the matter on

May 26, 1999. Australia also initiated WTO dispute settlement procedures

against Korean beef practices in the WTO on April 13, 1999.

U.S. WTO and CVD

Cases Involving Korea
Appendix II

WTO Disputes and U.S. Countervailing Duty Cases Involving Export Policies of Brazil,

Indonesia, Korea, and Thailand

Page 62 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

Also, within the last 5 years the Commerce Department has conducted

three CVD investigations, all involving potential Korean government

subsidies to its steel industry. Commerce launched the first of these

investigations in April 1998 to determine whether Korea was providing

countervailable subsidies to certain Korean producers and exporters of

stainless steel plate in coils. In its final determination in March 1999,

Commerce ruled that the subsidy existed but that it was not

countervailable due to its small size. Nevertheless, prior to Korea’s recent

IMF financing arrangements, the Commerce Department found certain

other Korean subsidy programs to be countervailable. These subsidies

involved

• government-influenced lending,

• government infrastructure investments at a port facility used

predominantly by a state-owned steel company,

• short-term export financing,

• tax reserves for export losses,

• tax reserves for overseas market development,

• investment tax credits, and

• electricity discounts from a government-owned power company.

In July 1998, the Commerce Department began another investigation to

determine whether Korea was providing countervailable subsidies to

certain Korean producers and exporters of stainless steel sheet and strip in

coils. In its final determination in June 1999, Commerce ruled that such

countervailable subsidies were being provided. These subsidies involved

• government influenced lending;

• the purchase of one steel company's divisions by another state-owned

steel company;

• government-supported infrastructure development at a port facility used

predominantly by a state-owned steel company;

• export industry facility loans;

• short-term export financing;

• tax reserves for export losses;

• tax reserves for overseas market development;

• investment tax credits;

• utility rate discounts from the government-owned electricity provider;

• loans from the National Agricultural Cooperation Federation; and

• two-tiered pricing structure for domestic customers of one steel company.
Appendix II

WTO Disputes and U.S. Countervailing Duty Cases Involving Export Policies of Brazil,

Indonesia, Korea, and Thailand

Page 63 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

Finally, in March 1999, the Commerce Department initiated an

investigation to determine whether Korea, among other countries, was

providing countervailable subsidies to certain manufacturers, producers,

or exporters of certain cut-to-length, carbon-quality steel plate. As part of

the investigation that was still ongoing as of April 30, 1999, the Commerce

Department is reviewing alleged countervailable subsidies involving

• a two-tiered pricing structure to domestic customers of one steel company;

• government-directed credit programs;

• Korea’s Private Capital Investment Act;

• government-supported infrastructure development at a port facility;

• certain tax programs and asset revaluation under Korea’s Tax Reduction

and Exemption Control Act;

• special cases of Tax for Balanced Development Among Areas;

• certain industry promotion and research and development subsidies;

• Overseas Resource Development loan and grant programs;

• free trade zones;

• excessive duty drawbacks;

• port facility fees;

• preferential utility rates;

• a scrap reserve fund;

• export insurance rates by the Korean Export Insurance Corporation;

• short-term export financing;

• Korean Export-Import Bank loans;

• Export Industry Facility Loans and Special Facility Loans; and

• loans from the Energy Savings Fund.

Since 1996, the United States has participated in two WTO dispute

settlement proceedings involving Brazilian subsidies. The United States

invoked WTO dispute settlement procedures and held consultations with

Brazil regarding various aspects of its automotive regime in August 1996,

including provisions in its WTO-notified subsidy program for automobiles.

In March 1998, the United States and Brazil signed an agreement settling

the dispute. (See app. I for more details.) Japan and the European Union

have also invoked WTO dispute settlement procedures in response to

various aspects of Brazil’s automotive regime. These consultations were

pending as of April 30, 1999.

In a second dispute, in June 1996, Canada requested consultations with

Brazil regarding its claim that export subsidies granted by PROEX, a

Brazilian government export financing program, to foreign purchasers of

Brazil’s Embraer aircraft were inconsistent with the WTO’s Agreement on

Brazil
Appendix II

WTO Disputes and U.S. Countervailing Duty Cases Involving Export Policies of Brazil,

Indonesia, Korea, and Thailand

Page 64 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

Subsidies and Countervailing Measures. Canada later requested

establishment of a WTO dispute settlement panel to review the matter. The

United States and the European Union reserved their rights as third parties

in the dispute. One of the many U.S. submissions to the panel challenged

Brazil’s position that it could provide export subsidies to counter

nonexport credit subsidies offered by another WTO member. In April 1999,

the dispute settlement panel found that Brazil did not meet the conditions

that allow developing nations more time than developed nations to remove

prohibited export subsidies, such as PROEX. The panel declared that

PROEX’s interest equalization program was a prohibited export subsidy

and that it must be withdrawn without delay.

In addition to the WTO disputes, the U.S. government has preliminarily

determined one Brazilian subsidy to its steel industry to be

countervailable. In October 1998, the Commerce Department began

investigating whether Brazil was providing countervailable subsidies to

manufacturers of certain hot-rolled flat rolled carbon-quality (“hot-rolled”)

steel products. In its preliminary decision in February 1999, Commerce

ruled that some equity infusions and debt-to-equity conversions provided

to several of these manufacturers were countervailable because they were

inconsistent with the usual investment practices of private investors. The

net subsidy rate for these manufacturers ranged from 6.62 percent to

9.45 percent. The Commerce Department also preliminarily ruled that tax

deferrals that were provided to some of the same steel manufacturers were

not countervailable because they were not limited to any specific industry.

According to USTR, since 1996, Indonesia’s most controversial trade policy

has been its efforts to develop an indigenous automotive industry. Two

programs were involved. One program, which was begun in 1993 and was

to be continued until the year 2000, granted import duty relief to certain

automotive parts and accessories for use in assembling or manufacturing

motor vehicles based on the percentage of local content in the finished

vehicles. The other subsidy related to the 1996 establishment of a national

car program. Under this program, Indonesian companies designated as

“pioneer firms” were permitted to import tariff-free finished automobiles

designated as “national cars,” and to sell the national cars luxury tax free

for 3 years. A single Indonesian company was granted pioneer status, and

in 1996 it began importing finished national cars from Korea, where they

were produced by a company that was jointly owned by the Indonesian

company and a Korean firm.

In October 1996, 6 months after Indonesia announced the establishment of

its national car program, the United States and the European Union

Indonesia
Appendix II

WTO Disputes and U.S. Countervailing Duty Cases Involving Export Policies of Brazil,

Indonesia, Korea, and Thailand

Page 65 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

initiated WTO dispute settlement procedures against the program and

against the other automotive sector subsidy, the local content tariff

exemption.4

 After its financial crisis began and while the WTO dispute

settlement procedure still was ongoing, Indonesia committed to the IMF to

eliminate the national car program by removing its special tax, customs,

and credit privileges. In January 1998, while the WTO dispute was ongoing,

Indonesia revoked these privileges as a commitment to the IMF. Indonesia

also pledged to the IMF to phase out tariff privileges tied to local content

levels, although a WTO panel had not reached a final decision. In June

1998, the WTO panel issued a final ruling against Indonesia, and Indonesia

was given until July 1999 to eliminate the second subsidy. In January 1999,

the Indonesian government announced that it would formulate a new

national car policy that would conform to its WTO obligations.

In addition to the national car program, during 1997-99 the U.S.

government has investigated one other Indonesian export subsidy under

U.S. CVD law. In response to a complaint from a U.S. company regarding

extruded rubber thread, on March 26, 1999, the Commerce Department

found that the Bank of Indonesia’s rediscount export financing program

was a subsidy because, during 1997 under the program, “special” exporters

received financing at a lower rate than was available to other firms.

However, the Commerce Department determined that the subsidy

provided to the two Indonesian producers of extruded rubber thread

products in question was not countervailable because the subsidy

amounted to less than 3 percent of the value of the products.

Since 1996, the United States has not formally raised concerns about Thai

subsidies in the WTO; however, in the past the U.S. government has found

a number of Thai subsidies to be countervailable. Some of these programs

were found to be countervailable with regard to certain apparel, steel pipe

and tubing, ball bearings, and pocket lighters, but no CVD order was issued

with respect to pocket lighters because the ITC did not find material injury

to the competing U.S. industry. These programs were found to be

countervailable:

• Export packing credits, which are short-term, preshipment export loans,

provided and recorded on a shipment-by-shipment basis, and approved

new export packing credit loans totaling $500 million to stimulate export

activity in reaction to Thailand’s lagging exports were countervailable. The

Commerce Department determined that this program was countervailable

 

4 At the same time, Japan initiated WTO dispute procedures against the national car program only.

Thailand
Appendix II

WTO Disputes and U.S. Countervailing Duty Cases Involving Export Policies of Brazil,

Indonesia, Korea, and Thailand

Page 66 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

in the context of investigations of certain apparel, steel pipe and tubing,

and other products.

• Tax certificates for exporters, which are issued by the Thai government to

exporters, and which are transferable, were found to be countervailable;

these certificates also rebate indirect taxes and import duties levied on

inputs used to produce exports.

• Tax and duty exemptions that allow exporting companies to import

machinery and equipment free of import duties and business and local

taxes were countervailable.

• Income tax exemptions that allow companies to obtain 3 to 8 year

exemptions from payment of corporate income tax on profits derived from

net profits for losses incurred during the tax exemption period were found

to be countervailable.

• Goodwill and royalties tax exemption status, which is granted to promoted

businesses for income arising from goodwill, royalties, and other payments

for a period of up to 5 years were countervailable.

• Tax deductions for dividends that allow promoted businesses receiving tax

exemptions to receive an additional deduction from taxable income for

dividends received from promoted activities were found to be

countervailable.

• Assistance for trading companies, which the Board of Investments

authorized in 1978 to provide certain incentives to eligible trading

companies, were countervailable.

• Duty exemption for raw materials that allows companies to import raw

and “essential “ materials used in the production, mixing, and assembly of

exports, free of import duties were found to be countervailable.

• Permission to maintain foreign currency bank accounts, which allows a

Thai company to hold a foreign currency account, is countervailable in the

event the account is denominated in U.S. dollars.
Appendix III

Comments From the Department of the

Treasury

Page 67 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies
Appendix IV

Objectives, Scope, and Methodology

Page 68 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

This report (1) identifies the extent to which current International

Monetary Fund (IMF) borrower countries restrict international trade and

the countries whose trade has the greatest potential to affect the United

States; (2) describes in detail the reported trade barriers and export

policies of four IMF borrowers that are among those with the greatest

capacity to affect the United States—Brazil, Indonesia, the Republic of

Korea, and Thailand—and recent actions reported to have been taken to

reduce those barriers or modify policies; (3) identifies actions, in the

context of their current IMF programs, the four countries have taken or

are committed to take to liberalize their trading systems; and (4)

determines the extent to which the impact of the four countries’ export

policies on the United States can be predicted and measured and which

U.S. industry sectors might be affected by changes in trade from these

countries. Except where otherwise noted, we included information as of

April 30, 1999.

We defined IMF borrower countries as those 98 member countries that had

IMF credit and loans outstanding in calendar years 1997 or 1998.1

 These

98 countries have used IMF credit at some point during the past 10 years

and still have outstanding obligations.

To determine the degree to which current IMF borrower countries restrict

international trade, we analyzed several indicators of restrictiveness,

including average tariff rates;2

 nontariff barriers;3 and indexes constructed

by the IMF, the Heritage Foundation, and the Fraser Institute. The IMF

index is composed of three measures: an index of average tariff rates and

other duties on imports, an index of nontariff barriers, and an overall index

that rates trade restrictiveness on a 10-point scale that weights nontariff

barriers heavier than tariff barriers. The overall index classifies countries

as either “open” (1 to 4), “moderate” (5 to 7), or “restrictive” (8 to 10).

 1

 This includes credit from the use of the IMF’s General Resource Account, as well as from loans made

under three concessional (below-market-interest-rate) programs, the Structural Adjustment Facility,

the Enhanced Structural Adjustment Facility, and the Trust Fund.

2 Average tariff rates are the average of the applied rate across the entire tariff schedule. We obtained

information on average tariff rates from various sources, including the World Trade Organization

(WTO), the United Nations Conference on Trade and Development, the Asia-Pacific Economic

Cooperation forum, the Interamerican Development Bank, the International Trade Commission (ITC),

and the Office of the U.S. Trade Representative (USTR).

3

 Nontariff import barriers include quantitative restrictions, state trade monopolies, restrictive foreign

exchange practices that affect a country’s trade system, and quality controls and customs procedures

that act as trade restrictions.

Assessing Borrowers’

Trade Restrictiveness
Appendix IV

Objectives, Scope, and Methodology

Page 69 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

Although these indicators do not comprehensively measure the wide

variety of policies that countries may use to restrict trade, they do reflect

important barriers and provide information on the relative restrictiveness

of countries among each other and over time. We also collected

information on borrowers’ tariff levels from other sources.

We then compared how the IMF index rated countries to the way the

Heritage and Fraser Institute measures did so. We found that the three

organizations’ measures rated countries similarly and that the tariff rates

used by the three indexes were similar to the tariff rate data we collected

independently. Finally, we supplemented this information with information

from USTR and the WTO on membership in the WTO, the existence of

other multilateral and bilateral trade agreements with the United States,

formal market access disputes filed, and types of barriers identified in

USTR’s annual National Trade Estimate Report on Foreign Trade Barriers.

We selected four of the eight current IMF borrowers for more detailed

study—Brazil, Indonesia, Korea, and Thailand. We selected these four

countries because, in addition to being important U.S. trading partners,

they are among the 10 top current borrowers and currently have IMF

financing arrangements. Mexico is the largest U.S. trading partner among

current IMF debtors, and Mexico is the fourth largest current IMF debtor.

We did not select Mexico for our study, however, because Mexico is not

currently in an IMF financing arrangement and thus is not currently

eligible to borrow more funds from the IMF, and because U.S.-Mexican

trade is governed by the North American Free Trade Agreement.

To identify the priority4

 import barriers and export policies of Brazil,

Indonesia, Korea, and Thailand, we relied principally on USTR’s most

recent three (1997-99) National Trade Estimate Report on Foreign Trade

Barriers. These reports identify those foreign import policies and practices

that have the greatest potential to affect U.S. exports. We also relied upon

USTR’s Trade Policy Agenda and Annual Report of the President of the

United States on the Trade Agreements Program. These reports identify

the executive branch’s annual trade priorities. We also used recent State

Department Country Reports on Economic Policy and Trade Practices. In

addition, we interviewed U.S. government officials from USTR, the

Department of Commerce, and the Department of State. We reviewed the

results of countervailing duty reviews and investigations by the ITC and

the Department of Commerce’s International Trade Administration, which

 

4 We use “priority” to characterize these policies because the U.S. government has been particularly

active in reporting on and addressing certain trade practices in specific sectors.

Four Countries’ Import

Barriers and Export

Policies
Appendix IV

Objectives, Scope, and Methodology

Page 70 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

were reported in the Federal Register. And we met with officials from the

Department of the Treasury and the IMF to discuss import and export

policies in the context of each country’s current IMF program. Information

on foreign laws and policies does not reflect our independent legal analysis

but is based on interviews and secondary sources.

To identify and determine the status of trade liberalization measures that

Brazil, Indonesia, Korea, and Thailand have undertaken or have committed

to undertake within the context of their recent IMF financing

arrangements, we defined their “recent” IMF programs as those that

started since June 1997 when the Asian financial crisis began in Thailand.

Several of the countries technically have had more than one IMF financing

arrangement since then because their original programs were expanded.

We considered a measure to be trade liberalization in nature if it involved

eliminating or lowering either tariffs or nontariff barriers to imports;

concerned policies that promote exports, such as subsidies; or involved

export restrictions. We reviewed public and nonpublic country and IMF

documents, including the countries’ letters of intent and memorandums of

economic and financial policies. We also reviewed IMF staff reports on the

countries’ progress in attaining the objectives of their financing programs

and met with IMF and U.S. government officials.

We based our general discussion of the potential impact of export policies

on economic literature and reports that explain how the U.S. government

analyzes the impact of imports and export policies on trade. We identified

the rank of Brazil, Indonesia, Korea, and Thailand as exporters among IMF

borrowers by examining data prepared by the IMF. The latest available

data cover 1997. We identified the four nations’ ranks as world exporters

by examining the WTO’s April 1999 report on world trade in 1998. Exports

net of intra-European Union trade were used. We identified the rank of

Brazil, Indonesia, Korea, and Thailand as suppliers of specific product

groups by examining the U.S. Department of Commerce’s 1999 Industrial

and Trade Outlook report and the ITC’s 1998 annual Trade Shifts report.

To identify which of the four countries’ export policies might harm U.S.

industries, we reviewed the results of countervailing duty reviews and

investigations by the ITC and the Department of Commerce’s International

Trade Administration, which were reported in the Federal Register. We

looked exclusively at subsidies; that is, financial contributions by a

government that confer a financial benefit to selected companies, or that

are prohibited by WTO agreements. We also relied on the Commerce

Department’s Electronic Subsidies Enforcement Library to review

countervailing duty cases filed, and spoke with officials from the

Trade Liberalization in

Four Countries’ IMF

Programs

Assessing the Potential

U.S. Impact of the

Countries’ Export

Policies
Appendix IV

Objectives, Scope, and Methodology

Page 71 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

Department’s Subsidies Enforcement Office to discuss those cases. In

addition, we reviewed each of the four countries’ most recent export

subsidy notifications to the WTO’s Committee on Subsidies and

Countervailing Measures. However, information contained in these

notifications was dated. To determine which subsidies were subject to the

WTO dispute settlement activity or investigations under U.S.

countervailing duty law, we reviewed the most current Overview of the

State-of-Play of WTO Disputes in addition to the Commerce Department

sources previously cited. Where practicable, we identified overlaps and

linkages between the various types of policies and issues, but the available

information was not always clear or detailed enough to identify such

linkages.

We identified products that showed rising imports and falling prices by

examining trade data for the years 1997 and 1998. Specifically, we

identified product sectors showing large increases in U.S. imports from the

partner by analyzing all U.S. imports from these nations at both the 4- and

the 10-digit levels of aggregation of the U.S. Harmonized Tariff

Classification System. Products that met certain value, market share, and

import increase thresholds were analyzed further.5

 First, we netted out

import surges that appeared to be coming at the expense of other foreign

suppliers, instead of U.S. producers.6

 Second, we determined whether

price declines had occurred for the remaining items by calculating unit

values of imports at the 10-digit level.7

 The result of this screening process

was that 62 4-digit items, amounting to $4.1 billion in imports, showed the

specified increases in imports and price declines, as did 300 10-digit

harmonized schedule products, accounting for $5.3 billion in imports.

In reviewing whether a domestic U.S. industry exists, we examined regular

monitoring reports and secured staff-level insights by selected industry

experts at the ITC, the U.S. Department of Commerce, the U.S. Department

of Agriculture, and other sources. A limitation of this approach is that it is

somewhat imprecise and based on at-hand information, which may be

limited. However, it was not practicable to use other currently available

 

5 The criteria used at the 4-digit level were (1) value, $500,000 minimum value of imports of the product

category from the partner in 1998; (2) market share, the partner accounted for at least 5 percent of

total U.S. imports of the product; and (3) import increase, imports of the product from the partner had

increased by 15 percent or more in value terms from 1997 to 1998. The criteria used at the 10-digit level

were: (1) minimum value, $1 million; (2) market share, 5 percent of the U.S. import market; and

(3) import increase, 20 percent in value or quantity terms.

6

Specifically, only product sectors that showed increases in overall U.S. imports were further analyzed.

7

At the 4-digit level, unit values at all of the 10-digit product categories were calculated and then

averaged to determine whether prices fell for the 4-digit category.
Appendix IV

Objectives, Scope, and Methodology

Page 72 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

information on U.S. production because it is dated and did not neatly

match the classifications used for trade and tariff analysis. We identified

products that were eligible for Generalized System of Preferences

treatment by examining codes in the U.S. tariff schedule identifying such

treatment.

We discussed the leading import surges and price declines identified with

staff at the U.S. Department of Commerce and the ITC. We relied upon

these informal contacts as well as information on export policies

developed in a previous section and information on formal petitions for

import relief made under U.S. trade law to identify products where

concern exists by U.S. producers about harm from imports and/or unfair

trade practices by Brazil, Indonesia, Korea, and Thailand. Such information

is instructive but must be recognized as indicative only. Fully identifying

and analyzing the factors contributing to rising imports; the nature, extent

and impact of competition from imports on U.S. producers; and the extent

of export subsidies would require information that is beyond the scope of

this report.

We performed our work between November 1998 and May 1999 in

accordance with generally accepted government auditing practices.
Appendix V

GAO Contacts and Staff Acknowledgments

Page 73 GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies

Elizabeth Sirois, (202) 512-8989

David Genser, (202) 512-9617

In addition to those named above, Kim Frankena, Tim Wedding, Michael

Zola, David Artadi, Carlos Evora, and Rona H. Mendelsohn made key

contributions to this report.

GAO Contacts

Acknowledgments
Page 74 GAO/NSIAD/GGD-99-174 IMF Borrowers’ Trade Policies
Page 75 GAO/NSIAD/GGD-99-174 IMF Borrowers’ Trade Policies
Page 76 GAO/NSIAD/GGD-99-174 IMF Borrowers’ Trade Policies
Ordering Information

The first copy of each GAO report and testimony is free. Additional

copies are $2 each. Orders should be sent to the following address,

accompanied by a check or money order made out to the

Superintendent of Documents, when necessary. VISA and

MasterCard credit cards are accepted, also. Orders for 100 or more

copies to be mailed to a single address are discounted 25 percent.

Order by mail:

U.S. General Accounting Office

P.O. Box 37050

Washington, DC 20013

or visit:

Room 1100

700 4th St. NW (corner of 4th and G Sts. NW)

U.S. General Accounting Office

Washington, DC

Orders may also be placed by calling (202) 512-6000 or by using fax

number (202) 512-6061, or TDD (202) 512-2537.

Each day, GAO issues a list of newly available reports and testimony.

To receive facsimile copies of the daily list or any list from the past

30 days, please call (202) 512-6000 using a touch-tone phone. A

recorded menu will provide information on how to obtain these

lists.

For information on how to access GAO reports on the INTERNET,

send e-mail message with “info” in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at:

http://www.gao.gov
United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Correction Requested

Bulk Rate

Postage & Fees Paid

GAO

Permit No. G100

(711397)