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IV. TRADE POLICIES BYSECTOR
(1) Overview
1. Trade policies, broadly defined, affect practically allsectors oftheU.S.economy. Sectors
discussed inthisChapter areselected onthebasis oftheirimportance toworld trade, theirshare in
theU.S.economy and,inparticular, because theyareaffected bytrade policies. Foreign trade plays
animportant rôleinthedevelopment ofeachofthesesectors astheyrespond tochanges intheexternal
environment, competition andgovernment policies. Trade follows different patterns intheselected
sectors: traditional exports andimports areimportant inagriculture andsemiconductors; outward
processing hasincreased intextiles, clothing andautomobiles; while salesabroad through foreign direct
investment aresubstantially larger thanexports inthesemiconductor, automobile andpharmaceutical
sectors.
2. Differences intheresponse ofindividual sectors arecaused, among otherfactors, bydifferences
intheunderlying technical characteristics ofthesector, suchaseconomies ofscale, labour intensity
ortheneedtoplannextyear'ssupply response onthebasis ofcurrent prices. Government policies
alsoplayarôle:insome cases, suchasimport tariffs, theyareexplicitly designed toaffect tradeflows
(Table AIV.1). Inotherinstances, suchastechnical requirements, measures areimplemented toachieve
non-trade objectives, buthaveasignificant impact ontrade incertain sectors, including automobiles
andpharmaceuticals. U.S. participation intheWTO, aswellasregional andbilateral agreements,
influences government action andhence thetrade response bytheprivate sector.
3. Services isthelargest sector oftheU.S. economy, generating about two-thirds ofnational
income (Chapter I).Market access regulations fortheprovision ofservices aresector specific and
promulgated atboththeStateandthefederal level(Chapter II).Inmostservices sectors regulations
apply specifically todomestic andforeign suppliers, withthelatter competing through cross-border
supply andforeign direct investment, asmovement ofconsumers isnotimportant insectors other than
tourism. Sectors inwhich theregulatory environment hasevolved particularly rapidly include
telecommunciations andfinancial services; these arecovered below inseparate sections.
(2) Agriculture andFood Products
(i) Recent developments
4. Agricultural andfoodproducts account forsome 11percentofU.S.merchandise exports and
5percentofimports.1Thesector generates some 2.9percentofGDP, down from 3.5percentin
1990(Table IV.1), and3percentofemployment. Thevalue ofagricultural exports roseby30percent
between 1992and1995; thatofimports by18percent. Thedirection ofU.S.tradeflows inagricultural
andfoodproducts hasnotchanged significantly inrecent years (Chart IV.1).
5. Direct government payments havedeclined fromover30percentofnetfarmincome in1993
to14.6percentin1995. Producer andconsumer subsidy equivalents havealsogenerally declined,
partly under theinfluence ofrising world market prices (Tables IV.1andAIV.2a and2b).
1Thedefinition hereisthatused intheUruguay Round agriculture negotiations: i.e.HSChapters 1-24,
excluding headings 0301-0307, 0509, 0511.91, 1504, 1603-1605, 2106.90 (part) and2301.20 (fishandfishery
products), plus2905.43 and2905.44, 3301, 3501-3505, 3809.10, 3823.60, 4101-4103, 5001-5003, 5201, 5202,
5301 and5302.WT/TPR/S/16 Trade Policy Review
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Table IV.1
Overview ofU.S.farm production andtrade infoodproducts, 1990-95
1990 1991 1992 1993 1994 1995
Gross farmincome (US$ billion)a198.5 191.8 200.5 203.0 213.5 206.5b
Gross farmincome asashare ofGDP (percent) 3.5 3.2 3.2 3.1 3.1 2.9b
Netfarmincome (US$ billion)a44.8 38.4 47.9 42.1 46.7 42.4b
Direct government payments (US$ billion)c9.3 8.2 9.2 13.4 7.9 6.2
Direct government payments asashare ofnetfarm
income (percent) 20.8 24.4 19.2 31.8 16.9 14.6
Employment (million)a2.89d2.88 2.81 2.80 2.78 2.83
Exports ofagricultural products (US$ billion)e... ... 47.0 46.4 50.8 61.1
Imports ofagricultural products (US$ billion)e... ... 29.0 28.8 31.6 36.1
Estimates ofimpact onproducers andconsumers of
support foragriculturefAverage 1986-88 1992 1993 1994g1995h
Producer subsidy equivalent oftotalsupport to
agriculture (US$ billion)i32.6
-11.726.3 27.2 25.7 19.0
Consumer subsidy equivalent ofimplicit taxon
consumer (US$ billion)i-10.9 -11.8 -11.3 -8.8
a Council ofEconomic Advisors (1996).
b January-July 1995, atseasonally adjusted annual rates.
c U.S. Department ofAgriculture (1996).
d Year-end data.
e Uruguay Round definition (seefootnote 1,Chapter IV): source UNSTAT, Comtrade database.
f OECD; dataarenotdirectly comparable tostatistics presented above.
g Estimates.
h Provisional.
i SeeTable AIV.2.
Source: Council ofEconomic Advisors (1996), Annual Report, U.S.Government Printing Office, Washington, D.C.; U.S.Department
ofAgriculture (1996), Agricultural Outlook, January-February, Table 29;OECD (various issues), Agricultural Policies, Markets
andTrade inOECD Countries: Monitoring andEvaluation, Paris; andUNSTAT Comtrade database.
6. Under theWTO Agreement onAgriculture, allU.S. quantitative import restrictions on
agriculture havebeentariffied, andtariffs, export subsidies anddomestic support expenditures have
beenbound. Further policy changes, specified intheFederal Agricultural Improvement andReform
(FAIR) Actof1996, goinsome respects beyond theU.S.commitments made intheUruguay Round.
TheFAIR Actconverts mostdomestic production support intodirect income support; income support
expenditures havebeenallocated forthenextseven years below previous direct government payments
(Tables IV.1, IV.2).2TheFAIR Actof1996alsoallocates funds forexport subsidies andguarantees
(Table IV.2).
2Attheendoftheseven-year period in2002, anewfarm actwillberequired orthepermanent Agricultural
Actof1949 willbecome effective again.WT/TPR/S/16 Trade Policy Review
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Table IV.2
Domestic support andexport promotion expenditure specified intheFAIR Actof1996, 1996-2002
(US$ million unless otherwise specified)
Item 1996 1997 1998 1999 2000 2001 2002
Domestic support 5,570 5,385 5,800 5,603 5,130 4,130 4,008
Export Enhancement Program 350 250 500 550 579 478 478
Export credit guarantees under
GSM 102andGSM 1035,500 5,667 5,667 5,667 5,667 5,667 5,667
Market Access Program (previously
theMarket Promotion Program)90 90 90 90 90 90 90
Minimum level ofassistance under
PL480TitleII(metric tons'000)2,025 2,025 2,025 2,025 2,025 2,025 2,025
Source: U.S. Department ofAgriculture (1996), Summary sheet, 1996 Farm Bill,Washington, D.C.
(ii) Domestic policies
7. Prior totheFAIR Actof1996, payments weremade tofarmers onthebasisoftheproduction
ofparticular crops andonlandsetasides.3TheActeliminates most product-specific payments and
guaranteedpricesinpreviousfarmprogrammesandreplacesthemwithannualdomesticsupportpayments
thatdecline overseven years; thecrops covered arewheat, maize, sorghum, barley, oats,upland cotton
andrice.These payments aredelinked fromproduction oracreage, being based onhistorical payments
under theexisting deficiency payment scheme andonloanrateprogrammes, which were thebasis
forthe1990 Farm Bill; totalpayments arecapped overtheseven-year period atUS$35.6 billion.4
Under theAct,newplanting offruitandvegetables isprohibited unless there isahistory ofplanting
ofsuchproducts. Land setaside programmes havebeendropped except fora"conservation reserve",
which idles14.7million hectares ofenvironmentally vulnerable land.
8. "Non-recourse loans", atwhich aproducer maysellhis/her croptotheCommodity Credit
Corporation (CCC) ifprices dropbelow agovernment-set level, remain available under the1996Act.
The1995loanrateswere, however, wellbelow world market prices. Loan ratesarelikely tocontinue
tobebelow world prices, astheyaresetat85percentofthe(moving) average prices ofthepreceding
five-year period, withthehighest andthelowest prices excluded; under theAct,loanratescannot
exceed their1995 levelandproduct loan-rate ranges arespecified inthelaw.5Theinterest rateon
theseloans is1percentovertheratetheCCCischarged forborrowing. Farmers arenolonger required
topurchase cropinsurance, butarenoteligible foremergency crop-loss assistance fornon-insured
crops.
3GATT (1994).
4Actual payments fortheperiod willbedetermined during aone-time sign-up, which wasexpected torun
from lateMaytomid-July 1996. (U.S. Department ofAgriculture, 1996). On10September 1996, theUnited
States notified theWTO Secretariat ofthemodifications toitsdomestic support measures under Article 18.3
oftheAgreement onAgriculture "measures exempt from reduction".
5Forexample, thesoybean loanrateislimited toarange ofUS$4.92 toUS$5.26 perbushel; theupland
cotton loanratecanrange from US$0.50 toUS$0.5192 perpound; therateforriceisfrozen atthe1995 level
ofUS$6.50 perhundredweight (cwt).United States WT/TPR/S/16
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9. TheFAIR Actestablishes aUS$300 million "Fund forRural America" ofwhich aminimum
ofonethirdmustbespent onresearch andonethirdonruraldevelopment, andtheremainder oneither
ofthese. TheActdoesnotchange subsidies forirrigation, which wereestimated atUS$543.3 million
in1986 andareincluded intheU.S. Uruguay Round offer.6Subsidies forwater areparticularly
important fortheproduction offruitandvegetables. Domestic programmes which areadministered
under "nonetcost" totheFederal Government, suchasthesugar andpeanut programme, remain
practically unchanged following theimplementation oftheU.S.commitments under theUruguay Round
Agreement (section (vii)(e)).
10. Asof30April 1995, 73federal marketing orders under theAgricultural Marketing Agreement
Act(AMAA) of1937 were inforce; 38formilkand35forother products.7Tenofthenon-milk
orders covered more thanoneState. Marketing orders typically contain quality provisions regulating
size,grade andmaturity requirements. Quantity provisions allocating quantities toeachproducer in
theareacovered areusedbynineofthe35outstanding marketing orders.8However, observers have
noted that"quality standards holdpotential toaffect quantity marketed orprovide astrategic advantage
foradominant group within theorder andensure consistent, highquality".9Marketing orders for
lemons, Valencia oranges andnavel oranges enforced inCalifornia andArizona wereterminated in
August1994.TheFAIRActeliminatesmarketingquotasandallotmentsforsugarandordersaggregation
ofthemilkorders to10-14 orders.
(iii) Export policies
11. U.S.export support foragricultural products canbeclassified into:export subsidy programmes,
export credit programmes, non-price programmes andfoodaid.Although exports mayreceive support
through more thanoneprogramme, funds budgeted foroneprogramme cannot beusedforanother.
Twomainexport subsidy programmes remain inforce: theExport Enhancement Program (EEP) and
theDairy Export Incentive Program (DEIP); under theFAIR Actof1996, funding fortheCottonseed
OilAssistanceProgram(COAP)andtheSunflowerOilAssistanceProgram(SOAP)wasnotreauthorized.
Thetwomain export credit programmes aretheExport Credit Guarantee Program (GSM-102) and
theIntermediate Export Credit Guarantee Program (GSM-103). Non-price marketing programmes
include theForeign Market Development Program (FMPP) andtheMarket Promotion Program (MPP)
(renamed intheFAIR Actof1996astheMarket Access Program, MAP). Food aidisprovided under
Public Law480,Section 416(b) oftheAgricultural Actof1949 andunder theFood forProgress
Programme.
12. During fiscal year1994, export subsidy programmes allocated bonuses ofUS$1.3 billion, up
fromanannual average ofUS$0.8 billion during 1989-93. Grains andgrain products received over
threequarters oftotalpricesupport (Table IV.3). Almost halfofallexpenditure onexport pricesupport
programmes weremade onexports toAfrica, dominated byexports toNorth Africa (Table AIV.3).
Inview ofrising world market prices, nopayments havebeenmade fortheexport ofwheat since
1July1995. TheProgramme wasextended through 2001 bytheUruguay Round Agreement Act.
TheFAIR ActsetsanEEPfunding ceiling forintermediate-value products atUS$100 million. For
6WTO document G/AG/AGST, Vol.3, 22March 1995.
7Inaddition, federal andState legislation authorize levies onselected product-specific transactions tofund
research andpromotion programmes targeted tobenefit these products.
8Excluding flow-to-market provision suchasprorates andshipping holidays. (Neff andPlato, 1995, p.4)
9Neff andPlato (1995), p.4.WT/TPR/S/16 Trade Policy Review
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fiscal year1994expenditures ontheDairy Export Incentive Program amounted toUS$117.6 million,
supporting 133,524 metric tonsofexports.10Under theFAIR Actfunding forthisprogramme isto
continue atthemaximum volume andfunding levels allowed under theUruguay Round Agreement.11
Table IV.3
Export subsidy programme sales bycommoditya
Average 1989 -93 1994
Commodity Sales
('000tons)Bonuses
(US$)Sales
('000tons)Bonuses
(US$)
Grains ... 627,507 ... 982,991
Wheat 17,903 577,309 19,113 890,511
Barley 1,368 41,985 1,677 90,170
Rice 146 8,213 46 2,309
Grain products ... 39,941 ... 87,619
Flour 445 36,934 556 78,069
Barley 35 3,007 65 9,550
Vegetable oils 373 35,796 583 53,812
Dairy products ... 57,260 ... 117,615
Other non-bulk
productsb... 13,876 ... 49,264
Eggs (1,000 dozen) 20,486 4,983 61,892 14,972
Frozen poultry 16 8,782 28 20,662
Frozen pork 0 0 14 13,630
Total ... 774,380 ... 1,291,300
... Notavailable.
a Includes EEP, DEIP, COAP andSOAP sales.
b Other non-bulk products soldunder EEPfrom1989-93 werecanned peaches, eggsandfrozen poultry. For1994, non-bulk products
included eggs, frozen poultry andfrozen pork.
Source: Ackerman, Karen Z.,Mark E.Smith andNydia R.Suare (1995), Agricultural Export Programs Background for1995 Farm
Legislation, U.S. Department ofAgriculture, Agricultural Economic Report No.716,Washington, D.C.
13. Export credits administered under GSM-102 andGSM-103 declined from coverage of
US$5.6 billion ofexports in1992toUS$3.2 billion in1994(Table IV.4). Grain accounted formore
than80percentofexport credits administered under theProgrammes. Mexico wasthelargest recipient
ofsuchcredits, withathirdoftotaloutlays. Under theFAIR Act,export credit guarantees administered
under GSM-102 andGSM-103 havebeenfunded until2002, allowing forannual export insurance up
toavalue ofUS$5.5 billion (Table IV.2). Export credit insurance willbeavailable foritems ofup
to90percentofU.S.content(byweight)forhigh-value-addeditemsunlessthisreducestotalcommodity
salesunder theprogrammes. TheFAIR Actinstructs theSecretary oftheDepartment ofAgriculture
todevelop anexport strategy toincrease U.S. exports of"high value andvalue-added agricultural
products" raising theU.S.share ofworld trade insuchproducts.
10U.S. notification circulated asWTO document G/SCM/N/3/USA, dated 15March 1996, p.13.
11U.S. Department ofAgriculture (1996).United States WT/TPR/S/16
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Table IV.4
GSM export credit programme approvals, 1989-94
(US$ million)
Programme 1989 1990 1991 1992 1993 1994
GSM-102 4,769.8 3,964.4 4,438.9 5,595.6 3,643.2 2,771.5
GSM-103 425.5 332.0 83.0 88.0 238.9 149.1
Total 5,195.3 4,296.4 4,521.9 5,683.6 3,882.1 2,920.6
Source: Ackerman, Karen Z.,Mark E.Smith andNydia R.Suare (1995), Agricultural Export Programs Background for1995 Farm
Legislation, U.S. Department ofAgriculture, Agricultural Economic Report No.716,Washington, D.C.
14. Non-price support isprovided through theForeign Market Development Program (FMD),
theTargeted Export Assistance (TEA) Program andtheMarket Promotion Program (MPP). During
1989-93, twothirds oftheFMD programme provided assistance tobulkcommodities, while around
80percentoftheTEA/MPPexpenditurewasusedtopromotenon-bulkexports.12Combinedexpenditure
onTEA/MPP wassignificantly larger thanonFMD (Table IV.5). TheFAIR Actrenames theMPP
theMarket Access Program (MAP) andprovides funding untiltheyear2002(Table IV.2). Promoted
products havetoberecognized ascoming fromsmall business concerns under theSmall Business Act,
co-operatives ornon-profit trade associations. Brand promotions forforeign companies orforeign-
produced products areprohibited. TheEmerging Democracies Program isrenamed theEmerging
Markets Program (section 1542 oftheFAIR Act), defining country coverage as"those moving toa
market economy", andtheCCC isrequired tomake nolessthanUS$1 billion available forcredits
tothese markets. TheFAIR Actalsoauthorizes assistance totheDairy Export Trading Companies
andtheForeign Market Development Cooperation Program, andforthedevelopment ofanAgricultural
Export Promotion Strategy, butnofunding isspecified inthelaw.
Table IV.5
Foreign Market Development (FMD), Targeted Export Assistance (TEA), andMarket Promotion Program (MPP), programme levels
andexpenditure, 1989-95
(US$ million)
Programme 1989 1990 1991 1992 1993 1994 1995
FMD programme level 29.7 28.6 30.1 33.6 38.7 34.3 20.0
FMD Expenditure 29.7 28.6 30.1 33.6 38.7 34.3 ...
TEA/MPP programme level 200.0 200.0 200.0 200.0 147.7 100.0 85.5
TEA/MPP expenditure 145.2 169.2 227.6 170.0 191.6 154.8 ...
... Notavailable.
Source: Ackerman, Karen Z.,Mark E.Smith andNydia R.Suare (1995), Agricultural Export Programs Background for1995 Farm
Legislation, U.S. Department ofAgriculture, Agricultural Economic Report No.716,Washington, D.C.
15. Food aidisadministered under theAgricultural Trade Development andAssistance Actof
1954(Public Law(PL)480). PL480administers concessional sales(Title I)anddonations andgrants
(Titles IIandIII).13Inaddition, Section 416(b) oftheAgricultural Actof1949 asamended provides
fordonations ofCCC-owned surplus commodities todeveloping countries, and500,000 metric tons
12Ackerman, Smith andSuare (1995).
13GATT (1994).WT/TPR/S/16 Trade Policy Review
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offoodmaybeprovided through theFood ForProgress programme, established in1985. Africa
received overathirdoffoodaidshipments during 1989-93, while Europe accounted foralmost half
of1993shipments. Grains andgrain products werethemainproducts shipped under theprogrammes.
Funds allocated forconcessional sales(PL480,TitleI)dropped in1995compared toprevious years.
Asprices increased during theperiod, quantities soldunder thisprogramme declined (Table IV.6).
Under theFAIR Act,private entities become eligible forPL480TitleIcredit sales, theminimum
repayment period oftenyears hasbeeneliminated, themaximum grace period hasbeenreduced from
seven tofiveyears andanagricultural trade organization maybeauthorized bytheSecretary tocarry
outaprogramme intherecipient country using funds generated byPL480TitleIsales. Themaximum
level offunding under PL480TitleIItoassist eligible organizations intheadministration ofnon-
emergency programmes hasbeenincreased from US$13.5 million toUS$28.0 million. Anannual
minimum levelofassistance under thisTitlehasbeensetatjustover2million metric tons(Table IV.2)
Table IV.6
Sales under PL480,Title I,fiscal years 1993-95
(US$ million)
Fiscal year1993 Fiscal year1994 Fiscal year1995
('000tonnes) (US$ m.) ('000tonnes) (US$ m.) ('000tonnes) (US$ m.)
Wheat 872.5 121.3 1,081.7 147.4 672.0 114.9
Rice 125.7 28.4 110.7 30.8 86.7 26.8
Cotton n.a. n.a. 4.9 9.2 n.a. n.a.
Vegetable oilandsoybean
meal 281.8 91.8 687.8 152.1 252.1 62.9
Feed grains 791.3 79.3 150.8 16.6 121.4 14.6
Peanuts n.a. n.a. 7.1 8.1 n.a. n.a.
Tallow 34.3 12.0 n.a. n.a. 11.9 5.6
Freight financed n.a. 16.7 n.a. 19.0 n.a. 30.3
Total 2,105.6 349.5 2,043.0 382.7 1,144.1 255.1
n.a. Notapplicable.
Source: Dataprovided bytheU.S. authorities.
(iv) Import policies
(a) M.f.n. policies
16. Asspecified initsUruguay Round schedule, theUnited States hastariffied allimport restrictions
foragricultural products, including those which wereadministered under Section 22oftheAgricultural
Adjustment Actof1933, suchasdairy products, peanuts, cotton andsugar.14Domestic-content
requirements fortobacco products werereplaced in1995withanadvalorem rateof350percentfor
14Tariff equivalents submitted under theU.S.schedule aresubstantially higher thanthose previously published
bytheU.S. International Trade Commission (U.S. International Trade Commission, 1990). According tothe
U.S. authorities "The USITC report cited usedprice comparisons thatwere inaccurate. Thiswascorrected in
theU.S.submission. Other changes reflect theproblems associated withthenegotiations ontheUruguay Round 's
AgriculturalAgreemen t.TheU.S.altereditsmethodologyonsomeproductstomatchthatusedbyothercountries,
particularly theEU. Thiswasdeemed necessary toobtain equal treatment andprotection".United States WT/TPR/S/16
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above-quota imports oftobacco products.15Inthiscontext, between 1992and1996thesimple average
oftariffs foragriculture andlivestock production increased from5.7to8.6percent,forfoodproducts
from 6.6to8.8percentandfortobacco products from 14.6to104.4 percent(Table IV.7).
Table IV.7
Import tariffs applied toagricultural andfoodproducts, beverages andtobacco, 1992 and1996 (including advalorem equivalents
ofspecific duties)
(Percent)
1992 m.f.n. tariffs 1996 m.f.n. tariffsa
Average
tariffTariff
rangeAverage
tariffTariff
rangeNumber of
tariff linesNumber oflineswith
tariffs above 20%
Agriculture andlivestock
production (ISIC 111)5.7 0-354.9 8.6 0-350 366 24
Food products (ISIC 311) 6.6 0-75.5 8.8 0-147.3 809 63
Beverages (ISIC 313) 8.9 0-91.0 7.2 0-51.0 64 6
Tobacco products (ISIC 314) 14.6 2.7-37.1 104.4 4.4-350.0 11 4
a Tariff linesintroduced forthepurpose ofadministering import quotas onlyareexcluded.
Source: GATT (1994), Trade Policy Review -United States, Secretariat Report, Geneva; andWTO Secretariat based oninformation
provided byheU.S. authorities.
17. TheU.S.tariff schedule includes 192tariff linestoadminister product specific tariff quotas,
aswellasaseparate chapter (9906) toadminister additional NAFTA tariff quotas.16Tariff quotas
areusedinthecaseofbeef,dairy products, peanuts, sugar andsome sugar products, peanuts, tobacco
andcotton. In-quota tariffs aresubstantially lower thanout-of-quota tariffs. Forexample in-quota
cream issubject toatariff of3.2c/litre while out-of-quota cream issubject to86.3c/litre; in-quota
peanuts aresubject to6.6c/kg., while out-of-quota peanuts aresubject to147.4 percentadvalorem;
in-quota tariffs ontobacco forcigarette manufacture range fromfreeto$1.13/kg. while theout-of-quota
tariff issetat350percent(Table AIV.4). Including AVEs where available, theunweighted average
ofin-quota tariffs isestimated at9.9percentin199617,while theequivalent average ofout-of-quota
tariff lines, including AVEs based on1995 prices, isashighas54.5percent.18
15This tariff change wasimplemented following aGATT Panel report (Table AII.2a) andasubsequent
Article XXVIII consultation (Chapter III(2)(i)).
16Inaddition some 100tariff lineswere added toadminister "government use"and"personal use"provisions.
These allow forin-quota tariff ratestobeapplied tosuchimports while notbeing included inthequota asprovided
inGeneral Notes 15totheU.S. tariff schedule. Afurther fourtariff lines areusedtodistinguish Stilton cheese
originating from theUnited Kingdom from "Stilton cheese, other thantheproduct from theUnited Kingdom"
(Chapter4,footnote24,HarmonizedTariffScheduleoftheUnitedStates).StiltoncheesefromtheUnitedKingdom
issubject toimport tariffs ranging from 14.3to19percent, while "Stilton cheese, other thantheproduct from
theUnited Kingdom" issubject toanimport tariff of$2.536 perkg.
17Average of130advalorem rates and46advalorem equivalents ofspecific duties. Sixteen tariff linesare
excluded astheadvalorem equivalent ofspecific duties could notbecalculated.
18Average of18tariff lines withadvalorem duties, advalorem equivalents of85tariff lines withspecific
andmixed duties andtheadvalorem component of34tariff lines withmixed duties forwhich noadvalorem
equivalent ofthespecific component could becalculated. 54tariff lines withspecific duties arenotincluded
intheaverage asnoadvalorem equivalent could becalculated.WT/TPR/S/16 Trade Policy Review
Page 116
18. Some, butnotall,tariff quotas havebeenallocated toselected trading partners, asnegotiated
intheUruguayRoundandincludedintheU.S.WTOscheduleofcommitments(ScheduleXX).Tobacco
tariff quotas have been negotiated with selected countries inthecontext ofanArticle XXVIII
consultation.19TariffquotaswhichgobeyondtheU.S.WTOcommitmentsareadministeredunilaterally;
anexample istariffquotas forupland cotton, which havebeenincreased inresponse torising domestic
prices.20Tariff quotas aregenerally allocated toimporters onafirst-come first-served basis; exceptions
arethose fordried milk, butter andsome types ofcheese, which areallocated onthebasisofamixture
ofhistorical performance, designations bythegovernments ofexporting countries andlottery
(Table AIV.4).
19. Most tariff quotas were underutilized during 1995, inspiteofconsiderably lower tariffs on
in-quota imports thanonout-of-quota imports (Table AIV.4). Forexample, noimports ofdried cream
tookplace under quota.
20. Under theSpecial Safeguard (SSG) provisions oftheWTO Agreement onAgriculture, the
United States hasreserved therighttoapply additional tariffs onover-quota imports ifimport prices
dropbelow aspecified levelbased ontheaverage 1985-88 import price.21Twenty-four suchsafeguard
actions weretaken during 1995. Asthesafeguard isapplied automatically where Customs assess the
unitprice tobebelow thetrigger level, itmayapply toverysmall quantities, suchas8kg.ofcheese
from Ecuador and2kg.ofmixtures withover10percentsugar from Canada.22
21. Agriculturalimportsarealsoeligibleforgeneraltrade-remedyprotectionandcontinuetoreceive
preferences under public procurement.23Since thelastReview theUnited States hasinitiated twoanti-
dumping investigations regarding agricultural products: on16November 1994regarding garlic imports
fromChina andon18July1995concerning canned pineapple fromThailand. Asat31December 1995,
17anti-dumping andtencountervailing measures covering agricultural andfoodproducts remain in
action. Theearliest ofthese measures wasinitiated inMarch 1973, oncanned Bartlett pears from
Australia. Flowers fromLatin American countries aswellassugar fromCanada andtheEUmember
States were themost frequently affected products (Table AIV.5).
22. During 1995-1996, theU.S. International Trade Commission conducted twoanti-dumping
investigations, concerning respectively imports oftomatoes andimports oftomatoes andpeppers, under
Section 201-204 oftheTrade Actof1974 (Table III.2). Noinjury wasfound as"winter tomatoes"
could notbeconsidered aseparate industry from "tomatoes". Abillwhich would require theU.S.
International Trade Commission to"consider whether anindustry should bedefined onthebasis of
seasonal competition" passed theSenate but,at31August 1996, hadnotbeenapproved bytheHouse
ofRepresentatives.
19Annual tobacco quotas were allocated toArgentina (10,750 metric tons); Brazil (80,200 metric tons); Chile
(2,750metrictons);EuropeanUnion(10,000metrictons);Guatemala(8,500metrictons);Malawi(12,000metric
tons), Philippines (3,000 metric tons); Thailand (12,000 metric tons); Zimbabwe (12,000 metric tons) andother
countries orareas (3,000 metric tons) (Harmonized Tariff Schedule oftheUnited States)
20U.S. Department ofAgriculture, press release, 12September 1996.
21TheUnited States hasnotified under Article 5oftheAgreement onAgriculture alltariff lines towhich
itapplies theprice-based special safeguard (WTO document G/AG/N/USA/1, 10February 1995andaddendum).
22U.S. notification, circulated asWTO document G/AG/N/USA/4, 28March 1996.
23GATT (1994).United States WT/TPR/S/16
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(b) Regional free-trade agreements
23. Inthecontext ofitsregional free-trade agreements, theUnited States applies preferential import
tariffs toIsrael, Canada andMexico. TheU.S.-Israel FreeTrade Agreement isfullyimplemented,
buttariffs arestillapplied tosome significant foodandagricultural exports fromIsrael totheUnited
States(ChartIII.2andTableIII.1).TariffpreferencesforagriculturalproductsfromCanadaandMexico
havebeenimplemented onschedule, leading tobelow-m.f.n. rates. Complex duties (e.g.duties that
varyaccording totheunitvalue oftheproduct) apply toselected dairy products, fruitandvegetables,
specifying specific duties depending onseason ofimports, quantities andunitvalue. Duties witha
varying degree ofcomplexity apply to10percentofagricultural tariff linesinthecaseofimports
from Mexico. Tariff quotas under NAFTA apply todairy products, fruitandvegetables.
(v) SPSmeasures andstandards
24. Asinmostcountries, sanitary andphytosanitary (SPS) measures affect agricultural andfood
imports intotheUnited States. Since thelastReview theUnited States hasremoved foot-and-mouth
disease-based restrictions onimports ofbeeffrom Uruguay. InviewoftheWTO SPSAgreement,
theAnimal andPlant Health Inspection Service oftheU.S.Department ofAgriculture hasproposed
tochange itsregulations toestablish criteria forforeign "regions" based onriskclasslevels asopposed
torisklevelinforeign countries. TheService alsoproposes "toallow, under certain conditions, the
unloading andreloading attheportofarrival ofmeatandother animal products otherwise prohibited
entry intotheUnited States".24These changes would, forexample, allow forimports ofmeat and
otheranimal products fromdisease-free regions inArgentina, asopposed toanimport banonallimports
ofArgentine beef.25
(vi) Policies byU.S.trading partners
25. TheUnited States monitors theimplementation byitstrading partners oftheircommitments
under theWTO. Inthiscontext, theUnited States hasusedtheWTO dispute settlement provisions
forconsultations withKorea concerning SPSstandards ontheshelf-life ofcertain chilled andfrozen
foods; withtheEUconcerning thecalculation ofimport tariffs forgrain, import barriers tohormone-
treated beef, andimport licensing ofbananas; andwithHungary concerning export subsidies for
agricultural products (Table AII.2).
26. Asat31December 1995, Canada wastheonlytrading partner using anti-dumping measures
against U.S.agricultural exports. Anti-dumping duties wereapplied topotatoes, yellow onions, iceberg
lettuce andapples (Table AIV.5).
27. According totheU.S.authorities, SPSrestrictions areanimportant barrier toU.S.exports.26
Some ofthese barriers havebeenremoved following bilateral consultations. Forexample, abilateral
SPSagreement withJapan concluded on13September 1993facilitates exports ofapples (Table II.2).
24U.S. notification totheCommittee onSanitary and Phytosanitary Measures, WTO document
G/SPS/N/USA/37, 2May 1996.
25U.S. notification, circulated asWTO document G/SPS/N/USA/54, 15July 1996 andaddendum,
30August 1996. Therelevant document hasbeen published intheFederal Register, Vol. 61,2July1996,
p.34379.
26"The U.S. Department ofAgriculture hasestimated thatphytosanitary barriers, reflecting bothrealand
phantom health concerns, haveprevented upto$5billion inU.S.agricultural exports." (Journal ofCommerce,
"Phytosanitary barriers costly", 19August 1996).WT/TPR/S/16 Trade Policy Review
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Exporters areinvited tonotify newrestrictions totheU.S.Department ofAgriculture Sanitary and
Phytosanitary Working Group.27TheUnited States isalsoengaged inongoing consultations withIsrael
onSPSmeasures andstandards applied tocertain agricultural products, inthecontext oftheU.S.-Israel
FreeTrade Agreement. SPSissues raised bytheUnited States inWTO dispute settlement arediscussed
inChapter II(3)(i)(c) above andlisted inTable AII.2(c).
(vii) Trade policies byagricultural sub-sector
28. Within growing values ofexports andimports, theproduct structure ofU.S.tradeinagricultural
products hasnotchanged markedly since theearly 1990s. Cereals account forthelargest single
component ofU.S.exports, followed byfruitandvegetables, tobacco, andmeat(Chart IV.2).
(a) Cereals
29. Following theriseinworld market prices, export subsidies werereduced forcereals inwhich
theUnitedStatesprovidedasignificantshareofglobalsupply.TheUnitedStatesproduced18.4percent
ofworld cereals production, and32percentofprimary coarse grains, byvolume in1994.28Thesector
received substantial support under previous price support mechanisms, andcereals aretherefore the
main determinant ofannual payments under theFAIR Actof1996 (Table AIV.3). However, asof
1996 farmers willbefreetoshifttoother crops except fruitandvegetables.
30. TheU.S.share ofworld wheat exports increased from25percentin1990-91 toover35per
centin1994; itsshare ofunmilled maize exports declined fromalmost twothirds in1990tojustover
halfin1994 (Table IV.8). In1992, almost 80percentofU.S.wheat exports received support from
anexport price orexport credit programme; cereals received 90percentofexport price subsidy
expenditure in1994. Since thenexport subsidies havedeclined inimportance inviewofrising world
market prices; nopayments havebeenmade sinceJuly1995. Export subsidies arebudgeted tocontinue
andmayresume tothemaximum levels agreed intheUruguay Round Agreement (Table IV.2).
Table IV.8
U.S.exports ofselected cereal products andtheir share inworld exports, 1990-95
Product 1990 1991 1992 1993 1994 1995
Wheat, unmilled (US$ million) 3,887 3,350 4,496 4,668 4,056 5,457
Share ofworld exports (percent) 25.7 24.8 27.2 32.2 35.3 ...
Rice(US$ million) 801 754 725 770 1,008 996
Share ofworld exports (percent) 22.9 18.7 16.1 17.4 19.5 ...
Barley (US$ million) 247 155 197 155 154 178
Share ofworld exports (percent) 8.1 5.4 6.3 7.0 7.8 ...
Maize (US$ million) 6,205 5,146 4,984 4,462 4,187 7,524
Share ofworld exports (percent) 65.8 60.1 53.3 53.0 50.5 ...
... Notavailable.
Source: UNSTAT, Comtrade database.
27AnSPSteam wasformed attheU.S.Department ofAgriculture tomonitor SPSmeasures applied byU.S.
trading partners (U.S. Department ofAgriculture, press release, 15May 1995).
28Food andAgricultural Organization (1996), FAOSTAT, asposted ontheInternet.United States WT/TPR/S/16
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WT/TPR/S/16 Trade Policy Review
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31. Imports ofcertain cereals havealsobeenimportant. TheUnited States imported more than
halftheworld 'ssupply ofoats,during 1990-94; imports ofoatsfromCanada havegrown particularly
rapidly, increasing fromUS$60 million in1990toUS$151 million in1995, accounting formore than
80percentofU.S.oatsimports. Following thetariffication ofimport restrictions under oftheWTO
Agreement onAgriculture, simple average advalorem tariffs are9.1percentforcereals. Forty-five
outof108cereal tariff linesaresubject tospecific duties. Wheat exports fromCanada totheUnited
States arecurrently being monitored bytheU.S.Trade Representative following abilateral dispute
(Chapter II(3)(iii)). Although U.S.tariffs onimports fromCanada arebeing phased outinthecontext
oftheNAFTA agreement, theyremain higher thantariffs onimports fromMexico orevenCBI/ATPA
tariffs (Table IV.9). Imports from Mexico aresubject tocomplex duties on14tariff lines.
Table IV.9
Cereals, import duties bytrading partner, 1992-96
(Percent)
Import
tariffs
1992M.f.n.
import
tariffs
1994Import tariffs 1995 M.f.n.
import
tariffs
1996am.f.n. CBI/
ATPAIsrael Canada Mexico
Number oflines 69 108 108 108 108 108 108 108
Number oflines
subject tospecific
duties29 45 45 15 15 31 22b45
Average advalorem
duties7.1 9.1 9.1 0.3 0.0 2.2 3.1 8.8
Average including
advalorem
equivalent of
specific duties at
1995 prices5.0 9.4 9.2 3.3 3.3 4.8 3.0 8.9
Range 0-20.0 0-62.9 0-62.9 0-62.9 0-62.9 0-62.9 0-17.5 0-61.3
Number ofduty-
freelines15 15 15 90 90 35 65 15
a According tothe1995 nomenclature.
b Including 14tariff lineswithcomplex duties.
Source: WTO secretariat based oninformation supplied bytheU.S. authorities.
(b) Beverages andtobacco29
32. TheUnitedStates'shareinworldexportsofbeveragesandtobaccorecoveredtoover17percent
in1994, afterdeclining from19percentin1990 to16percentin1993. Thevalue of1995 exports
wasonlymarginally higher thanthe1994 level. Noproduct-specific export subsidies were applied
toexports ofbeverages andtobacco. TheUnited States accounted foraslightly smaller share oftotal
imports ofbeverages andtobacco products (Table IV.10). Inthecontext ofaGATT Article XXVIII
consultation, theUnited States hasabolished itsdomestic-content requirements fortobacco products
andintroduced atariff ratequota. In-quota imports paym.f.n. rateswithadvalorem equivalents
estimated between 0.3and54percent. Tariff quotas havebeenallocated toselected trading partners
andhavebeennotified totheWTO. Out-of-quota imports oftheaffected types oftobacco (flue-cured
29SITC category 1.United States WT/TPR/S/16
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andlightaircured, foruseincigarette manufacture) aresubject toanadvalorem rateof350percent.
Noimports were recorded in1995 under tariff linessubject tothe350percentimport tariff.
Table IV.10
U.S.trade inbeverages andtobacco products (SITC category 1),1990-95
Product 1990 1991 1992 1993 1994 1995
Exports (US$ million) 7,119 6,762 7,064 6,503 7,903 7,992
Share ofworld exports (percent) 19.2 17.2 16.4 15.9 17.3 ...
Imports (US$ million) 4,973 5,128 5,713 5,856 5,518 5,678
Share ofworld imports (percent) 14.7 14.1 14.2 15.3 13.3 ...
... Notavailable.
Source: UNSTAT, Comtrade database.
(c) Oilseeds, nutsandkernels30
33. TheUnited States produced 79.7million metric tonsofoilcrops in1994 (28.4 percentof
global supply), aswellas23.4percentbyvolume ofworld oilcakeandmealproduction byvolume
in1994. TheUnited States wasalsotheleading exporter, accounting for54percentofworld oilseeds
exports. In1995, thevalue ofU.S.exports grewtoUS$5.9 billion, following anincrease inthequantity
exported inresponse toariseinworld market prices. Export pricesubsidies represented around 1.5per
centofthevalue ofexports. Following theapplication oftariffication onagricultural products, average
tariffs increased from 1.4percentin1992 to18.9percentin1994. Asof1995, import tariffs for
Israel, Canada andMexico arenotsignificantly lower thanATPA/CBI tariffs (Table IV.11).
Table IV.11
Import duties onoilseeds, nutsandkernels bytrading partner (SITC category 22),1992-96
(Percent)
Import
tariffs
1992M.f.n.
import
tariffs
1994Import tariffs 1995 M.f.n.
import
tariffs
1996bm.f.n. CBI/
ATPAIsrael Canada Mexicoa
Number oflines
subject tospecific
duties6 8 8 - - - - 8
Average advalorem 0.5 24.6 24.6 15.4 15.4 15.4 17.2 24.0
Average including
advalorem
equivalent of
specific duties1.4 18.9 19.1 15.4 15.4 15.4 17.2 17.8
Range 0-10.7 0-187.9 0-187.9 0-187.9 0-187.9 0-187.9 0-187.9 0-183.1
Number of
duty-free lines 10 10 10 20 20 20 18 10
a Including out-of-quota tariff ratesforpeanuts imported from Mexico. In-quota imports from Mexico facelower duties.
b According tothe1995 nomenclature; advalorem equivalents ofspecific duties converted at1995 prices.
Source: WTO secretariat based oninformation supplied bytheU.S. authorities.
30SITC category 22.WT/TPR/S/16 Trade Policy Review
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(e) Other
34. Inimplementing theWTO Agreement onAgriculture, import quotas restricting imports of
sugar, peanuts andother sectors havebeenconverted intotariffs. In1995, there wasasmall amount
ofsugar imported attheex-quota tariff; noimports ofother products tookplace beyond tariffquotas.31
Loan ratesoftheCCC forsugar havebeenfrozen atthe1995 level.32Non-recourse loans areonly
available when tariff-rate quotas onsugar exceed 1.36million tonnes. Processors havetopayafee
foreachtonne offreighted product. Domestic marketing allotments havebeenrepealed, butimport
tariffs remain unchanged (section (2)(iv)). CCC loanrates forpeanuts havealsobeenfrozen and
marketing assessments havebeenincreased to1.15percentoftheloanratefor1996and1.2percent
forthe1997-2002 crops. Milkcontinued toreceive thelargest transfer asmeasured byproducer subsidy
equivalents (Table AIV.2a). Price support formilkistobephased down overfouryears fromUS$228
pertonne ofmilkequivalent in1996 toUS$218 pertonne ending in1999, when arecourse loan
programme willbeimplemented atUS$218 ofmilkequivalent. Arecourse loanrateisimplemented
forbutter, non-fat drymilkandcheese atloanratesequivalent ofUS$9.90 percwt.
(3) Textiles andClothing
(i) Overview
35. Textiles andclothing eachamount forabout 2percentofU.S.industrial value added.33In
bothsectors labour productivity hasclearly improved: intextiles, production rosebyabout 16percent
between 1990 and1995while employment declined to656,000 in1995fromabout 671,000 in1990;
inclothing, overthesame period, output remained roughly constant butemployment fellfrom over
1million toabout 916,000 (Table IV.12). TheU.Sclothing market istheworld 'slargest, accounting
forwellover25percentofworld imports; U.S.consumer expenditure onclothing andfootwear was
intheorder ofUS$250 billion in1995, equal to5.2percentoftotalconsumer outlay.
36. Import penetration oftheU.S.clothing market hasrisenfromaround 40percentin1993 to
over50percentin1995.34TheUnited States alsoaccounts forasignificant share ofworld textile
market, taking some 8percentoftotalworld imports in1994.
37. China andHong Kong, aswellasother Asian countries arethemainU.S.suppliers ofclothing.
Imports fromMexico, Caribbean andCentral American countries havebeengrowing faster thantotal
textiles andclothing imports, largely asaresult ofoutward-processing arrangements (Chart IV.3a).
Europe andCanada arethemainsuppliers ofartificial fibres totheUnited States; IndiaandBangladesh
ofjute; andChina isanimportant supplier ofcotton textiles (Chart IV.3b). However, import data
foroftextile andclothing products should beinterpreted withcaution: forexample, Hong Kong in
particular hasshifted fromexporting apparel totheUnited States toentrepôt trade, withitsre-exports
nowexceeding domestic exports.35
31WTO document G/AG/N/USA/3, 28March 1996 listsimports within quotas.
32US$397 pertonne ofrawsugar andUS$505 pertonne ofrefined beetsugar.
33Federal Reserve Bulletin, December 1995.
34U.S. International Trade Commission (1995); datasupplied bytheU.S. authorities; andSecretariat
calculations.
35GATT (1994b).United States WT/TPR/S/16
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Table IV.12
Overview ofthetextile andclothing sector, 1990-95
1990 1991 1992 1993 1994 1995
Textile production byvalue
(1990=100)100.0 99.4 107.1 113.2 116.9 116.1
Clothing production byvalue
(1990=100)100.0 95.5 97.8 100.0 103.1 98.7
Producer prices, average oftextiles
andclothing (1990=100)100.0 119.8 121.3 121.5 121.8 124.4
Textile employment ('000) 670.9a667.4 678.4 666.2 672.0 656.2
Clothing employment ('000) 1,017.4a1,024.1 1,017.6 977.2 954.3 915.8
Textile wages (US$ perhour,
annual average)b8.16a8.30 8.60 8.89 9.14 9.42
Clothing wages (US$ perhour,
annual average)b6.65a6.75 6.95 7.10 7.33 7.63
Textile imports (US$ billion)
Share ofworld imports
(percent)6.6
6.57.1
6.88.1
6.98.7
8.19.5
7.810.2
...
Clothing imports (US$ billion)
Share ofworld imports
(percent)27.2
23.927.9
22.433.2
23.335.8
25.738.9
25.941.6
...
a December 1990 data.
b Average annual private non-farm wage, perhour: US$10.34 (1991); US$10.59 (1992); US$10.83 (1993); US$11.12 (1994);
andUS$11.46 (1995).
Source: Council ofEconomic Advisors (1996), Annual Report, United States Government Printing Office, Washington; U.S.Department
ofLabor (various issues), Employment andEarnings, Bureau ofLabor Statistics; andUNSTAT Comtrade database.
38. U.S.exports oftextiles andclothing havegrown rapidly; textile exports reached US$7.1 billion
in1995, upfrom US$5.0 billion in1990, while exports ofclothing were US$6.4 billion in1995
compared toUS$2.4 billion in1990. Reflecting theimportance ofoutward-processing trade, U.S.
exports toMexico, Central American andCaribbean countries aredominated bycuttextiles andclothing
parts forassembly andre-export totheUnited States. U.S.exports ofclothing toJapan rosefrom
US$300 million in1990 toUS$900 million in1995, andthose toCanada from US$200 million to
US$500 million during thesame period; exports toother markets haveremained stable.36Foreign
affiliates ofU.S. companies accounted forUS$2.6 billion oftextile salesandforUS$6.1 billion of
clothing salesin1993,37inwhich yearU.S.clothing exports were US$4.7 billion.
36U.S. International Trade Commission (1995).
37U.S. Department ofCommerce (1995).WT/TPR/S/16 Trade Policy Review
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United States WT/TPR/S/16
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39. Further increases inimport penetration oftheU.S.clothing market canbeanticipated, clothing
production being alabour-intensive activity. Wages perhourintheclothing sector arearound two
thirds ofthemanufacturing average. Labour mobility allows workers tomove tohigher-paid jobs,
resulting ina"shortage" ofexperienced apparel workers.38Textile production, ontheother hand,
allows forverycapital-intensive production offabrics, asillustrated byU.S. textile imports from
high-wage economies suchasCanada andGermany. Theclothing sector hasthusbeenunder constant
competitive pressure andhasresponded withanincrease inproductivity, withtotalfactor productivity
rising from anannual average rateof0.5percentayearin1987-91 tosome 1.5percentayearin
1991-93.39
40. Flexible marketing andproduction havebeenimportant inthisproductivity growth. Observers
notethat"thecompetitive strength oftheindustry liesinitsability toimprove product quality and
develop market niches, strong brand names, andquick response tochanges inmarket demand".40
Proximitytoconsumerscombinedwithacomputerizedquickresponse(QR)systemenablesU.S.clothing
producers tobetter respond tochanges indemand andthusgives them animportant advantage over
imports. In1994, 72percentoftextile andclothing manufactures hadQRsystems inplace, compared
to60percentin1993.41
41. Outward processing hascontributed toproductivity growth inclothing. U.S.manufacturers
haveexpanded production-sharing operations, particularly intoMexico andtheCaribbean.42Under
outward-processing regulations, noimport duties orcustoms userfeesarelevied onU.S.-produced
intermediate inputs incorporated inre-imported finalproducts (Chapter III(2)). Inaddition, veryfew
binding quota restrictions apply under Guaranteed Access Levels (GALs) ifallintermediate inputs are
producedintheUnitedStates.43TextilesandclothingproductsimportedfromMexicothatareassembled
fromfabric cutandformed intheUnited States enterdutyfreeunder NAFTA, suchgoods fromCBERA
countries arestillsubject todutyonthevalue added offshore.44In1995, 89and82percentofMexican
andCBERA country apparel exports totheUnited States were made under outward-processing
38Ina1994 survey, 60percentofresponding plants noted aninadequate supply ofexperienced workers
compared to43percentin1993. (American Apparel Manufacturers 'Association, 1994).
39U.S. International Trade Commission (1995), p.5.
40U.S. International Trade Commission (1995), p.7.
41Kurt Salmon Associates (1994), p.3.
42Theimportance ofthistrade forsome oftheexporting countries concerned hasbeen noted intheTPRof
theDominican Republic (WTO, 1996).
43Guaranteed Access Levels (GALs) areidentified byU.S.tariff line9802.00.80.15 (previously Section 807A
oftheU.S.tariffschedule).Thisprogramme isavailabletoCBERA,andsince24August1995,ATPAdesignated
beneficiary countries (Chapter III(2)(iii)). TheUnited States hasnotified theWTO ofallGALs, perproduct
category andcountry existing on31December 1994 (WTO document G/TMB/N/66, 28April 1995). Subsequent
bilaterally agreed restraints withsome Caribbean countries under ATC Article 6havealsoincluded GALs. The
programme encourages theuseofU.S. textiles andintermediate products evenifthese products arepriced well
above world market prices; useofaminor itemnotproduced intheUnited States mayleadtocategorization
inabinding quota category.
44TheAdministration hassought Congressional approval forlegislation which would havegranted CBERA
countries parity toNAFTA treatment (Chapter II(2)(b)).WT/TPR/S/16 Trade Policy Review
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provisions.45Theimpact ofoutward processing varies perproduct butrepresents insome cases more
than18percentofU.S.shipments bydomestic U.S.firms (Table IV.13). Thetop15products using
theoutward-processing provisions represented atotalimport value ofUS$5.2 billion in1993, ofwhich
US$3.1 billion entered dutyfreeunder U.S. origin. Imports under outward-processing provisions
represented 15.4percentofallimports under these tariff lines.46
Table IV.13
Therôleof"Section 807" (outward processing) inshipments ofselected garments
(US$ million andpercent)
Item Shipments
(US$ m.,1993)Share of807imports intotal shipments peritem(percent)
1989 1993
Men'sandboys'trousers
andshorts7,480 8.3 15.0
Men'sandboys'shirts 6,823 3.4 7.8
Women 'sandgirls'trousers
andshorts5,047 6.3 13.0
Women 'sandgirls'blouses
andshirts4,580 4.4 6.4
Underwear 2,671 4.7 18.2
Men'sandboys'coats and
jackets2,150 3.6 7.1
Women 'sandgirls'coats
andjackets2,160 4.4 18.6
Foundation garments 1,579 21.5 32.1
Source: U.S. International Trade Commission (1995), Industry &Trade Summary Apparel, Office ofIndustries, Publication 2853,
Washington, D.C., p.21.
(ii) Trade policies
(a) Import measures
42. U.S.importsoftextilesandclothinghaveincreased,eventhoughtherehasbeenfairlysignificant
protection fortheproducts. Direct subsidies arenotanelement ofsubstantial assistance tothesector.47
Textile andclothing consumer products mustbelabelled showing thefibrecontent and,insome cases,
thename ofthemanufacturer andimporter (Chapter III(2)(iii)). Thisrequirement reportedly imposes
significant costsonclothing producers, butlesssofortextile manufacturers.48Import tariffs arewell
above themanufacturing average; inaddition, quantitative restrictions previously administered under
45U.S. International Trade Commission (1996), p.24.
46International Trade Commission (1995), p.24.
47In1995, subsidies under theAMTEX programme forcollaborative research between theDepartment of
Energy andtheintegrated textile andclothing industry, todevelop andapply advanced technologies ofmutual
interest,amountedtoUS$24.5million;subsidiesfromtheTextile/ClothingTechnologyCorporationProgram(C2),
amounted toUS$3.4 million (U.S. notification totheCommittee onSubsidies andCountervailing Measures,
circulated asWTO document G/SCM/N/3/USA, 15March 1996).
48U.S. International Trade Commission (1996).United States WT/TPR/S/16
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46. Inimplementing theintegration programme, CITA wasrequired toidentify thetariff lines
tobeintegrated ineachofthefourphases, asspecified intheAgreement, andinclude ineachofthe
integration stages "areasonable representation ofproduct fromeachofthefollowing groups: (1)tops
andyarns; (2)fabrics; (3)made-up products; and(4)clothing" andensure thatintegration ofthe
mostsensitive products willbedeferred untiltheendoftheten-year period".52CITA wasalsorequired
torequest comments from allinterested parties andtoconsult withrelevant advisory groups.
47. TheCITA haspublished thelistoftariff linesofthe1990 tariff schedule thatareincluded
ineachofthefourphases, buthasnotofficially notified ittotheWTO.53Thefourphases represent
16.21, 17.03, 18.11 and48.65 percent, respectively, of1990 imports oftextiles andclothing into
theUnited States byvolume.54None oftheproducts included inthefirstphase waspreviously covered
byquotas andmostweremainly imported fromdeveloped countries and/or Mexico. Thefirstphase
includes seatbelts (30.7 percentofthevalue of1990imports liberalized inthefirstphase); synthetic
yarns, topsandfibres (18percentofvalue) andsilkfabrics (12.7 percentofvalue). Byvolume (square
metre equivalent) in1990thefirstphase wasmade upoftopsandyarns (52percent), fabrics (15per
cent), made-up textile products (20percent)andclothing (12.2 percent). Asubstantial share ofimports
fromcountries currently subject toquantitative restrictions isclassified inphase 4,forwhich import
quotas aretoberemoved in2005 (Table IV.15).
48. Thequotas inplace during thelifeoftheATCaresubject toanautomatic "growth-on-growth"
provision. Thus, growth ratesofquotas under former MFA bilateral agreements wereincreased by
16percentformajor suppliers in1995, aretobeincreased byafurther 25percentinstage 2and
another 27percentinstage3,while for"small suppliers" (ie.exporters accounting forlessthan1.2per
centoftotalquotas asdefined on31December 1991) quota increases aretobeaccelerated byone
stage. TheU.S. authorities notethat"The effect ofquota growth acceleration willlikely besmall
intheearly years ofthetransition period, butbecome increasingly significant inthelatter years as
growth iscompounded".55
52Statement ofAdministrative Action (1994), p.771.
53"Committee fortheImplementation ofTextile Agreements: Final ListofProducts forSecond, third and
Final Integration ofTextile andApparel Products intoGATT 1994", Federal Register, Vol. 60,No.83,
1May 1995, p.21075.
54TheUnited States notified theproducts included inthefirstphase tothePreparatory Committee forthe
World Trade Organization (GATT document G/TMB/W/5, 10October 1994). Quantities ofeachproduct are
expressed assquare metre equivalents calculated onthebasis ofproduct-specific conversion factors.
55U.S. International Trade Commission (1996).WT/TPR/S/16 Trade Policy Review
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Table IV.15
Estimated value ofU.S.imports oftextiles andclothing covered bythefourphases ofintegration oftheATC, byorigin, 1995
(US$ million andpercent)
Percentage share ofimport value intotheUnited States, bycountrya
SourceTotal
(US$ million)Phase 1 Phase 2 Phase 3 Phase 4
Total
China
Hong Kong
Mexico
Chinese Taipei
Korea (Rep. of)
Canada
India
Dominican Republic
Italy
Philippines
Indonesia
Thailand
Bangladesh
SriLanka
Pakistan
Honduras
Turkey
Costa Rica
Macao
Malaysia
Guatemala
Japan
ElSalvador
Germany
Jamaica
United Kingdom
France
Israel
Singapore
Colombia
Allother46,648.4
5,795.5
4,457.1
3,607.2
2,544.7
2,390.4
1,895.5
1,759.2
1,722.0
1,694.3
1,553.7
1,323.0
1,246.9
1,071.0
973.2
965.8
934.8
810.5
770.0
751.5
740.9
698.7
646.2
607.1
541.0
530.4
523.2
429.1
429.0
425.7
391.2
4,423.73.1
2.8
0.1
7.1
2.9
5.8
11.4
4.7
0.9
2.9
0.3
0.8
1.6
2.1
1.3
0.4
0.0
1.0
0.6
0.0
0.3
0.2
13.4
0.0
15.8
0.0
8.8
5.7
0.1
0.0
0.0
2.36.5
12.9
2.7
4.9
7.3
5.2
10.8
5.7
1.8
6.3
9.6
2.6
8.9
3.3
2.8
0.4
0.3
1.8
5.2
3.3
3.0
2.0
8.3
4.5
10.7
20.3
21.4
15.1
3.8
3.7
13.7
5.25.5
4.9
3.1
4.3
5.9
5.0
14.1
6.2
3.0
7.5
3.5
2.6
2.8
5.9
5.0
10.9
2.7
14.0
1.2
1.6
1.4
1.8
14.8
2.8
13.9
2.6
12.1
11.0
7.8
1.4
3.2
6.165.7
39.7
79.8
66.3
70.0
64.6
47.4
68.4
75.7
60.2
65.4
81.7
70.9
77.8
74.3
76.4
83.7
77.0
70.5
84.4
85.4
87.1
37.9
81.2
35.5
70.2
39.9
48.9
74.3
91.7
60.7
65.5
a Theindicated shares areestimated minimum shares. They donotaddto100percent,as1,261 tarifflinesforwhich thedescription
haschanged between 1990 and1995 could notbeallocated among respective phases.
Note: MFA restrictions andquotas administered under theWTO Agreement onTextiles andClothing arenotapplied todeveloped OECD
member countries ortoMexico.
Source: WTO Secretariat based ondataprovided byUSGovernment.
49. Section 334oftheUruguay Round Agreements Act,aselaborated intheStatement of
Administrative Action, changed therules oforigin applied toimports oftextiles andclothing, with
effect from 1July1996. Theprinciples contain athree-tier testfordetermining origin:
- ifaproduct iswholly "obtained orproduced" inaparticular source, or,inthecaseofyarns,
threads, twines, ropes, cables orbraid, ifthefibres arespunorextruded inthesource or,in
thecaseoffabrics, iftheconstituent fibres, filaments oryarns areprocessed intofabrics in
thatsource;
- forcertain other products (HS5609, 5807, 5811, 6209.20.50.40, 6213, 6214, 6301, 6302,
6303, 6304, 6305, 6306, 6307.10, 6307.90, 6308 or9494.90) theabove ruleapplies;WT/TPR/S/16 Trade Policy Review
Page 132
being agreed (Honduras, underwear); andintwocases therestraints remained inplace without the
TMB being inaposition toreach consensus onarecommendation (Costa Rica, underwear; andIndia,
women ’swool coats). Thelatter twocases were appealed todispute settlement panels. Asthe
UnitedStatesrescindedtherestrictionagainstimportsofwomen’swoolcoatsfromIndia,panelactivities
onthiscasestopped (Table AII.2(c)).
53. TheUnited States consulted withPakistan regarding thealleged circumvention byPakistani
companies ofanimport quota onbedsheets (UScategory 361), through trans-shipment viaBangladesh.
Intheabsence ofasolution Pakistan referred thisissue totheTMB foritsconsideration. TheTMB
wasinformed, during itsreview ofthismatter, thatamutually agreed solution hadbeenreached between
theparties.
54. TheUnited States hasnotified someofthequotas thatitmaintains ontextile andclothing imports
fromnon-WTO members (Table IV.14).59These quotas generally grow ataslower ratethanquotas
from WTO members; andthephasing outofimport quotas, asagreed under theWTO Agreement
onTextiles andClothing, doesnotapply tonon-members. In1994, theUnited States andChina
concluded athree-year bilateral textiles agreement which provided fornoquota growth in1994 and
1percentquota growth in1995 and1996 (Table AII.1). Inaddition, 1995 and1996 quotas were
adjusted forovershipment during previous years aswellasalleged circumvention.60Virtually alltextile
andapparel imports from China areunder quota. According totheU.S.authorities, imports ofall
textile andclothing from China havefallen from US$6.4 billion in1994 toUS$5.9 billion in1995
andfurther toUS$5.6 billion onayear-ending June1996 basis.
(4) Motor Vehicles andtheirComponents
(i) Recent developments
55. TheUnited States istheworld 'slargest producer ofmotor vehicles, with25percentofworld
production byvolume. Vehicles andparts represent 5percentofU.S. consumer expenditure;
production generated 6.8percentofmanufacturing value added in1993(upfrom6percentin1990)
andthesector employed 933,000 people in1995(Table IV.16).61In1995, motor vehicles andrelated
products werevalued at14percentofU.S.merchandise imports and8.5percentofU.S.merchandise
exports.
56. Foreign affiliates 'production intheUnited States was1.95million carsand386,000 trucks
in1995, anoverall increase of14.8percentfrom1990, asignificant inflow ofdirect investment during
period.62Sales byaffiliates offoreign companies intheUnited States were US$40 billion in1993,
compared toUS$180 billion ofsalesbyforeign affiliates ofU.S.companies.63During thesameperiod,
sales ofimported vehicles fellfrom over3million to1.9million vehicles. Nevertheless, thevalue
oftrade inmotor vehicles andparts continued toincrease. In1994, U.S. imports accounted for
59WTO document G/TMB/N/66, 28April 1995.
60U.S. International Trade Commission (1996), Annual Statistical Report onU.S. Imports ofTextiles and
Apparel: 1995, Investigation No.332-343, Publication 2987, August, Washington, D.C.
61SICsector 317(motor vehicles andequipment) issued asaproxy fortheindustry, although significant output
andemployment ofvehicle parts isalsorealized inother sectors.
62U.S. Department ofCommerce, based onWard 'sAutomotive Report.
63U.S. Department ofCommerce (1995); andU.S. Department ofCommerce (1995).United States WT/TPR/S/16
Page 133
27percentofworld imports ofthese products; exports accounted for12percentofworld exports.
TherehasbeenextensivecompetitionamongStatestoofferincentivestoattractnewinvestment,including
taxcredits, training andrealestate forlocation ofproduction facilities.64
Table IV.16
Overview ofU.S.production andtrade ofautomotive products, 1990-95
1990 1991 1992 1993 1994 1995
Production (1990=100) 100.0 93.5 106.3 121.7 139.8 140.5
Share inworld volume ofcarsproduced (percent) 20.1 18.8 20.2 23.3 24.8 ...
Employmentb(thousand) 778.9a776.2 812.2 820.4 885.4 933.1
Exports (US$ billion)c28.7 30.1 35.6 38.9 43.8 46.2
Asashare ofU.S. merchandise exports (percent) 7.7 7.8 8.5 9.0 9.2 8.5
Asashare ofworld exports ofautomotive
products (percent) 9.7 10.2 10.6 12.0 11.9 ...
Importsc74.0 72.2 75.7 83.8 95.6 100.7
Asashare ofU.S. merchandise imports (percent) 14.5 14.5 13.9 14.2 14.1 14.7
Asashare ofworld imports ofautomotive
products (percent) 25.8 25.1 23.0 26.7 27.3 ...
... Notavailable.
a December 1990.
b U.S. Standard Industrial Classification 371.
c SITC category 732.
Source: Council ofEconomic Advisors (1996), Annual Report, U.S.Government Printing Office, Washington, D.C.; U.S.Department
ofLabor (various issues), Employment andEarnings, Bureau ofLabor Statistics andU.N. Comtrade database.
57. U.S.producers havereacted positively toforeign competition byrestructuring production and
raising productivity.65Wages perhourhavehistorically beensignificantly higher forworkers engaged
inproduction ofmotor vehicles thaninindustries producing parts(Table IV.17); inaddition, labour
costsforthethreemainU.S.manufacturers (General Motors, FordandChrysler) havereportedly been
higher thanforforeign manufacturers operating intheUnited States.66Totakeadvantage ofthelower
wages intheparts industry andtoincrease flexibility, U.S. manufacturers haveresponded bothby
outsourcing intermediate inputs toproducers intheUnited States andthrough theintegration ofU.S.
production withtheactivities ofaffiliates abroad.67Theresultant company-specific productivity gains,
havehelped tomake theU.S.automobile industry more competitive onworld markets.
64Plumstead, Russell andStuewe (1993), pp.163-180.
65Nelson (1996), pp.133-191.
66Factors explaining thistrend mayinclude costadvantages coming from theestablishment of"greenfield",
high-technologyassemblyplantsbynewentrants;moreflexibleworkingpracticesandtheemploymentofyounger
workers (Graham andKrugman, 1995).
67Thecorporate strategy ofGeneral Motors appears togivegreater attention tosourcing intermediate products
from subcontractors while integration withforeign affiliates appears tobeanimportant element oftheFord 2000
strategy.WT/TPR/S/16 Trade Policy Review
Page 134
58. Canada, Japan, theEuropean Union andMexico aretheUnited States 'maintrading partners
forautomotive products. Trade withthesecountries hasmade intensive useoftheoutward-processing
provisions oftheU.S.tariff schedule. However, between 1991 and1994, imports ofmotor vehicles
under outward-processing provisions declined fromUS$31 billion toUS$23 billion (Chapter III(2)(ii));
most ofthisfallwasinimports from Japan, which fellfrom US$15.8 billion toUS$9.3 billion as
Japanese producers expanded manufacturing intheUnited States. Outward processing inCanada has
expanded mainly under theprovisions oftheCanada-U.S. FreeTrade Agreement andtheNAFTA,
which givemore advantageous treatment thanthem.f.n. outward processing provisions.68Rules of
origin applied under NAFTA toautomobile imports fromCanada andMexico alsoprovide producers
withastrong incentive touseintermediate inputs produced inNAFTA countries (Table III.2). During
1990-95, theUnited States hasmaintained asurplus intradeinvehicle partswithCanada, and,except
in1991 and1992, hasbeenindeficit ontheitemwithMexico.
(ii) Policy developments
(a) Import measures
59. Under theUruguay Round Agreement, U.S. tariffs oncarparts have declined from an
unweighted average of1.9percentin1992 to1.7percentin1996 (Table IV.18). Import tariffs on
automobiles remained unchanged at2.5percent. Import tariffs fortrucks range from 2.4to25per
centin1996; theunweighted average declined from 20.3percentin1992 to19percentin1996.
Duties onimports fromCanada andMexico arebeing phased outunder NAFTA, provided theysatisfy
therelevant rulesoforigin (Table III.2). Anti-dumping orcountervailing measures havenotbeenused
intheautomobile sector. However, theuseofsuchtrade remedy measures onother products (such
assteel), aswellasimport restrictions ontextile products, arelikely tohaveincreased input prices
forU.S.automobile producers. Seatbelts havebeenincluded inthefirstphase ofintegration under
theAgreement onTextiles andClothing (section (3)(ii)).
Table IV.17
Wage rates inthemotor vehicle sector, annual averages, 1990-95
(US$ perhour)
SICsubsectora1991 1992 1993 1994 1995
Final product
3711, motor vehicles andbodies 18.34 18.32 19.44 20.71 20.57
Carparts
3465, automotive stampings 15.09 15.26 16.06 16.61 16.38
3592, carburettors, piston ringvalves 12.42 12.81 13.28 13.59 13.99
3691, storage batteries 12.91 13.04 13.73 14.21 14.38
3694, engine electrical equipment 12.26 12.56 13.37 13.42 13.93
3714, motor vehicle parts andaccessories 13.79 13.95 14.78 15.37 15.89
Other
371,Sector average 15.32 15.33 16.14 16.97 17.25
Average private non-farm wage 10.34 10.59 10.83 11.12 11.46
a U.S. Standard Industrial Classification Code anddescription.
Source: U.S. Department ofLabor (various issues), Employment andEarnings, Bureau ofLabor Statistics.
68U.S. International Trade Commission (1994)United States WT/TPR/S/16
Page 135
Table IV.18
Import tariffs applied tocarsandcarparts
1992 1995 1996a
Car
parts Cars TrucksbCar
parts Cars TrucksbCar
parts Cars Trucksb
Number oftariff
lines 39 8 9 71 8 9 71 8 9
Tariff average
(percent) 1.9 2.5 20.3 1.8 2.5 19.7 1.7 2.5 19.0
Tariff range
(percent) 0-4 2.5 4-25 0-4 2.5 3.2-25 0-4 2.5 2.4-25
a According tothe1995 nomenclature.
b Motor vehicles forthetransport ofgoods, Chapter 8704 ofthe1995 HStariff classification.
Source: WTO Secretariat based oninformation provided bytheU.S. authorities.
60. Voluntary export restrictions onpassenger carsfromJapan wereterminated inMarch 1994.69
AnewSection 301action, initiated bytheUSTR inOctober 1994, wasterminated following the
conclusion oftheU.S.-Japan Automotive Agreement inJune1995(Table III.5andChapter II(3)(iv)(c).70
On28September 1995, theUnited States andtheRepublic ofKorea alsoreached an"Automotive
Memorandum ofUnderstanding"71.TheUnited States hasalsoheldconsultations withBrazil onthe
69GATT (1995).
70TheU.S.-Japan Automotive Agreement wassigned on23August 1995, butcame intoeffect on28June.
Itconsists ofsixChapters: goals andgeneral policies, measures toencourage imports andtofacilitate market
access toforeign vehicles inJapan, measures toexpand purchases offoreign parts byJapanese firms inJapan
andthrough theirtransplants, regulatory reform bytheGovernment ofJapan, assessing implementation ofthe
measures, andconsultations. Japan 'scommitments, which areimplemented onanm.f.n. basis, include providing
information, exhibition space andimport promoting finance toforeign vehicle manufactures; supporting Japanese
vehicle manufacturers 'efforts toexpand research anddevelopment inforeign countries; increasing suppliers '
sales opportunities without adverse discrimination based oncapital affiliation; continuing open design-in and
procurementprocessestoforeignpartssuppliersinJapanandtosuppliersinothercountries;initiatingderegulation
oftheauto-parts after-market inJapan; andreviewing regulations, upon request byforeign vehicle manufacturers
andautoparts suppliers, toimprove market access. Aspecific listofregulations covered wasincluded inthe
Agreement. TheGovernment oftheUnited States wasto"provide support forU.S. vehicle manufacturers to
expand exports ofU.S. motor vehicles toJapan". Implementation oftheAgreement wastobemonitored by
thetwoGovernments based onobjective criteria which "donotconstitute numerical targets, butrather areto
beused forthepurpose ofevaluating progress achieved". Under theAgreement, theGovernments ofJapan
andtheUnited States notethattheyareprepared toholdannual consultations toassess theimplementation of
themeasures. InSeptember 1996, theUnited States andJapan heldtheir firstfollow-up meeting under the
Agreement; Canada andtheEUparticipated asobservers.
71UndertheMemorandumofUnderstanding,Koreaagreedto"liberalizestandardsandcertificationprocedures,
reduce taxes thatdiscriminate against imported vehicles, permit foreign advertisers equal access totelevision
advertisingtime,allowforeignmajorityownershipofautoretailfinancingentitiesandimproveconsumerperception
ofautoimports inthatcountry. Korea isalsocommitted nottointroduce anynewmeasures thatadversely affect
market access". TheMemorandum istobeimplemented onanm.f.n. basis. Under theAgreement, theU.S.
Department ofTreasury andtheKorean Ministry ofFinance andEconomy willcontinue todiscuss matters
associated withfinancing ofpassenger vehicles; implementation ismonitored bilaterally onthebasis ofKorean,
U.S.andotherpubliclyavailabledata(ChapterII(3)(iv)(d)).DetailsofKorea'scommitmentsundertheAgreemen t
arediscussed intheTrade Policy Review ofKorea (WTO, 1996).WT/TPR/S/16 Trade Policy Review
Page 136
latter'sautomobile policies inthecontext ofthe1995 WTO balance-of-payments consultations and
under dispute settlement procedures (Table AII.2c).
61. Allmajor automobile producers intheUnited States havelocated some oftheiractivities in
foreign tradesubzones (Chapter III(2)(ii)).72Firms based insuchasubzone maychoose whether import
duties areassessed onimported rawmaterials andintermediate inputs, oronthefinal product
(Chapter III(2)).73Firms choosing topaydutyonimported inputs arelikely tohaveacostadvantage
inusing U.S.produced rawmaterials andintermediate inputs; however, thisadvantage disappears
ifaggregate duties onimported inputs arehigher thanthose assessed onthefinalproduct. Foreign
manufacturers import asignificantly larger share oftheirinputs thanU.S.firms, although thedifference
isbecoming smaller overtime.
(b) Technical regulations andintellectual property issues
62. Automobiles andtheirparts, whether domestic orimported, aresubject toasignificant number
oftechnical requirements (Chart III.11). Policing ofthese requirements isundertaken onthebasis
ofself-certification enforced byproduct liability laws(Chapter III(7)).74TheAmerican Automobile
Labelling Actprovides that,fromOctober 1994, passenger carsandotherlightvehicles mustbelabelled
withtheproportion ofU.S./Canadian made partsandthefinalpointofassembly.75Theadministration
ofthese labelling requirements mayentail significant costs toboththeregulating authority andthe
producers.76Since thelastTrade Policy Review, theEnvironmental Protection Agency (EPA) has
promulgated rules amending theCorporate Average FuelEconomy (CAFE) Acttoinclude certain
alternative-fuelled automobiles, suchasthose driven bymethanol, ethanol, other alcohols ornatural
72In1992,GeneralMotorsoperated16subzoneswithatotalshipmentvalueofUS$17.2billion;Fordoperated
tensubzones withatotalshipment value ofUS$8.9 billion; Chrysler sixzones withatotalshipment value of
US$4.3 billion; Honda twozones withatotalshipment value ofUS$4.9 billion; Toyota onezone withatotal
shipment value ofUS$2.0 billion andNissan onezone withatotalshipment value ofUS$1.4 billion (four other
zones were operated byjoint ventures andSubaru-Isuzu) (Swenson, 1996).
73Foreign Trade Zones Actof1934, Section 3.
74Some industry officials haveasserted thatclaims under product liability laws"arethebiggest threat toU.S.
carmakers,notforeigncompetitionornewtechnology"(Mr.RichardWagoner,HeadofNorthAmericanoperations
atGeneral Motors, quoted inFinancial Times, 2April 1996)
75Manufacturers arerequired tolabel passenger motor vehicles withthefollowing: (i)thepercentage of
U.S./Canadian equipment (parts) content; (ii)thenames ofanytwocountries, other thantheUnited States and
Canada, which individually contribute 15percentormore oftheequipment content, andthepercentage content
foreach suchcountry; (iii)thefinal assembly place bycity,State (where appropriate), andcountry; (iv)the
country oforigin oftheengine; and(v)thecountry oforigin ofthetransmission. Suppliers areallowed greater
flexibility inmaking estimates. Dealers arerequired tomaintain thelabel oneachvehicle. (U.S. International
Trade Commission (1996), Table 3.1).
76"Annual operating costs tocomply withtheAmerican Automobile Labelling Act(AALA) estimated tobe
US$2millionin1995for23automobileproducers,accordingtotheNationalHighwayTrafficSafetyAdministration
(NHTSA). Separate start-up costs forthese producers were estimated byNHTSA atUSS13 million. Combined
start-upandfirst-yearoperatingcostsofAALAlabellingfor15,000autopartscompaniesareestimatedbyNHTSA
torange from US$600 million toUS$1.2 billion, averaging $40,000 to$80,000 perfirm" (U.S. International
Trade Commission (1996). Thesame report noted thattheNHTSA estimated thatthecosts totheGovernment
ofadministering andenforcing theAALA increased from US$91,725 during fiscal year1993/94 toUS$136,713
during fiscal year1994/95.United States WT/TPR/S/16
Page 137
gas.Therulesprovide CAFE "credits" forthesetypes ofautomobiles.77InJanuary 1993, EPAgranted
thestateofCalifornia authority topromulgate motor vehicle emission standards thataremore stringent
thanthefederal norm (Chapter III(7)(iii)(c)). Other states mayadopt California 'sregulations aslong
astheymake nochanges tothem.
63. Reportedly, differences between U.S.andEuropean standards increase thecostofdesigning
anddeveloping automotive products substantially.78Private sector proposals forharmonization of
standards andmutual recognition ofconformity assessment (testing) werediscussed during ameeting
oftheTransatlantic Business Dialogue (Chapter II((3)(iv)(b)).
64. Automobile products contain many items protected bypatents. Asnoted inChapter III(8)(iii),
although parallel imports oftrademark-protected products maynot,generally, beprevented bythe
owner ofthetrademarks iftheyareidentical totheproducts soldintheUnited States, parallel imports
ofpatented goods incorporated insuchitems may,bycourtorder, beprevented fromentering themarket
under Section 337oftheTariff Actof1930.79
(5) Pharmaceuticals
(i) Overview
65. TheUnited States istheworld 'slargest single market forpharmaceutical preparations, with
totalsalesofUS$55 billion in1995, more thantwice thevalue forJapan, thesecond largest market.
Production, driven byinvestments, isrealized atmarginal costsgenerally wellbelow prices. Protection
forintellectual property rights (patents andtrademarks) isseenbytheindustry asbeing ofvital
importance toallow established producers tomaintain prices above marginal costsoastorealize a
return ontheirinvestment inresearch andprovide funding forthedevelopment ofnewproducts. The
research-intensive nature ofproduction hascontributed towages above themanufacturing average
(Table IV.19)
66. Exports andimports ofpharmaceuticals (SITC category 54"Medical andpharmaceutical
products") wererespectively US$6.4 andUS$5.6 billion in1995, upfromUS$4.1 andUS$2.5 billion
in1990. U.S.imports andexports ofpharmaceutical products were11and8percentofworld trade
in1990-95. Foreign salesintheUnited States, andsalesbyU.S.firms abroad, arerealized mainly
through foreign direct investment; sales byforeign companies intheUnited States amounted to
US$32 billion in1993while salesbyforeign affiliates ofU.S.companies wereUS$41 billion in1993.80
Sales through foreign affiliates in1993 werethusmore thansixtimes aslarge asexports orimports.
Europe wasbyfarthelargest trading partner interms ofexports, imports andsalesbyforeign affiliates
(Chart IV.4).
7759Federal Register 39,638(1994).
78TheBureau ofNational Affairs (1996), pp.641-642.
79Asof31December 1994, imports ofcertain automotive fuelcapsandradiator capsandrelated packaging
andpromotional materials from Chinese Taipei were banned from entering theUnited States under Section 337
ofthe1930 Tariff Act.codified as19U.S.C. Section 1337 (Chapter III(8)(i)(b)).
80Sales of"Drugs" asdefined inU.S. Department ofCommerce (1995a andb).WT/TPR/S/16 Trade Policy Review
Page 138
Table IV.19
Overview ofthepharmaceutical sector, 1990-95
1990 1991 1992 1993 1994 1995
Production (US$billion)a53.7 60.8 68.0b69.7b76.7b...
Employmenta('000people annual
average)242.2c247.1 251.4 261.2 264.6 259.5
Wages (US$ perhour, annual
average)a13.12c13.54 14.04 14.70 14.83 15.20
Exports (US$ billion)d
Share ofworld exports (%)4.1
11.14.6
11.45.4
11.05.7
11.46.1
10.56.4
...
Imports (US$ billion)d
Share ofworld imports (%)2.5
7.23.1
7.93.9
7.94.2
8.44.8
8.35.6
...
... Notavailable.
a SICsector 283,drugs
b Estimate asreported inU.S. Department ofCommerce (1994).
c December 1990 data.
d SITC category 54,medical andpharmaceutical products.
Source: U.S.Department ofCommerce (1994) U.S.Industrial Outlook 1994, International Trade Administration, Washington, D.C.;
U.S.Department ofCommerce (1995), Statistical Abstract oftheUnited States, 1995, Washington, D.C.; U.S.Department
ofLabor (various issues), Employment andEarnings, Bureau ofLabor Statistics; andUNSTAT, Comtrade database.
United States WT/TPR/S/16
Page 139
67. Import tariffs havebeenlowinthissector, 4.6percentpriortothecompletion oftheUruguay
Round andpractically zerosince then(Table IV.20).81Asof31December 1995, theUnited States
applied anti-dumping duties toaspirin imported from Turkey; nocountervailing measures were in
place against imports ofpharmaceuticals; andnoWTO member hasnotified anti-dumping or
countervailing measures against U.S.exports ofpharmaceuticals. Government intervention through
public drugexpenditure hasalsobeenlowat10percentin1985, much smaller thaninother developed
countries, inwhich thecomparable figure wasover50percent, except inCanada where itwas
23percent.82Bycontrast,technicalrequirementsandtheprotectionofintellectualpropertyareimportant
forthepharmaceutical industry andhaveasignificant effect onforeign trade.
Table IV.20
Import tariffs applied topharmaceuticals (SITC category 54)
1992 1995 1996a
Number oflines 98 90 90
Number oflineswithspecific duties 1 - -
Simple tariff average ofadvalorem duties 4.6 0.1b0.1b
Range ofimport duties 0-16.2 0-3.7b0-3.7b
Number oflineswithzeroimport duties 11 87b87b
a According tothe1995 tariff classification.
b Import duties areapplied tothefollowing products: 2938.90.00 (other thanglycosides, natural orreproduced bysynthesis, and
theirsaltsethers, esters andother derivatives: other thanrutoside (rutin) anditsderivatives) -3.7percent; 2938.10.00 (rutoside
(rutin) anditsderivatives) -1.5percent; 2941.20.10 (streptomycins andtheirderivatives; saltsthereof: dihydrostreptomycin
anditsderivatives) -3.5percent.
Source: WTO Secretariat based oninformation provided bytheU.S. authorities .
(ii) Regulatory framework; standards andprotection forintellectual property
(a) FDA approval policies
68. Bylaw,theFederal Food andDrug Administration (FDA) ismandated toapprove all
pharmaceutical products soldintheUnited States (Table IV.21). The1962 amendment oftheFood,
DrugandCosmeticsActof1938authorizestheFDAtotestbothpharmaceuticalproductsandtheprocess
which produces theproducts; rawmaterials andintermediate inputs intheprocess arealsotobe
81TheUnited States iscommitted toelimination ofallduties andcharges asdefined within themeaning of
Article II.1(b) oftheGeneral Agreement onTariffs andTrade (1994) onallpharmaceutical products, asspecified
inGATT document L/7439, 25March 1994. In1996 import duties areapplied tothefollowing products:
2983.90.00 (other thanglycosides, natural orreproduced bysynthesis, andtheirsalts, ethers, esters andother
derivatives, other thanrutoside (rutin) anditsderivatives) -3.7percent; 2938.10.00 (rutoside (rutin) andits
derivatives) -1.5percent; 2941.20.10 (streptomycin andtheirderivatives; saltsthereof; dihydrostreptomycin
anditsderivatives) -3.5percent.
82Ballance, Pogány andForster (1992), p.47.WT/TPR/S/16 Trade Policy Review
Page 140
approved. Observers notethatthecurrent drugapproval process takesanestimated eighttotenyears.83
Approved drugs havetobeproduced according toFDAguidelines, which gobeyond those established
bytheWorld Health Organization (Table AIV.9)
Table IV.21
Selection ofdrug approval acts
Act Main regulation
PureFood andDrugs Actof1906 -foodmaynotbeadulterated ormislabelled
Food, Drug andCosmetic Actof1938 -drugmanufacturers arerequired toprove adrug'ssafety before itcould be
soldtothepublic.
-FDA approves orrejects a"new" drugwithin 60days.
1962 Kefauver-Harris Mendment tothe1938
Act-drugmanufacturers were required toprove bysubstantial evidence thatany
newdrugwasnotonlysafebutalsoeffective; and
-theFDA wasfreetotakewhatever timenecessary forapproving anew
drug.
1984 Drug Price Competition andPatent
Restoration Act.-allowed thepharmacist tosuggest tothepatient generic alternative ofa
prescribed brand drug;
-ageneric drugcompany canmarket aproduct bydemonstrating tothe
FDA thatthedrugisbioequivalent totheoriginal one. Thisisalow-cost
experiment which contrasts withthelengthy andcostly teststhese generic
companies were required toundertake; and
-restored partofthepatent lifewhich drugs hadlostasthepre-market
testing process byfirms andtheFDA -asaconsequence ofthe1962
reforms -lengthened. (equal tothesumofthedrugapplication review time
bytheFDA plusonehalfoftheclinical testing time. Themaximum
extension isfiveyears andnoextension beyond 14years ofeffective patent
lifewillbeallowed)
Source: Lindemann,Eric(1994),"ImportingAIDSDrugs:FoodandDrugAdministrationPolicyanditsLimitations",TheGeorgeWashington
Journal ofInternational LawandEconomics, Vol.28,No.1,pp133-170; andNogúes, Julio(1990), "Patents andpharmaceutical
drugs: understanding thepressures ondeveloping countries", Journal ofWorld Trade, Vol.24,December, No.6,pp.81-104.
69. In1988, over-the-counter pharmaceuticals represented 23percentofallpharmaceutical sales
intheUnited States; theyhaveincreased market share sincethen. Asimplified FDAapproval procedure
isavailableforover-the-counterpharmaceuticals.TheFDAapprovestheingredientsofover-the-counter
drugs, sothatproducts derived from these ingredients maybemarketed simultaneously. Ingredient
approval isbased ontheU.S.market history oftheproduct.
70. Bilateral agreements mayfacilitate imports fromandexports toselected trading partners. The
FDA requires imported drugs andtheiringredients tobetested before theyareexported totheUnited
States (Chapter III(7)). Imports fromSweden areexempt from thispolicy, astheUnited States and
Sweden mutually recognize eachother'sstandards forpharmaceuticals.84Bilateral mutual recognition
agreements with EUmember States willfurther strengthen thealready large bilateral trade in
pharmaceutical products between theUnited States andtheEU(Chart IV.5).
71. Imports ofnon-approved drugs areprohibited, andpatent-protected pharmaceuticals maybe
prevented bytheowner ofthepatent (Chapter II(8)(iii)). Anexception applies toimports ofnon-
83Lindemann (1994), pp.13-170. Theauthor notes thatspecial rules apply "that accelerate thedrugtesting
andapproval process inaneffort toallow people withserious orlife-threatening diseases toobtain drugs quickly"
(p.134).
84Ballance, Pogány andForster (1992, p.148)United States WT/TPR/S/16
Page 141
approvedpharmaceuticalsforpersonaluse.Theexceptionallowsdrugstotreatseriousorlife-threatening
diseases85tobeimported intotheUnited States provided that:(1)theproduct ispurchased forpersonal
use;(2)theproduct isnotforcommercial distribution; (3)thequantity oftheproduct isnotexcessive;
and(4)thepatient seeking toimport theproduct affirms inwriting thatitisforthepatient 'sownuse
andprovides thename andaddress ofthetreating physician.86
(b) Protection forintellectual property rights
72. Pharmaceuticals areeligible forpatent andtrademark protection. Asof8June1995, patents
arevalid for20years from filing.87The1984 Drug Price Competition andPatent Restoration Act
restored partofthepatent lifewhich drugs hadlostasthepre-market testing process byfirms and
theFDA. Themaximum extension isfiveyears andnoextension beyond 14years ofeffective patent
lifeisallowed (Table IV.21).88Following theexpiry ofpatent protection, pharmaceuticals maybe
produced asgenerics.89Generics represent asignificant share oftheU.S.market forpharmaceutical
products, reportedly above 50percentinsome major therapeutic classes.90
73. Intellectualpropertyprotectionisalsolikelytobeanimportantdeterminantofforeigninvestment,
asperceived inadequacies intheprotection ofintellectual property rights insome U.S.trading partners
hasbeenaparticular concern ofpharmaceutical companies investing abroad.91
(c) Prices andcompetition policy
74. U.S. prices ofpharmaceuticals arehigher thaninmost ofitstrading partners. Astudy by
theU.S.General Accounting Office investigates price differences forthesame drugs marketed inthe
United States andtheUnited Kingdom. Thestudy concluded "Ofthe77drugs wecompared, 66drugs
were priced higher intheUnited States while 11drugs were priced higher intheUnited Kingdom.
Forty-seven (or61percent)ofthe77drugs werepriced more thantwice ashighintheUnited States
8521C.F.R., section 312.80 (1994) states that"[t]hese procedures reflect therecognition thatphysicians and
patients aregenerally willing toaccept greater risks orsideeffects from products thattreatlife-threatening and
severely-debilitating illnesses, thantheywould accept from products thattreatlessserious illnesses" (cited in
Lindemann, 1994, p.140) .
86U.S. Food andDrug Administration (1989).
87Transitional provisions apply toapplication filed before 8June 1995 (Chapter III(8)(i)(a)).
88Effective patent lifeistheperiod thatpatents canactually beworked aftertheproducts based onthese patents
have been approved bytheFDA.
89Following theimplementation oftheUruguay Round Agreement Actvarious proposals have been made
toallow generics onthemarket prior totheexpiration ofthepatent. These proposals have notbeen adopted
asat30July1996.
90Nogués (1990), pp.81-104. "More specifically, thegeneric drugs share intotalprescriptions isnowhigher
than50percentinthefollowing therapeutic classes: cardiovascular, anti-diabetes, tranquilizers, anti-arthritis,
antibiotics,andanalgesics".HemantK.Shah,HKSGenericDrugIndustryMonitor,1April1990,citedinNogués
(1990).
91Mansfield, Edwin (1995) Intellectual Property Protection, Direct Investment andTechnology Transfer
Germany, Japan andtheUnited States, International Finance Discussion Paper No.27, Washington, D.C.WT/TPR/S/16 Trade Policy Review
Page 142
asintheUnited Kingdom".92Thepricedifferences persisted ifadjusted formanufacturers 'discounts
available tobulkconsumers intheUnited States andthemorewidespread availability ofgeneric products
intheUnited States thanintheUnited Kingdom. Ingeneral, price differentials tended tobesmaller
fordrugs thatentered theU.K. market relatively recently.
75. Practically nopricecontrols areapplied topharmaceuticals bythefederal orStateauthorities.93
Anti-competitive behaviour ofpharmaceutical firms iscontrolled bygeneral competition andanti-trust
policy (section III(4)). Alarge number offirms serve theU.S.market, in1990 themarket share of
thelargest firmwas7percent, thatofthefivelargest firms 22.5andthatofthetenlargest firms
35.5percent.94However, in1995, small retail pharmacists initiated legalproceedings alleging that
pricedifferentiation between large-scale purchasers andretailers, leading tolower prices inchain drug
stores andlarge-scale health-maintenance organizations (seebelow) wasanindication ofunfair
competition. InJanuary 1996, itwasreported thatagroup ofbigpharmaceutical companies hadagreed
inprinciple topay$600 million tosmall retail pharmacists intheUStosettle claims ofprice-fixing.
Thedrugs companies involved inthedealclaimed thatanydiscounts were onlyvolume-related.95
(iii) Private sector response
76. TheU.S.authoritiesmaintainastrongregulatoryframeworkfortradeinpharmaceuticalproducts.
However, regulations areenforced onanon-discriminatory basis ofnational treatment, andprivate
foreign investors arefreely allowed entry toserve theU.S.market.
77. Consumers havealsoresponded toregulatory import restrictions onpharmaceutical products
andtodomestic prices, which arewellabove world market prices. Private insurance companies and
HealthMaintenanceOrganizationsnegotiatevolumediscountswithpharmaceuticalcompaniesandreduce
costsbylimiting thepatient 'schoice ofproducts. Inspecific areas, suchasAIDS-related drugs, buyers '
clubshavebeenestablishedtoexploitthepersonaluseexemptionavailabletoimports(section(a)above).
Observers havenoted that"Buyers 'clubs havenowbecome institutionalized andhavebeenallowed
toextend theboundaries ofwhatthepersonal useexception wasoriginally intended toallow".96Buyers '
clubs havealsoimported drugs which wereeither notapproved intheUnited States orwereavailable
atlower costinother countries. On25May1993theFDAissued guidelines toensure active oversight
byalicensed physician, refuse commercialization orpromotion oftheimported drugs, andrefuse
importation ofdrugs from anunknown origin.97TheFDA hasnotclosed anybuyers 'clubs onthe
basis ofviolation ofthese guidelines orotherwise.
92U.S. Government Accounting Office (1994), pp.21-22. Price differences remained after taking account
ofdiscounts forhigh-volume sales available intheUnited States. However, thestudy alsonoted thatsuch
differentials could notbeattributed todifferences inmanufacturing costs, buttoavariety offactors, including
thefactthat97percentofallprescription drugexpenditures intheUnited Kingdom aremade bytheNational
Health Service.
93TheFDA approves charges foralldrugs which arebeing released prior toapproval forserious andlife
threatening diseases. (21,C.F.R. §312.7(d)(1) (1994), cited inLindemann (1994), pp.133-170.
94Mossialos, Kanavos andAbel-Smith (1994), pp.18-85.
95Financial Times, "$600m dealagreed onUSdrugs price claims", 19January 1996.
96Lindemann (1994), p.153.
97Lindemann (1994), p.158.United States WT/TPR/S/16
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(6) Semiconductors
(i) Overview ofrecent developments
78. Foreign trade plays animportant rôleintheproduction andconsumption ofsemiconductors:
over35percentofproductionisexported,whileover40percentofapparentconsumptionwasimported
in1993and1994(Table IV.22).98Inaddition, production abroad byU.S.firms wassignificant; foreign
affiliates ofU.S.firms intheelectronic components andaccessories sector realized totalsalesofUS$30
billion in1993 more thandouble thevalue ofexports inthatyear.99Following adecline intotal
employment inthecontext ofanindustrial contraction in1991, employment inthesector hasbeen
rising steadily from 214,000 attheendof1992 toover241,000 in1995 (Table IV.22).
Table IV.22
Overview ofthesemiconductor industry, 1990-95
Item 1990 1991 1992 1993 1994 1995
Value ofproduction (US$ billion)a24.0 27.4 30.4 37.6 52.5 ...
Exports (US$ billion)a10.7 10.8 11.5 13.7 18.0 ...
Imports (US$ billion)a12.0 12.9 15.3 17.9 20.6 ...
Employment annual average ('000) 233.4b229.1 223.5 214.5 222.5 241.2
Wages perhourannual average (US$ perhour) 12.67b12.78 13.80 14.72 14.47 14.59
... Notavailable.
a Trade databased onexport andimport datafortheindustry "semiconductors andrelated devices" (SIC3674) asreported inU.S.
Department ofCommerce (1994).
b December 1990 data.
Source: U.S.Department ofCommerce (1994), U.S.Industrial Outlook 1994, International Trade Administration, Washington, D.C.;
U.S. Department ofCommerce (1995), TheStatistical Abstract oftheUnited States, 1995, Washington, D.C.; Department
ofLabor (various issues), Employment andEarnings, Bureau ofLabor Statistics, Washington, D.C.
79. Semiconductor production isbased onlarge-scale investments; theoutlay toestablish afactory
hasrecently beenestimated atUS$1-2 billion.100Technical economies ofscale alsocontribute toa
relatively highindustry concentration. Thetenlargest firms hadacombined world market share of
54.9percent; production bythethreelargest U.S.producers (Intel, Motorola andTexas Instruments)
represented 20percentofworld output in1995. Production bythese firms wasorganized onaglobal
scale, withlabour-intensive activities being located inlowwage locations, partly forre-export tothe
United States andother developed countries.
80. Development ofsemiconductor chips isdominated byU.S.andJapanese-owned firms; these
haveregistered mostinnovations under theSemi-conductor ChipProtection Actof1984(Chapter III(8)).
During 1985-88 Japanese-owned firms registered 37percentandU.S.-owned firms 57percentof
allregistrations under theAct;during 1989-91 thebalance shifted, with57percentofallregistrations
98Apparent consumption isdefined asproduction plusimports minus exports.
99Electroniccomponentsandaccessories(SIC367)includes:electrontubes(SIC3671);printedcircuitboards
(SIC 3672); semiconductors andrelated devices (SIC 3674); andpassive components (SIC 3675-79).
100Hutcheson andHutcheson (1996), pp.40-46.WT/TPR/S/16 Trade Policy Review
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made byJapanese-owned firms and40percentbyU.S.-owned firms with3percentforother
countries.101Production bytheU.S. firms isconcentrated inhigher-value-added items, suchas
microprocessors, while production ofmemory chips ("DRAMS") isdominated byJapanese andKorean
firms. Memory chips aremass-produced withcomparatively less-advanced technology.102Revenue
forallofthetenmajor players inthesector increased rapidly during 1995.103
81. Production wasveryprofitable during theearly 1990s, when prices formemory chips were
approximately three times production costs. Building onsuchprofits, totalinvestment inthesector
wasUS$30 billion in1995. However, following aperiod ofrelatively stable prices during 1992-95,
prices haveexperienced asharp fallduring late1995, continuing in1996.104Thebook-to-bill ratio
(thevalue oforders asashare ofchips produced) dropped below 1.0forthefirsttimesince 1989.105
Inspiteofsharp drops inprices, output remains relatively stable asprices remain above marginal costs.
Inthiscontext, bothU.S.andforeign firms havepostponed plans toexpand production capacity.
82. Asecular decline inprices istobeexpected aspartofthelong-term development ofthesector;
theprice ofamegabyte ofsemiconductor memory hasdeclined from US$550,000, 25years ago,to
US$38.106Current trends intheindustry suggest thatindividual firms seektomaintain profitability
through product diversification asproducers offermore versions ofeachproduct.107Other strategies
include inter-firm co-operation toshare theinvestment costs, andsubcontracting; forexample, design
maybedonebyonefirm, contracting production outtoafactory without itsowndesign operation.108
Many ofthealliances involve bothU.S.andJapanese companies.109
101Christie (1995).
102TheEconomist (1996), pp.21-25.
103TheEconomist (1996), pp.21-25.
104Reportedly, international spotprices of16megabit dynamic random access memory (DRAM) chips fell
from US$50.10 inAugust 1995 toUS$12 inAugust 1996 (Reuters, 11September 1996).
105Semiconductor Industry Association, cited inTheEconomist (1996).
106Hutcheson andHutcheson (1996), p.43.
107"Intelsplitits486microprocessorofferingintomorethan30variations.Duringtheearly1980s,incontrast,
thecompany offered justthree versions ofits8086 microprocessor andonlytwoversions ofits8088. Dynamic
memory chips arebeing similarly diversified. Toshiba forexample, currently hasmore than15times asmany
four-megabit DRAM configurations asithad64-kilobit onesin1984". (Hutcheson andHutcheson 1996, p.46).
108TheEconomist (1996), pp.21-25. Factories without their own design operation include "Taiwan
Semiconductor Manufacturing" and"Chartered Semiconductor Manufacturing" located inSingapore.
109Intel from theUnited States andSharp from Japan co-operate todevelop flash memory chips; competing
inthismarketwiththeU.S.producerAMDwhichisco-operatingwithFujitsufromJapanaswellasacombination
ofHitachiandMitsubishi,bothfromJapan.(FinancialTimes,"Intel,Sharpboostflashtechnology",24April1996,
p.18)United States WT/TPR/S/16
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(ii) Trade policies
83. M.f.n. import tariffs range fromzeroto15percent,withanaverage of4.1percentin1996.110
Theimpact ofthese tariffs ontheglobal integration oftheU.S.semiconductor sector ispartially offset
bytheoutward-processing provisions oftheU.S.tariff schedule, which areparticularly wellusedby
South-East Asian countries (Chapter III(2)(ii)).111Therulesoforigin markings required byU.S.law,
however, reportedly increase costs byasmuch asUS$50 million.112Theindustry stillbenefits from
government procurement preferences, inparticular those administered bytheDepartment ofDefense
andtheNASA (Chapter III(6)). Annual government funding forsuperconductors wasintherange
ofUS$200-250 million during 1989-92.113
84. Since5October1993,theUnitedStateshasimposedanti-dumpingdutiesonimportsofDRAMs
ofonemegabyte andabove from theRepublic ofKorea; nocountervailing duties areinforce on
semiconductors asat31December 1995. Thebilateral agreement onsemiconductors between the
United States andJapan, originally concluded in1986andextended in1991, expired on31July1996.114
Theforeign share oftheJapanese microchip market grew rapidly from 16.7percentin1992 to
25.4percentin1995, achieving arecord 30.6percentinthefirstquarter of1996.
85. InAugust 1996, thetwoGovernments issued a"Joint Statement" regarding theirrelationship
afterthetermination oftheagreement, aswellasglobal conditions facing thesemiconductor industry;
inparallel, theU.S.Semiconductor Industry Association andtheElectronics Industry Association of
JapanconcludedanewAgreementregardingSemiconductors.115IntheJointStatement,theGovernments
recognize thatco-operation withregard tosemiconductors should becarried outonthebasisofmarket
principles, consistency withWTO rules, andinternational co-operation bothmultilateral andbilateral.
Theinter-industryAgreementestablishesaSemiconductorCouncil,throughwhichindustriesmay"discuss
andengage in"activities including co-operative activities between users andsuppliers116;collect data
onandreport toGovernments ontrade flows, market developments andco-operative activities; and
make recommendations onissues ofconcern. Other national industry associations whose governments
haveeliminated orcommitted toeliminate alltariffs onsemiconductors, mayjointheCouncil. Provision
ismade forregular intergovernmental consultations onissues affecting thesemiconductor industries;
these consultations areopentoother governments whose national industry associations havejoined
theCouncil. Inaddition, thetwoGovernments callfortheestablishment ofaGlobal Governmental
Forum, tomeetannually, inwhich governments ofmajor semiconductor-producing countries andother
economies mayparticipate "without anypreconditions".
110Average of43tariff lines classified under SITC Rev.1 Code 7293; 18tariff lines were dutyfree.
111In1994, Malaysia, Singapore, thePhilippines andThailand accounted for66percentofsemiconductor
imports under Section 9802.00.80 oftheU.S. tariff schedule (U.S. International Trade Commission (1996).
112Estimate bytheU.S.Semiconductor Industry Association reported inU.S.International Trade Commission
(1996).
113U.S. Department ofCommerce (1994).
114GATT (1994), andGATT (1995).
115Joint Statement bytheGovernment oftheUnited States andtheGovernment ofJapan Concerning
Semiconductors, 2August 1996, Vancouver, Canada.
116Such activities mayinclude standardization, environmental issues, worker health andsafety, intellectual
property rights, trade andinvestment liberalization andmarket development.WT/TPR/S/16 Trade Policy Review
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(7) Services
(i) Introduction
86. Theservices sector accounts forsome 66percentofU.S.GDP andforabout 65percentof
employment (Chapter I(2)(iii)). These ratios, which areamong thehighest among WTO countries,
indicate thecritical rôlethatservices playinthegeneration ofU.S. welfare. Inthisrespect itis
noteworthy thatthesector created over25million jobsintheperiod 1979 to1995. Thesector also
isanimportant element inU.S.external trade; exports ofU.S.services aresome 27percentofall
U.S.exports andU.S.cross-border imports ofservices are16percentofallimports. Establishment
hasbecome increasingly important inthesector andisnowthemajor formofdelivery offoreign services
totheUnited States.117
87. Themajor service sectors intheUnited States include transportation, wholesale andretailtrade,
andfinancial services, including insurance andrealestate. Thelatter, inasignofconsiderable
capital-intensity,accountsforabout17percentofGDPbutemployslessthan6percentoftheworkforce
(Table I.3). Financial services alsogenerate asurplus ontheU.S.external accounts, although inthis
respecttransportation(includingtravelandpassengerfares)isthesinglelargestelementofU.S.services.
Arapidly growing areainthiscontext isbusiness services, where U.S.exports havemore thandoubled
since 1990 andnowaccount forover2percentofallU.S.exports.
88. TheUnited States isboththeworld 'slargest exporter andimporter ofservices. Animportant
element inthestrength oftheU.S.sector liesinthederegulated andcompetitive environment, including
through external competition, inwhich itoperates. TheUnited States hasbeenderegulating itsservice
sectors sincethe1970s, starting withtransportation (airline, railroad, trucking), financial services and,
most recently, telecommunications services. Such deregulation isgenerally accepted ashaving had
apositive effect ontheeconomy byincreasing efficiency through competition andlowering theprices
ofservices toconsumers.
89. Inthiscontext, theUnited States played akeyrôleintheservices negotiations inthe
Uruguay Round, leading totheGeneral Agreement onTrade inServices (GATS), andmade alarge
number ofcommitments (BoxIV.1). Toasignificant degree, theefforts ofU.S.negotiators andthe
interest ofU.S.industries behind them determined thecourse ofthenegotiations intheservices area.
Keysectors ofinterest totheUnited States inpromoting international negotiations included
telecommunications,financialservices,airtransport,someprofessionalservicesandaudiovisualservices.
TheUnited States hasalsoparticipated inallofthepost-Uruguay Round negotiations, buttheresults
havesofarbeenmixed. Inthefinancial services negotiations concluded inJuly1995, asnoted in
ChapterII,theUnitedStatesreviseditsApril1994Scheduleofspecificcommitments,protectingexisting
foreign investments infinancial services butnotguaranteeing m.f.n. treatment forneworexpanded
operations.TheUnitedStatesdidnotreviseitscommitmentsregardingthemovementsofnaturalpersons
inthenegotiations also concluded inJuly1995. Intheextended negotiations onbasic
telecommunications, theUnited States submitted anoffer providing unrestricted market access and
nationaltreatmenttoforeignservicesandforeignservicesuppliersinitslocaltelecommunicationsmarket.
Inthenegotiations onmaritime transport services, theUnited States didnotsubmit anoffer.
117Data usedinthesections onservices areextracted from thefollowing sources, unless indicated otherwise:
U.S. Bureau ofEconomic Analysis, Survey ofCurrent Business, various editions; TheAmerican Almanac
1995-1996 Statistical Abstract oftheUnited States; U.S.Department oftheTreasury, National Treatment Study
1994. Foradetailed description ofrecent trends inU.S. services trade, see"U.S. Trade Shifts inSelected
Industries: Services," Investigation No.332-345, U.S. International Trade Commission, June 1996.United States WT/TPR/S/16
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BoxIV.1: Commitments under theGATS
Thespecific commitments made bycountries under theGeneral Agreement onTrade inServices (GATS)
cover notonly cross-border supplies andconsumption abroad ofservices, butalsosupplies ofservices
through commercial presence andthepresence ofnatural persons inthehostcountry. Thesupplies of
services through such modes ofsupply areonly indirectly reflected intheconventional statistics of
foreign trade orbalance ofpayments; i.e.through remittance ofprofits andearnings. TheUnited States
isoneofthefewcountries thatcompiles dataonsales ofservices through affiliates ofU.S. companies
andthrough U.S. affiliates offoreign companies. Given thescope oftheGATS commitments, itwould
notbesufficient toanalyze services trade flows interms ofcross-border transactions andconsumption
abroad; such analysis would onlygiveapartial picture ofservices thatareeasily orconveniently traded
across borders orconsumed abroad, such astourism andtransport. Efforts areunder way in
international organizations andgovernments tocollect datawhich willenable governments tograsp the
extent offoreign participation inservices markets through commercial presence andnatural persons.
90. TableAIV.10summarizestheU.S.commitmentsinitsScheduleundertheGATS.TableAIV.11
isasummary oftheArticle II(m.f.n.) exemptions thattheUnited States hastaken, which indicates
theareas inwhich theUnited States hasmaintained measures inconsistent withmost-favoured-nation
treatment toother countries, asallowed under theGATS. Although theUnited States hasoneofthe
mostcomprehensive setofcommitments taken byWTO Members under theGATS, ithasleftsome
important areas unbound orwithreservations and/or withexemptions from them.f.n. principle.
91. Inaddition toleaving unbound areassuchasbasictelecommunications andmaritime transport,
which aresubject tocontinued orfuture negotiations under theGATS, theUnited States hastaken
abroad m.f.n. exemption withregard tofinancial services. While theUnited States hasbound market
access andnational treatment forexisting financial service suppliers, itsm.f.n. exemption allows it
toapply, onthebasisofbilateral reciprocity, non-m.f.n. treatment toother countries 'financial service
suppliers withrespect totheexpansion ofexisting operations, theestablishment ofanewcommercial
presence, ortheconduct ofnewactivities.
(ii) Telecommunications services
Market structure
92. Telecommunications isalargeandgrowing sector oftheU.S.economy. Thecommunications
industry intheUnited States accounted forsome 2.4percentofnational income in1995, compared
toaround 2percentin1989; nominal growth ofvalue added inthesector hasbeenintherange of
7.5percentayear. Thesector ishighly competitive, andbecoming more so;sectoral priceincreases
havelagged inflation, ascanbeseenwithin theconsumer price index, where theprice levelforall
items was48percenthigher in1994 thanin1982-84, butonly23percenthigher fortelephone
services. Among telephone services, localcharges were 57percenthigher, butinter-State charges
were25percentlower. Although theownership ofbasic equipment suchasthetelephone, television
set,andradio havelongsincereached thepointofsaturation, theirusage isstillrising, albeit ataslower
pacethanbefore. Thenumber ofoverseas telephone callsmade intheUnited States, forexample,
increased bymore thanfifteen-fold from1980to1993; revenues oftelephone companies fromoverseas
calls increased byfivetimes inthesame period. In1995, telecommunications exports were
US$2.8 billion, or1.5percentofprivate services exports, andimports were US$6.8 billion, or
5.4percentofprivate services imports; these numbers compare with2.4percentofexports and
5.0percentofimports in1986.WT/TPR/S/16 Trade Policy Review
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93. Foreign participation inthetelecommunications market intheUnited States isarelatively recent
phenomenon.Domesticmarketshavetraditionallybeenhighlysegmented,particularlyafterthebreak-up
oftheAmericanTelephoneandTelegraphCompany(AT&T)in1984,withmonopolysuppliersespecially
inlocal exchange markets. However, thispicture isnowstarting tochange, asnoted below. The
communications industry employed 41,000 fewer people in1992thanin1979, butthishasbeenoffset
atleastinnumerical terms byemployment increases inrelated areas suchas"computer anddata
processing".
Regulatory framework118
94. TheU.S.Governmentregulatesinter-Stateandforeigncommunications,aswellasallradio-based
services. TheFederal Communications Commission (FCC) isresponsible foradministering the
Communications Actof1934, asamended bytheTelecommunications Actof1996; theActsprovide
fortheregulation ofallelectronic communications provided bywireorradio, bothdomestically and
internationally. TitleIIoftheActaddresses theregulation of"common carriers", thatis,carriers
whooffer communications services tothepublic generally. State Governments regulate intra-State
communications. Some States havelimited thesupply ofintra-State localandlongdistance telephone
services toamonopoly provider, while otherStates havedefactomonopoly providers oflocalexchange
telephone service; thisisexpected tochange under theTelecommunications Actof1996, which rules
outdejuremonopoly providers ofthese services. Approximately 1,200 companies provide local
exchange telephone services intheUnited States; the22BellOperating Companies (BOCs) account
forapproximately 80percentofalltelephone stations. Before theenactment ofthe1996Act,anumber
ofStates hadbegun tointroduce some competition tothemonopoly provider forintra-State service.
95. With thesector subject tocompetition, theUnited States doesnothaveamonopoly supplier
forinter-State basic telecommunications norinternational basic telecommunications services. The
American Mobile Satellite Corporation wasinitially authorized asthesoleprovider ofdomestic satellite-
based mobile service duetospectrum scarcity, butthisisnotconsidered asamonopoly. Ininternational
mobile andfixed satellite services, theCommunications Satellite Corporation (Comsat) isdesignated
asthesoleU.S.signatory toINTELSAT andINMARSAT satellites, butthere isnolimitation onthe
number ofseparate international satellite facilities operators. Comsat isrequired toprovide
non-discriminatoryaccesstoINTELSATandINMARSATtoallcarriersandusers.Incellulartelephone
service, aduopoly ofsuppliers exists, under which thelocalmonopoly telephone company inthelocal
exchange market isallowed toownone,butnotboth, ofthetwocellular operators. TheBOCs are
thelocaltelephone operating companies formerly owned byAT&T, butdivested in1984pursuant to
theModified Final Judgement (MFJ) of1982, which settled ananti-trust casebytheU.S.Government
against AT&T. TheMFJ alsoprohibited theBOCs from providing domestic orinternational
inter-exchange service. TheBOCs areowned byseven regional holding companies (Regional Bell
Operating Companies).
96. Authorization ofcommunications common carriers isgoverned bySection 214ofthe
Communications Act. Ininter-State inter-exchange services, onlycarriers designated as"dominant"
common carriers arerequired toapply forFCCauthorization under Section 214(BoxIV.2). Among
otherrequirements,adominantcarriermustfilecost-supportedtariffsfortheirservicesonupto45days'
advance notice. TheFCCmustalsoauthorize dominant carriers 'acquisition oftransmission capacity.
118Information inthissection derives largely from theU.S. Response totheQuestionnaire onBasic
Telecommunications inWTO documents S/NGBT/W/3/Add.13 of21October 1994 anditsSupplement of
20January 1995.United States WT/TPR/S/16
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Non-dominant carriers haveshorter notice periods, andtheirtariffs arepresumed tobelawful, while
nosuchpresumption exists fordominant carriers.119
BoxIV.2: Dominant Carriers under theCommunications Act
Acarrier isconsidered "dominant" ifithasthepower tocontrol thesupply orprice of
telecommunications services inageographic market. Thus local monopoly carriers were classified as
"dominant" intheir areas; AT&T wasalsoclassified asdominant since itwasthelargest U.S. provider
ofinter-exchange telephone service, even though itnolonger heldamonopoly inanymarket.aSince the
FCC declared AT&T non-dominant fordomestic inter-State, inter-exchange services inOctober 1995,
there arenolonger anydominant suppliers ofthese services. AT&T andother domestic suppliers were
alsodeclared non-dominant forinternational services asofMay 1996..
Thedefinition of"dominant" and"non-dominant" carriers hasevolved; forexample, since March 1993,
dominant carrier regulations areapplied tointernational services only onthose routes where aU.S.
carrier hasaforeign affiliate withtheability todiscriminate against unaffiliated U.S. carriers.
Competitive safeguards arealsoinplace against unfair competition bydominant carriers; thustheMFJ
required local exchange carriers togiveequal, non-discriminatory access toalllongdistance carriers on
thesame terms asAT&T. TheFCC monitors these safeguards through prescribed accounting andcost-
allocation procedures, reporting requirements, andprocedures fordealing with information thecarrier
obtains from andabout itscustomers.
aTheU.S. authorities estimate thatnon-dominant carriers service approximately 40percentofthe
U.S. inter-State, inter-exchange market. Exact figures could notbeobtained, however, since non-
dominant carriers arenotrequired toreport traffic orrevenue datatotheFCC.
97. Ininternational services, allcarriers mustapply totheFCCforSection 214authority toprovide
commoncarrierservices.Companiesauthorizedtoprovideinter-Stateinter-exchangetelephoneservices
mayalsoprovide international inter-exchange services. Section 214authorization isgiven when the
grant isconsidered toserve the"public convenience andnecessity" (also referred toasthe"public
interest" standard). Although, under Section 214,foreign entities arenotprevented from obtaining
authorization asacommon carrier orfrominvesting incompanies holding suchauthorization, ithas,
untilnow, beengranted tothemonlyonacase-by-case basis under limited circumstances. Recently,
andasdescribed below, theFCCamended itsrulestoclarify thestandards forauthorization andfacilitate
theentry offoreign carriers intointernational services.
98. Under Section 310oftheCommunications Act,foreign governments ortheirrepresentatives
areprohibited from holding anytypeofradio-station licence; foreign nationals andcorporations
organized under thelawsofaforeign government arealsoprohibited fromholding broadcast, common
carrier andaeronautical fixedandenroute radio station licences. Direct andindirect foreign ownership
hasbeenclosely restricted; firstly, licensees ofthesecategories ofradio licences maynotbemore than
20percentforeign-owned; andsecondly, theFCChasthediscretion torevoke ordenytheradiolicence
ofanyU.S.licensee indirectly ordirectly controlled byacorporate parent thathasmorethan25percent
foreign ownership ifitfinds thatsuchaction would serve thepublic interest. Before theenactment
ofthe1996 Telecommunications Act,there were alsorestrictions onthenationality ofofficers or
directors ofanycompany holding directly orindirectly acommon carrier radio licence. Recently,
119Forinternational services, dominant carriers must filerevisions totheir tariffs onnotlessthan35-days
notice, while non-dominant carriers mayfiletariff revisions onnotlessthan14-days notice.WT/TPR/S/16 Trade Policy Review
Page 150
however, theFCChasliberalized itsruleswithregard toindirect investment concerning common carrier
licences under Section 310(b)(4).
99. There were, untilrecently, anumber ofother limitations onmarket access ornational treatment
fortelecommunications service suppliers. Forexample, the1984 Cable Actprohibited telephone
companies fromproviding video programming intheirservice areas; inturn,cabletelevision companies
wereprohibited under Statelaworregulation fromproviding telephone services inmany jurisdictions.
InAugust 1993, acourt ruling heldthatsuch prohibition ofcross-ownership violated theFirst
Amendment oftheU.S.Constitution. TheFCCrecently stated thatthecross ownership prohibition
didnotapply tolong-distance carriers. Consistent withU.S.efforts topromote afullycompetitive
environment, these restrictions havenowalsobeenremoved withthepassage ofnewlegislation.
100. Apotentialnationaltreatmentlimitationconcernsthegrantingofalicenceforlandingasubmarine
communication cable. Under theSubmarine Cable Landing Actof1921, theFCC hastheauthority
towithhold, revoke orcondition thegrant ofacable-landing licence ifsuchaction willassist insecuring
rights forthelanding oroperation ofcables inforeign countries, maintaining therights andinterests
oftheUnited States oritscitizens, promoting thesecurity oftheUnited States, andassuring justand
reasonable ratesandservices intheoperation ofthecables.
101. TheUnited States hasnotentered intoanybilateral agreements orarrangements relating to
thesupply byU.S.persons ofbasic telecommunications inanother country, orthesupply byforeign
persons ofbasic telecommunications intheUnited States. TheNAFTA covers thesupply ofenhanced
telecommunications services; theUnited States hasalsoentered intobilateral trade agreements with
Japan andtheRepublic ofKorea, andnon-binding agreements withFrance, Germany, Hong Kong,
theNetherlands, andtheUnited Kingdom inrelation toenhanced services.
Theroadtoreform
102. Telecommunications, asthecarrier ofinformation, isafundamental element intheeconomic
infrastructure. TheUnited States, inencouraging thedevelopment oftheGlobal Information
Infrastructure (GII), which hasalsobecome anundertaking oftheInternational Telecommunications
Union (ITU), hastaken aleadinadvocating policies toincrease theefficiency andvitality ofthesector,
particularly through deregulation andenhanced competition. Fiveprinciples advocated bytheUnited
States inthedevelopment oftheGIIare:encouraging private sector investment; promoting competition;
providing open access tothenetwork forallinformation providers andusers; creating aflexible
regulatory environment thatcankeeppacewithrapid technological andmarket changes; andensuring
universal service.120
103. InFebruary 1996, theUnited States passed keylegislation inthereform process. The
Telecommunications Actof1996, signed bythePresident on8February 1996, isalandmark in
liberalizingtheU.S.telecommunicationsmarkets,andthefirstmajorreforminU.S.telecommunications
legislation since 1934 (Box IV.3). Themain elements ofthederegulatory reform contained inthe
Actarethefollowing:
- terminate themonopoly oflocaltelephone companies andallow competition inthesupply of
localtelephone services, including cable television firms competing withtraditional telephone
companies;
- allow localtelephone companies toprovide long-distance services andtomanufacture telephone
equipment;
120U.S.DepartmentofCommer ce,TheGlobalInformationStructure:AgendaforCooperation,February1995.United States WT/TPR/S/16
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- allow telephone companies toprovide cable services121;
- allow electricity andgasutility firms toprovide telephone, cable, orother telecommunications
services through affiliates;
- relax therestrictions onthenumber ofradio andtelevision stations which maybeowned or
controlled byasingle party nationally orlocally; and
- allow asingle party toownorcontrol anetwork ofbroadcast stations andacable system.
BoxIV.3: Competitive Safeguards intheTelecommunications Actof1996
The Act contains elaborate provisions toensure effective competition inderegulating local
telecommunications markets. Thecompetitive safeguards provided intheActinclude thefollowing:
- The local Bell Operating Companies (BOCs) may begin providing long-distance services
originating outside their regions immediately, buttheprovision oflong-distance services
originating intheir regions requires approval bytheFCC conditioned ontheimplementation ofa
"competitive checklist". This requires theBOCs toensure interconnection and non-
discriminatory access totheir network elements forother telecommunications carriers; to
unbundle local looptransmission from switching orother services; toprovide non-discriminatory
access todirectory assistance services, operator callcompletion services, andtodatabases and
associated signalling necessary forcallrouting andcompletion; andtomake number portability
arrangements (theability ofusers toretain theexisting telecommunications numbers when
switching from onetelecommunications carrier toanother). ABOC willbeallowed toprovide
in-region long-distance services inprinciple only when there isafacilities-based competitor in
thelocal market.
- ForBOCs toenter thelong-distance market, separate affiliates arerequired foraperiod ofthree
years, aprohibition ofcross-subsidization isimposed, andjoint marketing oflocal andlong-
distance services byBOC affiliates isprohibited unless theparent BOC alsopermits other
carriers tomarket andsellitstelephone exchange services.
- ForBOCs tomanufacture telecommunications equipment, manufacturing must alsobeperformed
inseparate affiliates foraperiod ofthree years, cross-subsidization isprohibited, and
procurement bytheBOCs andtheestablishment ofstandards must benon-discriminatory.
121TheActremoves allprevious restrictions ontelephone companies from providing video programming
intheirserviceareas.AlthoughtheActlimitsthefinancialinterestofalocalexchangecarrierinanycableoperator
within thelocal exchange carrier 'stelephone service area, andviceversa, there areexceptions forrural and
competitive cable television markets, etc.WT/TPR/S/16 Trade Policy Review
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104. Aprovision torelaxallforeign ownership restrictions under Section 310oftheCommunications
Actof1934 wasdropped inthefinalstage ofdeliberations; however, restrictions onthenationality
ofofficers ordirectors ofanycompany holding directly orindirectly acommon carrier radio licence
wereabolished. TheActthusprovides forsubstantial domestic liberalization ofservices andallows
entry offoreign carriers tomany areas ofbusiness, butmaintains some restrictions ondirect foreign
ownership, aswellasdiscretionary power regarding indirect foreign ownership.
105. Partly inanticipation ofthepassage ofthe1996 Telecommunications Act,theFCC adopted
on28November 1995ameasure toallow foreign carriers entry intotheinternational services market
andtorelax indirect foreign ownership ofradio licences, subject totheconsideration ofreciprocal
"effective competitive opportunities (ECOs)" inforeign markets. Factors considered arelegalbarriers
toentry; theexistence ofreasonable andnon-discriminatory charges; terms andconditions for
interconnection toaforeign carrier 'sdomestic facilities; competitive safeguards andtheregulatory
framework. Asimilar ECO analysis willbeapplied inthecontext ofresale ofnon-interconnected
private lines. Inaddition, theFCCwillconsider thegeneral significance oftheproposed entry tothe
promotion ofcompetition intheU.S. communications market; national security, lawenforcement,
foreign policy, ortrade concerns raised bytheExecutive Branch; andthepresence ofcost-based
accounting rates. TheFCC willprohibit anyexclusive arrangement between aU.S. andaforeign
carrier thatgrants exclusive rights totheU.S.carrier fortheprovision ofbasic telecommunications
services originating orterminating intheUnited States.
106. Aproposal wasmade recently bytheFCC tointroduce asimilar framework forevaluating
applications forauthority toaccess satellites licensed byother countries. This"effective competitive
opportunities forsatellites" or"ECO-Sat" testwillrequire thattheFCCexamine the"home market"
ofthenon-U.S. satellite plusvarious "route markets" towhich service from aU.S.earth station is
proposed. Licences forearth stations tooperate withnon-U.S. satellite stations maybedenied ifin
anysuchmarkets, therearedejureordefactobarriers existtoentry byU.S.satellite systems seeking
toprovide aservice analogous tothatwhich thenon-U.S. satellite system proposes toprovide to,from,
orwithin theUnited States. Theproposal wasopenforpublic comment until15July1996.
107. Theoverall picture ofreform intheUnited States isverypositive, therefore, although concerns
havebeenexpressed byother countries withregard toreciprocity considerations bytheFCCofforeign
markets, andpractices bytheUnited States inallowing foreign entry intoitsownmarkets.122Such
measures, iftheyresult intheapplication ofdifferential treatment toother countries, might needto
belisted asanexemption totheGATS principle ofm.f.n. (most-favoured-nation) treatment, when
theongoing negotiations onbasic telecommunications services areconcluded inFebruary 1997. In
theprocess ofreform, careful consideration isalsonecessary onthedesign andimplementation of
competitive safeguards andcompetition policy ingeneral. Thus, artificial barriers toentry must be
usedinacareful andselective manner sothatsuchmeasures donotprevent competition inthemarkets,
while excessive restrictions onthedominant carriers 'abilities toexpand theirservices could leadto
inefficiencies. TheUnited States hasbeenapplying suchpolicies inacareful andtransparent manner.
108. TheUnited States isplaying anactive rôleinthenegotiations onbasic telecommunications
services under theWTO. Ithasoffered unrestricted market access andnational treatment toforeign
telecommunications services andservice suppliers initslocaltelecommunications market. Ithasalso
offered upto100percentindirect foreign ownership ofcommon-carrier radio licences. Theoffer
comprises pro-competitive regulatory disciplines contained inthereference paper attached toit.After
122Forexample, see"Report onU.S. Barriers toTrade andInvestment", theEuropean Commission, May
1995, p.45. Also see"Inside U.S. Trade" Vol.13 No.47, 24November 1995, p.2.United States WT/TPR/S/16
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adecision topreserve theoffers made inthecourse ofthenegotiations andtore-examine those offers
during a30-day period beginning on15January 1997, thesenegotiations arenowscheduled toconclude
inFebruary 1997.
(iii) Financial services
Market structure
109. Theshare offinancial services (including insurance andrealestate) inU.S.national income
hasrisen from about 16towellover17percentintheperiod since theturnofthepresent decade;
banking andinsurance isupfrom about 6.3tosome 7percentoverthesame period. Employment
inthesector hasgrown onlymoderately since 1990, toabout 6.8million atpresent; however, this
isanincrease ofalmost 2million jobssince1979. Incross-border trade, theshare offinancial services
(excluding netinsurance transactions, duetotheirvolatility) ininternational transactions ofprivate
services hasalsobeenrising inrecent years. Thisisparticularly trueforimports offinancial services,
which haverisenfrom 2.5percentoftotalprivate services imports in1990 to5.4percentin1994.
110. Evidence ofthegrowing internationalization oftheU.S. banking market canbeseenfrom
Table IV.23. Theassets ofU.S. offices offoreign banks increased byalmost five-fold from 1980
to1995; theirshare intotalassets ofcommercial banks rosefrom12percentin1980 to22percent
in1995. Inthesame period, deposits inforeign banks increased from 7to18percentofthetotal
andtheirshare inU.S. business lending rosefrom 18to34percent. Asat31December 1995,
270foreign banks from 60countries operated intheUnited States 546agencies andbranches,
247representative offices, 117U.S. banking subsidiaries, 16Edge corporations, four"agreement"
corporations andfiveNewYork State Investment Companies.123Theactivities offoreign banks are
concentrated inthemajor financial centres; asatDecember 1995, NewYorkaccounted for68percent
oftheU.S.assets offoreign banks followed byCalifornia with12percent.
111. Foreign-owned insurers intheUnited States hadtotalincome (premium income, investment
income andother income) of$72.9 billion in1991, anincrease ofmore thanthree-fold from 1985.
Itisestimated thatforeign-owned insurers frommorethan25countries accounted forabout 11percent
oftheU.S.premium market in1991.124Insecurities andother financial services, internationalization
isalsothetrend. Registered broker-dealers withmore than25percentforeign ownership counted 173
in1995versus 130in1990, outofatotalofabout 8,000 registered broker-dealers intheUnited States.
In1993, foreign broker-dealers leadmanaged some 3.8percentoftotaldebtissues and1.7percent
oftotalequity issues intheU.S.market.
123Edgecorporationsandagreemen tcorporationsarespecializedentitiesthatengageininternationalorforeign
banking andother international business activities.
124According totheU.S.authorities, theforeign share oftheU.S.insurance market waslessthan9percent
in1990, rising toaround 10percentin1994.WT/TPR/S/16 Trade Policy Review
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Table IV.23
U.S.banking offices offoreign banks, 1980-95
(US$ billions andpercent)
YearaAssets Loans Deposits
Total Business
1980 200.6 121.4 59.6 80.4
1985 440.8 247.4 108.8 236.7
1990 791.1 397.9 193.3 383.9
1995 960.1 414.5 231.1 508.7
Percent
Shareb1980 11.9 13.4 18.2 6.6
1985 16.1 15.4 22.5 12.1
1990 21.4 18.0 30.8 14.5
1995 21.8 16.2 33.6 17.6
a End-December ofeachyear, except for1995 which isend-June.
b Percentage shares inthetotals fordomestically owned commercial banks andU.S. offices offoreign banks.
Regulatory framework125
112. Under the"dual" U.S.banking system, banks canbeauthorized tooperate under either afederal
orStatelicence. Foreign banks mayentertheU.S.market either byestablishing federal orState-licensed
branches oragencies/representative offices, orbyacquiring anational orState subsidiary bank.
Establishment ofbranches oragencies offoreign banks isprohibited bylawinsome States, butStates
withmajor financial centres suchasNewYork, California, Illinois, Texas, Florida, andGeorgia permit
foreign bankbranches oragencies.
113. Foreign banks withU.S.branches oragencies weremade subject tofederal regulation under
theInternationalBankingAct(IBA)of1978,whichprovidedthatfederally-licensedbranchesandagencies
offoreign banks could generally operate under thesame restrictions andconditions asapplicable to
anational bankoperating atthesame location. TheIBArequired foreign banks withoperating offices
intheUnited States tomaintain reserves against deposit liabilities andlimited theiractivities and
geographic expansion intheUnited States inaccordance withthecomparable limitations applicable
toU.S.banking organizations, thusapplying national treatment. Thismeant thatuntiltheenactment
oftheRiegle-Niel Interstate Banking andBranching Actmentioned below, inter-State banking activities
offoreign banks were alsorestricted.
114. Concerns arising fromproblems associated withalleged fraudulent orillegal activities offoreign
banks ledtotheenactment oftheForeign Bank Supervision Enhancement Actof1991(FBSEA). The
FBSEA strengthened regulation andsupervision oftheactivities offoreign banks byrequiring prior
approvaloftheFederalReserveBoard(FRB)fortheestablishmentofState-licensedandfederally-licensed
branches andagencies orrepresentative offices offoreign banks, orforacquiring ownership orcontrol
ofacommercial lending company. Italsomade foreign banks maintaining abranch, agency or
commercial lending company intheUnited States subject totheprovisions ofSection 3oftheBank
Holding Company Acttothesame extent asaU.S. bank holding company. Thisincludes the
125Theinformation provided below owes largely tothe"National Treatment Study", U.S. Department of
theTreasury 1994.United States WT/TPR/S/16
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requirement thatabankholding company obtain theprior approval oftheFRBwhen acquiring more
than5percentofthevoting shares ofaU.S.bankorbankholding company.
115. TheFBSEA requires thataforeign bankbesubject tocomprehensive consolidated supervision
(CCS) byhome country supervisors inorder fortheFRBtoapprove theestablishment ofabranch
oragency, ortheacquisition ofasubsidiary bankintheUnited States bythatforeign bank. Although
thisnewrequirement slowed theestablishment offoreign bankoffices, supervision onthebasisofCCS
hasbeenendorsed bytheBasle Committee onBanking Supervision asanecessary prudential standard.
TheFBSEA alsopermits theFRBtoorder aforeign bankthatoperates aState-licensed branch oragency,
oracommercial lending company subsidiary intheUnited States, toterminate itsactivities iftheFRB
findsthattheforeign bankisnotsubject toCCSorifithasreasonable cause tobelieve thattheforeign
bank hascommitted aviolation oflaworengaged inanunsafe orunsound banking practice inthe
United States.
116. ItistheproclaimedpolicyoftheU.S.authoritiestoprovidenationaltreatmenttoforeignfinancial
institutions under U.S. lawsandregulations.126However, some suggest thatthere areanumber of
provisions intheFBSEA thatapply differential treatment toforeign banks ascompared todomestic
banks. Oneisthatnoforeign bankmayaccept ormaintain retail deposits oflessthanUS$100,000,
except through aninsured banking subsidiary. Branches thatwereinsured priorto19December 1991
were grandfathered. Inaddition, theFBSEA required thatthecostofexaminations undertaken by
theFRBatleastonceayearshallbeassessed against andcollected fromtheforeign bankoritsparent
holdingcompany;bycontrast,theFRBisnotrequiredtoimposefeesondomesticbanksthatitexamines,
although itisargued thatdomestic banks arecharged forthecostofexaminations through other means,
suchasfederal deposit insurance premiums. Therecently enacted Interstate Banking andBranching
Efficiency Actof1994, noted below, imposes athree-year moratorium ontheimposition ofthese fees
onforeign banks. Thismoratorium expires inJuly1997.
117. Requirements onforeign banks other thanthose stipulated intheFBSEA are:alldirectors of
anational bankmustbecitizens oftheUnited States unless anational bankisanaffiliate orsubsidiary
ofaforeign bank, inwhich case,subject toapproval oftheComptroller oftheCurrency, onlyamajority
oftheboard needbecitizens127;theimposition ofa30percentbranch profits taxonearnings that
havebeenrepatriated from theUnited States128;andtheimposition ofanexcess interest tax,which
depends ontheamount ofthebank'sinterest expense deduction.129
118. TheFBSEA required theTreasury andtheFRBjointly toconduct astudy ofwhether foreign
banks should berequired toconduct banking operations intheUnited States through subsidiaries rather
thanbranches. TheSubsidiary Study, submitted toCongress in1992, opposed theideathatasubsidiary
requirement should beapplied toforeign banks, asthiscould haveasubstantial adverse impact on
theability ofU.S. banks tooperate through branches overseas byencouraging other countries to
126Thefollowing paragraphs listsome possible exceptions asnoted byforeign governments andfinancial
institutions. TheU.S. authorities have stated thatthese measures areprudential measures within thescope of
paragraph 2oftheAnnex onFinancial Services totheGATS.
127TheIBAterminated aformer prohibition onforeign citizens becoming directors ofnational banks.
128Thebranch profits taximposes ataxonafter-tax earnings thatwould besubject toawithholding taxif
thebranch wereaU.S.incorporated subsidiary anddistributed itsearnings toitsshareholders. Thebranch profits
taxistherefore intended tobeasubstitute foradividend withholding tax.
129Theexcess interest taxisasubstitute forawithholding taxoninterest deemed paidtotheforeign office,
itisimposed even ifthebank hasnotaxable income.WT/TPR/S/16 Trade Policy Review
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introduce similar requirements. TheFBSEA alsorequired thattheTreasury andtheFRBjointly submit
theCapital Equivalency Report, analysing theBasle andforeign capital standards, andtheirrelationship
withtherequirements applicable toU.S.banks.
119. TheFBSEAandtheFederalDepositInsuranceCorporationImprovementActof1991(FDCIA),
ofwhich theFBSEA forms apart,havealsointroduced various prudential measures, applicable equally
toforeign banks branches andtodomestic banks, including thesystem ofprompt corrective action
bysupervisory authorities based oncapital adequacy criteria andrisk-based assessment ofdeposit
insurance premiums.
120. TheGlass-Steagall Actof1933 established adistinct separation between commercial and
investment banking intheUnited States; banks weregenerally prohibited fromunderwriting ordealing
insecurities ofnon-governmental issuers. TheIBAextended thisrestriction totheU.S.branches and
agencies offoreign banks andtheiraffiliates initsapplication ofnational treatment.130Since 1989,
theFRBhasadopted aninterpretation ofSection 20oftheGlass-Steagall Actwhich allows affiliates
ofbankholding companies tounderwrite anddealinalltypes ofdebtandequity securities, subject
torevenue limitations of10percentandcertain additional prudential restrictions andconditions
(firewalls).131Asat31March 1996, theFRBhadapproved 37companies toengage inunderwriting
anddealing indebtsecurities, ofwhich 14wereowned byforeign banks. Banks arealsoprohibited
fromselling insurance products except inlimited circumstances. Onesuchexception iswhen national
banks actasinsurance agents insmall towns withapopulation ofnotmore than5,000.132
121. Insurance business isregulated attheStatelevel, under theMcCarren-Ferguson Actof1945.
However, allchiefStateinsurance administrators belong totheNAIC (National Association ofInsurance
Administrators). TheNAIC hasnoformal legislative authority, butexercises strong influence through
model insurance lawsandregulations andthrough itsco-ordinating activities, including thedesigning
ofuniform financial reporting forms, etc.TheUnited States Trade Representative conducts extensive
consultations withStates oninternational matters through theInternational Commission oftheNAIC.
122. According totheU.S.authorities, noimmediate changes inState lawswere necessary asa
result oftheU.S. commitments under theGATS. However, several States modified theirlawsin
anticipation oftheresults oftheUruguay Round; examples aretheprovision forinitial entry offoreign
insurers inTexas, andallowing under certain conditions theentry offoreign government-owned or-
controlled insurance companies inNewYork fornon-life business.133
130Asexceptions, foreign banks were allowed toretain anynon-banking activities inwhich theywere engaged
prior totheenactment oftheIBA, andtheforeign commercial andindustrial affiliates offoreign banks were
allowed toengage inthesame non-financial activities intheUnited States astheyconducted abroad.
131Recently, theFRB hasproposed toincrease from 10percentto25percenttheamount oftotalrevenue
thatanon-bank subsidiary ofabank holding company mayderive from these activities, aswellastopartially
easeoreliminate thefirewalls between thesubsidiary anditsaffiliated bank (Federal Register, 5August 1996).
132Arecent decision oftheU.S. Supreme Court confirmed thatanational bank cansellinsurance products
insmall towns withapopulation ofnotmore than5,000 through aState-licensed agency, inspite ofaState law
toprohibit suchsales. Barnett Bank ofMarion County v.Florida Insurance Commissioner (26March 1996,
No.94-1837)
133Ontheother hand, California added alimitation ontheentry ofgovernment-owned or-controlled insurance
companies attheendoftheextended negotiations onfinancial services under theGATS inJuly1995.United States WT/TPR/S/16
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123. Remaining limitations onnational treatment inanumber ofStates include therequirement that
amajority ofdirectors and/or incorporators ofaninsurer beU.S. citizens.134Some States haveno
mechanism forinitial entry bynon-U.S. insurers asbranches and/or subsidiaries, duetoaperceived
lackofresources necessary toeffectively supervise non-U.S. insurers, especially branches.135Aspecial
federal excise taxof1percentonlifeand4percentonnon-life insurance premiums isimposed for
U.S.riskspaidtocompanies notincorporated under U.S.law.136Alarge number ofStates prohibit
theconduct ofbusiness bygovernment-owned orgovernment-controlled insurance companies, based
onconcerns about unfair competition bysubsidized insurers from abroad (including Canada).
124. Insecurities, theSecurities andExchange Actof1934 gives theSecurities andExchange
CommissionbroadregulatoryauthorityoverU.S.marketsandpersonsdealingwithsecurities.Although
abroker-dealer generally must register withtheSECtoeffect transactions insecurities, exemption
isgranted toforeign broker-dealers thatengage from off-shore incertain activities involving U.S.
institutional investors andU.S.markets, suchas"non-direct" contacts byforeign broker-dealers with
U.S.investors andmarkets, orthrough execution ofunsolicited securities transactions. Foreign broker-
dealers mayprovide research reports tomajor U.S.institutional investors andeffect transactions in
thesecurities discussed inthose reports, provided certain requirements aremet.Certain direct contacts
between foreign broker-dealers andU.S.institutional investors arealsopermitted, provided thatany
securities transactions areeffected through aregistered U.S. broker-dealer, andother requirements
aremet. Most States require thatsecurities offered intheState beregistered intheState, although
exemptions areavailable toissuers whose securities aretraded oncertain exchanges anddesignated
markets. Federal lawsdonotpre-empt State lawsrelated tosecurities offerings.
125. National treatment istherule. Alimitation onthisisthePrimary Dealers Act,which restricts
designation offoreign-owned entities asprimary dealers intheU.S.government debtmarket iftheir
home country doesnotaccord the"same competitive opportunities" inunderwriting anddistribution
ofgovernment debtinstruments toU.S.firms asitaccords todomestic companies. ThisActgives
explicit legalauthority toapply differential treatment among countries, andthustheUnited States took
anm.f.n. exemption andentered acorresponding limitation initsSchedule under theGATS.137
126. TheInvestment Advisors Actof1940excludes U.S.banks andbankholding companies from
thedefinition of"investment advisor," andtherefore from regulation under theInvestment Advisors
Act. Foreign banks andbankholding companies arenotsimilarly excluded. Domestic banks, which
areregulated under U.S. banking regulation, were excluded from regulation under theInvestment
Advisors Acttoavoid subjecting them toduplicative regulation.
134According totheauthorities, thisisareflection ofthedesire ofState authorities tobeabletotakenecessary
legal action against theinsurers toprotect theinterests ofpolicyholders andclaimants.
135InJuly1994, theNAIC approved aState-of-Entry Model Lawwhich provides guidance forStates seeking
tobeaninitial point ofentry forbranches ofnon-U.S. insurers. Only theState ofMichigan hasadopted the
Model sofar.
136Thestated purpose ofthefederal excise taxistolevel theplaying fieldbetween U.S.insurers andforeign
insurers notsubject tonetbasis U.S. taxonpremium income; there areforeign insurers whoconsider this
discriminatory.
137TheU.S.authoritieshavenoted,however,thatforeignfirmshavesignificantinvolvementasprimarydealers
intheUnited States, accounting forapproximately 45percentoftheprimary government securities dealers
reporting totheFederal Reserve Bank ofNew York asat28March 1996.WT/TPR/S/16 Trade Policy Review
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127. Section 7(d)oftheInvestment Company Actprohibits aforeign investment company from
publicly offering itsshares intheUnited States unless theSECissues, onacase-by-case basis, anorder
permitting thecompany toregister under theInvestment Company Act. Section 7(d)authorizes the
SECtoissue suchanorder iftheCommission finds thatitisbothlegally andpractically feasible to
enforce theprovisions oftheInvestment Company Actagainst theforeign investment company, and
thattheissuance oftheorder isconsistent withthepublic interest andtheprotection ofinvestors.
Thepurpose ofSection 7(d)istoensure thatU.S.investors havethesame levelofprotection when
theyinvest inforeign investment companies aswhen theyinvest indomestic investment companies.138
128. Since foreign regulatory systems forinvestment companies differ greatly fromthatunder the
Investment Company Act,most foreign investment companies have found itdifficult tomeet this
standard, andhavetherefore chosen nottoseekorders under Section 7(d). In1992, theSEC'sDivision
ofInvestment Management recommended amending Section 7(d)toaddress some ofthedifficulties
thatforeign investment companies haveinmeeting Section 7(d)requirements. Neither theSECnor
Congress hastaken anyaction onthisproposal.139
129. According totheU.S.authorities, thereisapractical means forforeign advisors togainaccess
totheU.S.market without thenecessity ofobtaining aSection 7(d)order. Foreign advisors mayregister
asinvestment advisors intheUnited States, andthenorganize andregister investment companies under
U.S.law.Many foreign advisors haveorganized U.S.funds. TheSECstaffhastaken stepsinrecent
years tofacilitate theability offoreign advisors toorganize U.S.funds byeasing restrictions onforeign
advisors whoserve bothU.S.andforeign clients.
Recent andpending reforms
130. TheRiegle/Niel Interstate Banking andBranching Efficiency Actof1994 made possible the
following three means ofinter-State expansion forforeign anddomestic banks, thuspre-empting the
lawsof38States thathadallowed inter-State banking onlyonareciprocal orregional basis:
- inter-Statebankingbyacquisition:i.e.,adequatelycapitalizedbankholdingcompanies(including
foreign banks) areallowed toacquire abankinanyU.S.State asfrom29September 1995;
- inter-State branching bymerger: i.e.,States mayapprove anout-of-State banktomerge with
anin-State bankandthenallow theresulting banktocontinue tooperate branches, beginning
1June1997; and
- inter-State branching bydenovo establishment ofdirect branches: i.e.,abankwillbeable
toestablish andoperate abranch inaStateinwhich thebankdoesnotalready operate, provided
thehost-State lawexpressly permits suchinter-State branching.
Oninter-State banking bymerger, States mayenact lawstopermit mergers earlier than1June1997
(early opt-in), andenactlawsbefore 1June1997nottopermit inter-State branching bymerger (opt-out).
AsofApril1996,34States(includingCalifornia,Illinois,NewYork,andPennsylvania)andPuertoRico
138TheSEChastheauthority toaddress onacase-by-case basis issues presented byforeign funds thatpropose
alternative methods ofmeeting theInvestment Company Act'srequirements inorder tomeet thestandards of
Section 7(d). Suchalternative methods could include undertakings orother arrangements bywhich foreign funds
could meet theconcerns addressed bytheInvestment Company Actwhere comparable home country regulations
donotexist. Inthisregard, Section 7(d)contemplates amore flexible approach toforeign funds thantodomestic
funds.
139Theproposal toamend theICAincluded exempting aforeign fundfrom certain provisions oftheICA
ifforeign laws, orspecific conditions agreed tobytheforeign fund, provided investor protection comparable
tothatprovided bytheICA.United States WT/TPR/S/16
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haveopted-in tosome form ofinter-State branching bymerger, while Texas hasopted out. Texas
legislation, however, contains asunset provision thatremoves therestriction after1999. Inthecase
ofdenovo interstate branching, tenStates andPuerto Ricohaveexplicitly permitted thismode of
inter-State banking insome form.
131. TheActgrants national treatment toforeign banks inproviding opportunities forinter-State
banking, butithassome provisions pertaining specifically tothetreatment accorded toforeign banks.
Oneistoprovide athree-year moratorium ontheimposition ofFRBexamination feesonforeign banks
mentioned above. Another continues theapplication oftheCommunity Reinvestment Act(CRA) to
aforeign bank, ifthelatter acquired anexisting bankorbranch previously subject totheCRA ina
Stateinwhich theforeign bankdidnotpreviously maintain abranch; under theCRA abankisrequired
tolendacertain amount tomeetlocalcommunity credit needs. Since aforeign banknotincorporated
intheUnited States would inprinciple notbeabletotakeretail deposits under current legislation,
concerns havebeenraised thatthisprovision might overly burden foreign banks 'inter-State operations
andmaybeinconsistent withnational treatment. TheUnited States hasstated, however, thatthe
provision treats foreign banks thatchoose tomake suchinter-State acquisitions thesame assimilarly-
situated U.S.-incorporated banks thatdonottakeretail deposits butarenonetheless subject toCRA
requirements, andtherefore there isnodeviation from theprinciple ofnational treatment.
132. Recently, billshavebeenconsidered intheCongress toreform theGlass-Steagall Act,providing
formore liberal access intosecurities businesses bybanks andbank holding companies. The
Administrationhasstatedthatitsupportsfinancialsystemreformandhasproposedpermittingaffiliations
between banks andother financial institutions, including insurance companies, while maintaining the
separation between banking andcommerce. TheHouse ofRepresentatives hasconsidered aproposal
thatwould allow affiliations between banks andsecurities firms, andmore recently aproposal that
would alsoinclude affiliations withinsurance companies. However, afullfloor votehasyettobe
taken onaHouse billandnoaction hasbeentaken asyetonafinancial modernization billintheSenate.
Oneobjective ofthereform would betofurther strengthen theglobal competitiveness ofU.S.financial
institutions.
133. Inearly 1995, aFairTrade inFinancial Services billwasintroduced inCongress. Thatbill,
onwhich there hasbeennoactive discussion inCongress, would haverequired theExecutive Branch
toidentify foreign counties thatfailed toprovide U.S.banking, securities, andinsurance institutions
withnational treatment. Thebillwasdrafted tomake theimposition ofsanctions contingent upon
afinding ofadverse effect onU.S. financial institution. TheExecutive Branch would have been
authorized toenter intonegotiations withthecountry orcountries found tobenotproviding national
treatment priortotheimposition ofsanctions. Thebillalsowould havemade theimposition ofsanctions
discretionary onthepartoftheExecutive Branch; would have required consultations withU.S.
regulatory agencies; andwould haverequired thatanyimposition ofsanctions beconsistent withany
U.S.bilateral ormultilateral obligations concerning financial services. Although thebillhasnotbeen
enacted aslawtodate,suchlegislation could cause concern tothetrading partners oftheUnited States,
totheextent thatdifferential treatment ofcountries based onsuchlegislation would beinconsistent
withm.f.n. treatment.
134. Inthefinancial services negotiations under theGATS concluded inJuly1995, theUnited States
wasoftheviewthatoffers from many important countries didnotprovide substantially fullmarket
access andnational treatment.140IttookanArticle II(m.f.n.) exemption which enables ittoapply
140TheUnited States wasparticularly concerned thattheoffers ofmany ofitstrading partners didnotprovide
fornewmarket access, protect fully thecurrent market access offoreign firms, oreliminate thepossibility to
force divestiture offoreign firms.WT/TPR/S/16 Trade Policy Review
Page 160
reciprocity provisions toother countries 'financial services suppliers withrespect totheexpansion of
existing operations, theestablishment ofanewcommercial presence, ortheconduct ofnewactivities.
Newactivities would include anyactivity requiring approval ofU.S.authorities, suchasexercising
thenewopportunities toengage ininter-State banking. Subsequently, theUnited States made bilateral
commitments onm.f.n. andnational treatment totheEuropean Union, Japan andSwitzerland. This
wasconditionedonthosepartiesmaintainingtheircommitmentsintheWTOandimplementingbilaterally
agreed liberalization measures.
135. TheGATS financial services negotiations areexpected toresume towards theendof1997when
WTO Members willhaveanother opportunity torevise theircommitments. Whether WTO Members
includingtheUnitedStateswilltakeanm.f.n.-basedobligationundertheGATStoguaranteesubstantially
fullmarket access andnational treatment toforeign financial services suppliers could beoneofthe
focal points ofinterest inthethese negotiations.
136. AccordingtotheU.S.authorities,enforcementofthem.f.n.exemption,i.e.differentialtreatment
offoreign financial service suppliers based onreciprocity intheabsence ofFTFS legislation, ispossible
under broad legalauthorization available totheExecutive Branch, butnotunder thepower oftheFederal
Reserve orotherfinancial regulators. However, thisisnotarequirement, anditremains normal practice
oftheU.S.Government toprovide national treatment onanon-discriminatory basis. Inthem.f.n.
exemption listunder theGATS, theUnited States haslisted Statemeasures applying areciprocity test
when granting permission toforeign banks toestablish State-licensed branches oragencies, ortoown
commercial banksubsidiaries.
137. Outstanding bilateral tradeissues infinancial services include theimplementation ofmeasures
agreed withJapan inOctober 1994regarding insurance andfurther measures inFebruary 1995regarding
other financial services. Theinsurance measures tobetaken byJapan cover deregulation regarding
theapproval ofinsurance products andrates, introduction ofinsurance brokerage services, transparency
andprocedural protection, andcompetition policy. Thefinancial services measures tobetaken by
Japan cover suchareas aseffective participation byinvestment advisory companies inthemanagement
ofJapanese pension funds; easier availability ofbusiness licences aswellasderegulation inthearea
ofinvestment trusts; broadening ofthetypes ofsecurities thatcanbetransacted; andsimplification
ofapproval andnotification processes forcross-border transactions. Commitments bytheUnited States
under these measures include thefollowing:
Insurance:
- toencourage theNAIC tocontinue and,asappropriate, intensify itsefforts toprovide
fortheinitial entry ofnon-U.S. insurance providers without prior establishment in
another State, andtoaddress theissue ofcitizenship requirements fortheboard of
directors offoreign insurance providers; and
- towelcome consideration bytheNAIC, ifappropriate, ofthetimeperiod forreview
oflicensing applications ofinsurance providers;141
Other financial services:
- toconsult withtherelevant administrative authorities oftheGovernment ofJapan, at
theirrequest, withtheviewtoward exploring and,where appropriate, toimplementing
141According totheU.S.authorities, theNAIC doesnotcurrently haveformal activities regarding citizenship
requirements andthetimeperiod forreview oflicensing applications ofinsurance providers.United States WT/TPR/S/16
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administrative action toaddress restrictions onaccess byforeign investment trusts and
issues raised bytheGovernment ofJapan thatconcern investment advisors; and
- toconsider theissues raised bytheGovernment ofJapan regarding areas where it
believes there isanoverlap between federal securities registration requirements and
State securities registration requirements, andwhich itbelieves create impediments
totheofferintheUnited States ofsecurities ofJapanese issuers, and,asappropriate,
toexplore means ofaddressing these issues.
TheUnited States andJapan haveconfirmed thatthese measures willbeapplied onanm.f.n. basis
bybothparties toallWTO Members.
138. Noapparent problem hassofarbeenidentified intheimplementation oftheFebruary 1995
measures onfinancial services, butadisagreement seems tohaveoccurred between thetwoGovernments
with regard totheimplementation inJapan oftheOctober 1994 measures oninsurance. The
United States hasnoted thattoallow entry intotheso-called "third sector" (personal accident, sickness,
andnursing careinsurance) oftheJapanese market bysubsidiaries ofmajor Japanese insurance
companies,asannouncedbytheJapaneseGovernment,wouldnotbeinconformitywiththeOctober1994
measures unless certain conditions aremet,particularly deregulation ofasubstantial portion ofthe
lifeandnon-life insurance markets.142
139. Future regulatory reforms inthefinancial services sector oftheUnited States willneed, as
anywhere elseintheworld, tostrike afinebalance between thecontinuing needforeffective prudential
regulation andthepursuit offinancial liberalization policies, which could involve adifficult choice
between re-regulation andderegulation ofthefinancial markets anditsvarious participants. Despite
recent incidents involving foreign banks intheUnited States, suchasthetermination ofDaiwa Bank's
banking licence, U.S.banking authorities donotenvisage anychange inlegislation leading torestrictions
onentry offoreign banks intheUnited States. Anenhanced framework forsupervising theU.S.
operations offoreign banking organizations (the"FBO Program") wasdeveloped andadopted in1995
bytheFederal Reserve inco-operation withother federal andState supervisory authorities. This
programme included procedures forco-ordinating theexamination ofU.S.offices offoreign banks
bytherelevant supervisory agencies.143Closer international co-operation hasbeencalled forinthis
area.144
(iv) Transportation
(a) Airtransport
140. After some years oflosses, theU.S.airline industry seems tohavebecome profitable, with
thenumberofpassengerscarriedandfreightcapacityincreasingsteadilyinrecentyears."Transportation
byair"represents around 0.7percentofnominal GDP. Intheperiod 1990 to1993, airline fares
increased by20percentwhile theU.S.consumer priceindex wasupbyabout 10percent. Although
theprice index might notfullyreflect theabundance ofdiscount fares, itcould suggest thatsome
142United States Trade Representative (1996).
143However, according totheU.S. authorities, there arenochanges pending thatwould altertherôles of
theFederal Reserve andState regulators supervising andexamining State-chartered offices offoreign banks,
andtheFederal Reserve andtheOffice oftheComptroller oftheCurrency (OCC) supervising andregulating
Federally-chartered offices offoreign banks.
144Seeforexample, theLyon Summit Economic Communiqué, Lyon, 28June 1996.WT/TPR/S/16 Trade Policy Review
Page 162
passenger faresareontherisewhile airfreight prices mayhavedeclined inrecent years.145Intrade
flows, transactions onpassenger fares, ofwhich airfaresconstitute thebulk, hasbeenarising share
ofbothexports andimports inrecent years, representing around 10percentofinternational transactions
inprivate services, andhavebeeninsurplus; airfreight hasalsobeeninslight surplus. Theshares
ofU.S.flagaircarriers inU.S.international passenger andfreight traffic inrecent years havebeen
relatively stable ataround 53to54and39to42percent, respectively.
Regulatory framework
141. Until theAirline Deregulation Actof1978, theU.S.CivilAeronautics Board (CAB) regulated
theentry, pricing androute selection ofairlines, inthepublic interest. However, during the1970s,
public dissatisfaction withtheregulatory framework invarious areas prompted Congress topassthe
Airline Deregulation Act,substantially relaxing theregulation ofnewentries andfares. TheActphased
outtherateandroute authority oftheCAB overtime. In1984 itwasdecided toeliminate theCAB
itself, anditsresidual functions concerning airline mergers andconsumer protection weretransferred
totheDepartment ofTransportation. Since deregulation, theU.S.airline market hasprobably been
themostderegulated oftheworld, withliberalized pricing andmarket entry. Most observers agree
thatderegulation hasincreased efficiency andbenefited bothconsumers andairlines, although some
critics point tothedevelopment ofanoligopolistic market structure asaresult ofmergers andexits
from themarket.146
142. TheFederal Aviation Administration (FAA), which ispartoftheDepartment ofTransportation
(DOT), approves newaircarriers aswellasconducting supervision andinspection ofexisting carriers.
Onthebasisofsafety standards, theFAAcanprohibit aforeign carrier fromflying totheUnited States.
Apart fromsafety andmaintenance requirements, remaining restrictions arethoseoninternational flights
forwhich international bilateral agreements apply, andtherestriction inSection 1301 (3)oftheFederal
Aviation Actof1958 thatforeign airline companies cannot ownmore than25percentofaU.S.air
carrier 'svoting equity. However, withregard tothelatter restriction, theDOT haspermitted, ona
case-by-case consideration, foreign beneficial ownership ofupto49percentofaU.S.aircarrier 's
equity. Anumber ofbillshavebeenintroduced inCongress thatwould permit foreign investments
ofupto49percentofvoting stock, subject totherebeing aliberal, pro-competitive aviation relationship
withtheinvestor 'shome country.
143. Currently, traffic rights andservices directly related totheexercise oftraffic rights areoutside
thescope oftheGATS; theAnnex onTransport Services further specifies thattheGATS shallnot
reduce oraffect aMember 'sobligations under bilateral ormultilateral agreements thatareineffect
onthedateofentry intoforce oftheWTO Agreement. Suchbilateral civilairtransport agreements
haveoften restricted newentries orexpansion ofservices ininternational airroutes inallcountries.
TheU.S.-Japan agreement isanexample ofsuchanagreement. However, inthecontext ofbilateral
discussions, aseparate agreement wasreached between theUnited States andJapan on28March 1996
torelax therestrictions onaircargo services forcarriers ofbothcountries, following asettlement in
July1995topermit Federal Express, aU.S.cargo carrier, toexercise itsrighttooperate beyond Japan
145According totheauthorities, passenger yields, which isthequotient ofallpassenger farerevenues divided
byallrevenue passenger miles, havefallen bymore than25percentinrealterms from thelevel in1978, when
theAirline Deregulation Actwasenacted. This, however, includes onlyyields ofU.S. flagcarriers, from both
domestic andinternational flights.
146Forexample,GeorgeWilliams(1994),statesthatcompleteeconomicfreedomdoesnotnecessarilyguarantee
astrongly competitive environment. However, Steven Morrison (1995), states that"although there isroom for
disagreement, analysts believe thatreturning theindustry totraditional rateandentry regulation would atbest
bepremature,and atworst amistake". SeealsoDipendra Sinha (1995).United States WT/TPR/S/16
Page 163
toother Asian destinations. Discussions toliberalize airpassenger services between thetwocountries
areongoing.
144. TheUnited States hasreached anumber of"open skies" agreements withother countries.147
These agreements havestarted toallow freeaccess forairlines ofbothparties totheagreement from
anypoint inonecountry toanypoint inanother country through anypoint ineither country. The
onlyremaining restrictions willbeoncabotage andontheso-called "seventh freedom"; i.e.routes
without anylinktotheairline 'shomeland. TheUnited States hasconcluded such"open skies"
agreementswith12Europeancountries;theNetherlands,Norway,Sweden,Denmark,Finland,Belgium,
Austria, Switzerland, Iceland, Luxembourg, Germany andtheCzech Republic. Theagreement with
theCzech Republic willenterintoforceinNovember 1997withfulllegaleffect fromNovember 1999.
TheUnited States alsoconcluded anewagreement withCanada inFebruary 1995, which provides
fortransborder "open skies" attheendofatransition period. Themostrecent "open skies" agreement,
agreed withGermany on29February 1996, allows airlines ofbothcountries tooperate toanypoint
ineither country aswellastothirdcountries without limitation; allows airlines ofbothcountries to
settheirprices without restriction; andremoves allrestrictions oncode-sharing, thusmaking iteasier
toformairline alliances. TheEuropean Commission wasmandated recently tonegotiate anagreement
withaviewtocreating acommon aviation areawiththeUnited States.
145. TheGATS applies toaircraft repair andmaintenance services, theselling andmarketing of
airtransport services andcomputer reservations system (CRS) services.148TheUnited States hasbound
aircraft repair andmaintenance services undertaken while anaircraft iswithdrawn from service, in
itsSchedule ofGATS commitments.149Ithastaken m.f.n. exemptions withregard totheselling and
marketing ofairtransport services andtheoperation andregulation ofCRS services. Analleged
discriminatory practice thathasbeennoted byforeign airlines hasbeentheaccess tomarketing, booking
andsalesdatagenerated byCRSs intheUnited States. Although negotiations between theEuropean
Commission andtheDOT haveresulted inthelifting ofdiscriminatory treatment ofnon-U.S. carriers
intheprovision ofsuchdata150,theCommission claims thatsome systems givepreference to"on-line"
services (connections withthesamecarrier) over"interline" services (connections withothercarriers).151
Thisallegedly disadvantages non-U.S. carriers which, unlike theirU.S.competitors, mustrelyoninter-
airline connections forservices toandfrom U.S.airports other thantheirowngateways. TheU.S.
authorities statethatCRSproviders arefreetodisplay on-line andinterline services astheirclients
prefer, aslongasthetreatment isnon-discriminatory.
147Such bilateral "open-skies" agreements typically provide open entry intoeach other'smarkets, allow
unrestricted capacity andfrequency onallroutes andfreedom insetting fares.
148However, totheextent thatthose services havebeencovered bybilateral airtransport services agreements
withother countries, theGATS does notreduce oraffect theobligations under those agreements.
149Aircraft repair andmaintenance services aresubject tosafety requirements oftheFAA. Countries having
airsafety lawsandorganizations comparable tothose oftheUnited States have concluded bilateral airsafety
agreements withtheUnited States which would make itpossible tosubstitute national safety inspections forthose
oftheFAA.
150According totheU.S. authorities, when non-U.S. CRSs became capable ofreciprocal provision ofthese
datain1994, theDOT granted anexemption from arulethathadpreviously limited foreign access inorder to
avoid conferring anunreciprocated competitive advantage onnon-U.S. airlines.
151See"Report onU.S. Barriers toTrade andInvestment", theEuropean Commission, Brussels, May1995,
p.58.WT/TPR/S/16 Trade Policy Review
Page 164
146. Another measure thatsome havepointed tointhepastasbeing possibly disadvantageous to
newentrants isthesystem ofadministratively restricting thedistribution oftake-off andlanding rights
atairports. Thecost-free award ofscarce slotsonthebasis of"grandfather rights" hasencouraged
airlines toapply foradditional slotsinorder togainacompetitive advantage byoffering more frequent
flights. Fornewcomers, sometimes, additional slotscould beacquired onlythrough mergers.152
147. Section 2oftheInternational AirTransportation FairCompetitiveness Actof1974, asamended,
andtheFederal Aviation Actof1958, asamended confers ontheSecretary ofTransportation the
authority to:
- survey charges imposed onanaircarrier byaforeign government oranother foreign entity
fortheuseofairport orairway property andtonegotiate andestablish acompensating charge,
ifnecessary, when thecharge isfound tobediscriminatory; and
- takeactions toeliminate anactivity ofaforeign government oranother foreign entity ifthe
activity (a)isanunjustifiable orunreasonable discriminatory, predatory, oranti-competitive
practice against anaircarrier; or(b)imposes anunjustifiable orunreasonable restriction on
theaccess ofanaircarrier toaforeign market.
(b) Maritime transport
148. Theimportance ofocean transport intheshipment ofU.S.exports andimports hasdeclined.
In1980, shipping byvessel accounted for55percentofallmethods oftransporting exports and
69percentofimports invalue terms, butin1994 these wereonly35and51percent,respectively.
Theshare of"water transport" inGDP hasbeendeclining slightly since 1980, andisnowbelow
0.2percentinbothcurrent andconstant prices. Boththenumber andgross tonnage ofU.S.-registered
merchant vessels havedeclined inrecent years, andemployment onU.S.-flag merchant vessels was,
at9,100 in1994, lessthanhalfwhatitwasin1980. TheU.S.authorities estimate thattheshare of
U.S.-flag carriers inU.S.ocean-borne international tradehasbeenaround 4percentoverthelastfive
years. Containerization ofcargo andnewtechnologies fortransport documentation aswellas
deregulation havegiven birthtotheconcept ofinternational multimodal transport resulting inastructural
change ofrelated transport service industries (Box IV.4).
149. While theMaritime Administration oftheDepartment ofTransportation deals withpolicies
fordeveloping andmaintaining amerchant marine required forbothcommercial trade andnational
defence, theFederal Maritime Commission isresponsible forregulating ocean-borne transportation
inforeign commerce anddomestic offshore trade, anddeals withdiscriminatory orunfair practices
offoreign governments orcarriers related toU.S.orforeign commerce.153
150. Section 27oftheMerchant Marine Actof1920, theso-called Jones Act,requires thatallgoods
transported bywater between U.S.portsbecarried inU.S.-flag ships, constructed intheUnited States,
owned byU.S. citizens andcrewed wholly byU.S. citizens (Box IV.5). TheJones Actlimits the
delegation ofvessel inspection andplan-review functions bytheCoast Guard totheAmerican Bureau
ofShipping (ABS) orasimilar U.S. classification society. Proposed legislation (theCoast Guard
Authorization Actof1996) would allow theCoast Guard todelegate authority related tovessel inspection
152Cornelius andPfähler (1993), p.186. Also seeButton (1993), p.67.
153Theinformation provided below derives largely from theU.S.Response totheQuestionnaire onMaritime
Transport Services inWTO document S/NGTMS/W/2/Add.11 of31January 1995 anditssupplement of
6April 1995.United States WT/TPR/S/16
Page 165
andplanreview toforeign classification societies.154Theproposed legislation includes areciprocity
requirement toensure equal delegation andaccess totheABSinforeign markets. Thisbillwaspassed
byCongress on28September 1996 andnowawaits Presidential signature.
BoxIV.4: International Multimodal Transport
International multimodal transport isaprocess whereby goods pass from onecountry toanother by
various modes oftransport. With theadvent ofcontainerization, efficient andseamless services from
door todoor byasingle transport service supplier canbeprovided fortheir customers. The
transportation process isacombination ofinland transport, portandterminal handling, ocean carriage,
andinland transport aswellasportandterminal handling attheother end, butthemultimodal service
supplier assumes theriskofon-time delivery aswell asanyfinancial consequences forcargo lossor
damage.
There isnodistinct class of"multimodal carriers". However, there arecarriers andintermediaries who
specialize inproviding multimodal service. Theindustry developed inthelate1950s when truck trailers
were placed onships toexpedite themovement offreight. Byvirtue ofthederegulation laws ofthe
1980s, shippers andcarriers could begin tailoring transportation services tomeet their needs andto
effectively contract forfreight services.
There areavariety ofregulatory issues related tomultimodal transport. Operating andsafety
regulations, aswell asinfrastructure decisions regarding transport services arestillbased onan
orientation byeach mode oftransport. Theneed toaddress thetreatment ofinternational multimodal
transport hasbeen taken upintherecently suspended negotiations onmaritime transport services under
theGATS.
BoxIV.5: Economic Effects ofDeregulation: theJones Act
Some estimates have been made oftheeconomic costs oftheJones Act. Forexample, arecent study by
theU.S. International Trade Commission (USITC)a,suggests thattheeconomic costs oftheActranged
from $1.1billion to$3.1billion annually. A1993 estimate bytheUSITC dealing onlywithocean-borne
cargo for1991b,measured thewelfare gainfrom theremoval oftheJones Actat$3.1 billion, while a
more recent study bytheUSITC dealing alsowithocean-borne cargo puttheeconomy-wide welfare gain
ofremoving theJones Actat$2.8 billion.cSuch estimates depend heavily onassumptions about the
expected fallintheprice ofshipping services should therestrictions under theJones Actberemoved,
andtheresulting adjustment ofthedomestic shipping sector.
a U.S. International Trade Commission, The Economic Effects ofSignificant U.S. Import
Restraints: First Biannual Update, December 1995.
b USITC, The Economic Effects ofSignificant U.S. Import Restraints, publication 2699,
November 1993.
c USITC, op.cit, December 1995. SeealsoJoseph F.Francois, Hugh M.Arce, Kenneth A.
Reinert, andJoseph E.Flynn, Commercial Policy andtheDomestic carrying trade, Canadian
Journal ofEconomics, XXIX No.1, February 1996.
151. Under "cargo preference" measures, certain types ofgovernment-owned or-financed cargoes
mustbecarried onU.S.flagcommercial vessels. Specifically, onlyvessels ofU.S.registry orvessels
belonging totheUnited States maybeusedinthetransportation byseaofsupplies bought forU.S.
154There isnorequirement todelegate theauthority toissue loadlines andtonnage certificates toU.S.
classification societies. Neither isthere arequirement forvessel classification byanyclassification society.WT/TPR/S/16 Trade Policy Review
Page 166
military agencies. Fiftypercentofnon-military government cargoes (75percentinthecaseofcertain
agricultural commodities) arereserved forprivately owned U.S.registered ships. Cargoes generated
inconnection withloans made byinstrumentalities oftheU.S.Government inconnection withthe
export ofU.S.products (such asproject cargoes resulting fromloans made bytheExport-Import Bank
oftheUnited States) aretobecarried inU.S.vessels, although theSecretary ofTransportation may
permit upto50percentofsuchcargoes tobecarried invessels oftherecipient country ifthatcountry
doesnotdiscriminate against U.S.vessels. According totheU.S.authorities, theproportion ofU.S.
international ocean-borne shipping covered bysuchpreferential measures isroughly 2percentby
volume.155
152. Other countries alsomaintain various restrictive measures inmaritime transport, especially
intheareaofcabotage, i.e.domestic coastal trade between twodomestic ports. Inthisrespect, the
United States doesnotstand outasanexception, although theJones Actisoneofthemostwell-known
ofsuchmeasures. However, given thepotential costtotheeconomy oftheprotective measures, in
terms ofhigher faresandlessefficient service resulting fromthelackofcompetition, itisuseful for
WTO Members toidentify areas where liberalization measures could betaken bythem, including the
United States. Although cabotage wasineffect excluded fromthescope ofthenegotiations onmaritime
transportservicesundertheGATS,thesenegotiationswereaimedatreachingagreementonliberalization
ofinternational shipping, auxiliary services, access toanduseofportfacilities, andmultimodal transport
services. TheUnited States participated inthose negotiations, but,taking theviewthattheoffers of
other participants were notadequate, didnotpresent anoffer.
153. Inaddition tothecargo preference measures mentioned above, some other factors maycause
concern. These include anumber ofprovisions inU.S. maritime lawthatcallforreciprocity or
retaliation against foreign discriminatory treatment. Thefollowing measures, which arenotmandatory,
cover aspects thatare"unfavourable toshipping inU.S.foreign trades":
- Section 19oftheMerchant Marine Actof1920 provides authority totheFederal Maritime
Commission (FMC) tocounter conditions unfavourable toshipping inU.S.foreign trade that
arise outofforeign laws, rules orregulations, orfrom competitive methods orpractices
employed byowners, operators, agents, ormasters ofvessels ofaforeign country;
- Section 13(b)(5) oftheShipping Actof1984 provides similar authority totheFMC when it
finds, afternotice andhearing, thattheaction ofacommon carrier oraforeign government
hasunduly impaired access ofU.S.-registered ships toocean tradebetween foreign ports; and
- theForeign Shipping Practices Actof1988 (Title X,Subtitle AoftheOmnibus Trade and
Competitiveness Actof1988) mandates theFMC toinvestigate whether anylaws, rules,
regulations, policies orpractices offoreign governments, oranypractices offoreign carriers
orother persons providing maritime ormaritime-related services inaforeign country result
inconditions thatadversely affect theoperations ofU.S.carriers intheU.S.ocean-borne trade.
Thefirstandthethirdprovisions focus onshipping between theUnited States andforeign destinations,
while thesecond covers ocean trade between foreign countries. Section 19oftheShipping Actof
1920 andtheForeign Shipping Practices Actcanbeinvoked byaforeign carrier aswellasaU.S.
carrier.
155According totheU.S. authorities, suchmeasures arecurrently exempt from obligations under theGATS
byvirtueofArticleXII:1(GovernmentProcurement),andfromcommitmentsundertheGovernmentProcurement
Agreement through entries inAnnex I(Central Government Entities) andAnnex IV(Services).United States WT/TPR/S/16
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154. Itisimportant tonotethatthese provisions havenotveryoften ledtoactual sanctions156and
indeed section 13(b)(5) oftheShipping Actof1984hasnever beeninvoked. Nevertheless, theexistence
ofsuchmeasures canbeusedasnegotiating leverage bytheUnited States inbilateral negotiations with
other countries.
155. Some recent initiatives byCongress toreview maritime legislation include theMaritime Reform
Bill,which would eliminate theFederal Maritime Commission andanumber offiling requirements
fortariffs oflinerconferences. Thisbillhasnotbeenenacted.157Ontheother hand, theMaritime
Security Actof1995, which contains anewprogramme replacing theexisting Operating Differential
Subsidy Program158,andanAct(Section 28oftheMineral Leasing Act,asamended) toliftabanon
exports ofAlaskan North Slope Oilunder thecondition thatitbeshipped onU.S.-flagged andmanned
vessels, havebeenenacted.159
156. Objections havebeenraised byanumber oftrading partners including theEuropean Union,
Japan andNorway ontheenactment ofthelatter bill.According tothese countries, theprovision to
reserve theshipping oftheoiltoU.S.-flagged andmanned ships violates U.S. commitments under
bilateral treaties between governments aswellastheU.S.commitment under theWTO Ministerial
Decision onNegotiations onMaritime Transport Services, donebyMembers oftheGATS.160The
OECDCommonPrinciplesofShippingPolicyalsocontainacommitmentnottointroducenewmeasures
torestrictcompetitiveaccesstointernationalcargoes.TheUnitedStatesdisagreeswiththeseallegations,
andmaintains thatthelegislation doesnotviolate U.S.international obligations; itdoesnotimprove
theU.S. negotiating position, since oilfrom Alaska could notpreviously betransported inforeign
vessels asitwasonlyshipped toU.S.ports. According totheU.S.authorities, thelegislation will
actuallyincreaseopportunitiesforforeignshippersbecauseoilimportedbytheU.S.fromothercountries
willhavetosubstitute fortheAlaskan oilthatwillbeexported.
156Ofthe37cases registered under Section 19oftheShipping Actof1920 andtheForeign Shipping Practices
Actof1988 since 1945, theFMC assessed sanctions inthree cases (twocases related toU.S. trade withthe
Republic ofKorea, andonecaserelated toU.S.trade withPeru), buttheywere suspended from entry intoforce
toallow timeforother countries tomake changes based onbilateral negotiations. Inonecase(U.S. trade with
Ecuador), theFMC collected acashsettlement.
157Aproposed amendment oftheShipping Actof1984, supported byshippers, contained thefollowing points:
reconsiderationofanti-trustimmunityforshippingconferences;institutionalizationofconfidentialservicecontracts,
permitting ratecutstobemade confidentially; abolition ofthetariff-reporting system; andthedissolution of
theFMC, withitsresidual regulatory functions transferred totheDOT.
158Thisconsists offunds tocompensate forcostdifferences between U.S. operators andtheirmajor foreign
competitors ondesignated trade routes. AtotalofUS$218 million waspaidtofourparticipating carriers in1991.
159On28April 1996, thePresident made adetermination required bytheAct,thatsuchexports would be
inthenational interest, after consideration oftheresults ofanenvironmental review.
160Paragraph 7ofthisDecision states thatparticipants shallnotapply anymeasure affecting trade inmaritime
transport services except inresponse tomeasures applied byother countries andwithaview tomaintaining or
improving thefreedom ofprovision ofmaritime transport services, norinsuchmanner aswould improve their
negotiating position andleverage.WT/TPR/S/16 Trade Policy Review
Page 168
(v) Other services
(a) Professional services
157. Professional services isavastanddiverse area, making itdifficult toprecisely indicate the
share ofthese services inU.S. GDP. Using standard definitions, thesumof"business services"
(including legalservices) amounted tosome 5.1percentofGDP in1992 compared to3.5percent
in1980. Employment in"professional andrelated services" increased fromabout 13million in1970
to29million in1994, accounting formore thanathirdoftotalemployment growth intheUnited States
during thesameperiod. TheU.S.tradesurplus forbusiness services wassome US$12 billion in1995,
upfromabout US$5.5 billion in1990(Table I.3). Exports oflegalservices havegrown particularly
rapidly, andthose ofaccounting andauditing havealsoshown rapid recent growth. Itisalsoofsome
notethatsalesofsimilar services toforeign persons byforeign affiliates ofU.S.companies (i.e.the
sumofadvertising; computer anddataprocessing; engineering, architectural, andsurveying; and
accounting, research, management andrelated services) were US$10.2 billion in1993, while sales
ofsuchservices toU.S.persons byU.S.affiliates offoreign companies were US$27.5 billion.
158. Professional services areregulated byState authorities. Ininternational trade relations, the
Federal Government negotiates commitments tobetaken bytheUnited States, butimplementation
istheresponsibility oftheStateauthorities. According totheauthorities, nochanges wererequired
ineither federal orStatelegislation following theconclusion ofthenegotiations onprofessional services
intheUruguay Round; thusthecommitments bound thestatus quo. Theprofessional services section
oftheU.S.ScheduleundertheGATScontainsvariouslimitationsonmarketaccessandnationaltreatment
attheState level, inparticular forlegalservices.
159. Foreigngovernmentsandprofessionalshavesometimescomplainedthatthecurrentdecentralized
regulatory system forprofessional services intheUnited States actsasabarrier toentry forforeign
professionals.161OnlytheStates havelegalauthority toadopt market-opening measures. TheUnited
States concluded anagreement withCanada onacommon examination andcertification system for
architects in1991. Thishasbeenadopted by26U.S.States andsixCanadian Provinces. Alsoon
16September1991,theAmericanInstituteofCertifiedPublicAccountants(AICPA),the(U.S.)National
Association ofState Boards ofAccountancy (NASBA) andtheCanadian Institute ofChartered
Accountants (CICA) concluded anagreement on"Principles ofReciprocity". Theagreement isa
recommendation toU.S. State andCanadian Provincial authorities toallow U.S. certified public
accountants (CPAs) seeking thechartered accountant (CA) titleinCanada andtheCAsseeking the
CPAtitleintheUnited States toqualify bypassing anabbreviated examination rather thanbytaking
theentireuniformaccountancyexaminationintheothercountry.Thisrecommendationhasbeenadopted
bymore than35U.S.States.
160. Chapter 12oftheNAFTA doesnotprovide forautomatic recognition ofprofessional titles
obtained inother NAFTA parties. However, theAgreement contains disciplines, suchasobjectivity
andtransparency, pertaining tothelicensing andcertification ofprofessionals, andacommitment to
eliminate byJanuary 1996anycitizenship orpermanent residency requirement thataparty maintains
161Forexample, seetheremarks bytheAustralian Trade Minister BobMcMullan on19June 1995 reported
inthe"International Trade Reporter", Vol. 12,p.1259, 26July1995.United States WT/TPR/S/16
Page 169
forthelicensing orcertification ofprofessional service providers ofanother party. Ifaparty does
notcomply withthisobligation, anyother party maymaintain anequivalent requirement.162
161. TheNAFTAalsoencouragestherelevantbodiesintheirrespectivecountriestodevelopmutually
acceptable standards andcriteria forlicensing andcertification ofprofessional service providers.163
Inthiscontext, amutual recognition agreement fortemporary andpermanent licensing ofengineers,
recognizing equivalent professional qualifications, wassigned on5June1995between theprofessional
representatives oftheNAFTA Parties, which mutually recognizes professional qualifications ofthese
countries forengineers. Similar efforts areunder wayonforeign legalconsultancy, andpossibilities
ofmutualrecognitionarebeingexploredbyotherprofessions(e.g.architects,accountants,landsurveyors
andveterinaries).164
(b) Audiovisual services
162. "Motion pictures services" and"radio andtelevision broadcasting services" together account
forsome 0.8percentofGDP, increasing itsshare from1980 when itwas0.5percent. Themotion
pictures industry alone employed some 400,000 people in1992, almost twice asmany asin1979.
Although acomplete setofdataonaudiovisual services trade isnotavailable, given theincreasingly
diversified nature oftheservices inquestion, theUnited States seems tohavebeenrunning large
surpluses intheinternational transactions oftheseservices. According toofficial tradestatistics, receipts
from filmandtaperentals abroad amounted toUS$1,071 million in1986 andUS$3,448 million in
1994; payments wereintheorder ofUS$90 million in1986andUS$105 million in1994. According
toestimates bytheMotion Picture Association ofAmerica, theU.S.filmindustry showed asurplus
tradebalance ofsome US$4 billion in1992, aslightly larger amount thansuggested bytheabove data.
Itshould alsobenoted thatsalesofservices toforeign persons byforeign affiliates ofU.S.companies
withregard tomotion pictures, including television tapeandfilm, were US$3,618 million in1989
andUS$5,886 million in1993, andsalesofsuchservices toU.S.persons byU.S.affiliates offoreign
companies wereUS$3,582 million in1989andUS$7,580 million in1993. Thissuggests thatthebulk
ofU.S.motion picture services abroad areprovided through localaffiliates, andthatU.S.affiliates
offoreign companies arerapidly increasing theirpresence intheU.S.audiovisual market.
163. TheU.S.services Schedule inGATS contains veryliberal commitments inaudiovisual services.
Theonlylimitations arethefollowing:
- Inmotion picture andvideo tapeproduction anddistribution services, grants fromtheNational
Endowment Fund fortheArtsareavailable onlyforindividuals withU.S. citizenship or
162NAFTAArticle1210,paragraph3.Anumberofcitizenshiprequirementsforprofessionalservicesuppliers
aremaintained intheU.S.Schedule under theGATS, butthephasing outofcitizenship requirements under the
NAFTA neednotbeautomatically applied toWTO Members regardless ofthem.f.n. obligation under theGATS,
solongastheNAFTA isinconformity withtheconditions laiddown inArticle V,paragraph 1oftheGATS.
163Annex 1210.5 oftheNAFTA contains provisions onthedevelopment ofprofessional standards for
professional services. Specifically, theParties totheAgreement "shall encourage therelevant bodies intheir
respective territories todevelop mutually acceptable standards andcriteria forlicensing andcertification of
professional service providers andtoprovide recommendations onmutual recognition" totheFree Trade
Commission. TheFree Trade Commission willreview therecommendation, andbased onthisreview, each
party shallencourage itsrespective competent authorities, where appropriate, toimplement therecommendation
within amutually agreed time.
164TheUnited States hasnotyetnotified anymutual recognition agreements under theGATS Article VII:4
which require notification ofexisting recognition measures, but,according totheU.S.authorities, itispreparing
todoso.WT/TPR/S/16 Trade Policy Review
Page 170
permanent resident alienstatus, andnon-profit companies. According totheauthorities, any
trade-distorting effect from thegrant should beminimal, since thetotalsumofthegrant is
around $11million peryear, oronaverage $8,500 perfilm, anditisdistributed onlyto
non-commercial films.
- Asingle company orfirmisprohibited fromowning acombination ofnewspapers, radioand/or
TVbroadcast stations serving thesame local market.165Thisrestriction wasrelaxed for
televisionandradiostationownershipbytheTelecommunicationsActof1996,whichauthorizes
theFCCtoextend awaiver toanyofthetop50markets, consistent withthepublic interest,
convenience, andnecessity.
164. Tworecent trade issues concerning audiovisual services were thefollowing:
- Thedebate overEuropean broadcasting quotas
Under the"Television-Without-Frontiers Directive", Member States oftheEuropean Union
mustensure"wherepracticableandbyappropriatemeans"thatamajorityoftelevisionbroadcast
timeisreserved forEuropean works, defined asworks created bypersons located inaMember
StateoftheCouncil ofEurope. Recently therehasbeenamove tostrengthen thisrequirement
intheformofanamendment totheDirective proposed bytheEuropean Parliament todelete
thephrase "where practicable" andtoenforce thequotas by"legally effective means". The
method ofcalculation isalsoproposed tobereinforced byfocusing onfiction programs and
documentaries,excludingtalkandgameshows.Thecoverageoftherestrictionsisalsoproposed
tobeextended totele-shopping, music channels andadvertising. Although theUnited States
isthetarget ofsuchmeasures, sofarU.S.industry haskeptalowprofile inthedebate.
- Thedispute overtheCanadian banoftheU.S.-based Country Music Television (CMT) network
InJune1994, theCanadian Radio-television andTelecommunications Commission cancelled
abroadcasting licence heldbytheCountry Music Television network when aCanadian
competitor (New Country Network) became available fordistribution. TheUSTR launched
aSection 301investigation inFebruary 1995. Anegotiated settlement wassought, anda
tentative agreement wasannounced on22June1995 inwhich thetwocompanies willjointly
formanewentity (Country Music Television) tooperate inCanada. On6February 1996 -the
statutory deadline foradetermination under Section 301inthisinstance -theUSTR determined
thatcertain Canadian broadcasting policies denied national treatment andmarket access toU.S.-
owned television programming services andwere discriminatory, butinlightofongoing
discussions between thenetwork companies concerned, noretaliatory actions wereannounced
atthattime. Afinalagreement between thecompanies wasreached on7March 1996; it
received regulatory approval inCanada on29July1996. TheU.S. authorities continue to
beconcerned withtheunderlying Canadian policy which resulted inthedispute. Under this
policy, theCommission can"de-list" thenon-Canadian service, incases where aCanadian
service islicensed inaservice competitive withthatofanauthorized non-Canadian service,
ifthenewCanadian applicant requests ittodoso.
165Thepurpose ofthismeasure istoensure thatpublic debate andcomment areinformed byawide variety
ofviews andnotdominated byinterests ofanysingle party.United States WT/TPR/S/16
Page 171
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