EAST-WEST TRADE AND THE GATT SYSTEM

EAST-WEST TRADE AND THE GATT SYSTEM

Also published for the Trade Policy Research Centre by Macmillan

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NEGOTIATING ON NON-TARIFF DISTORTIONS OF TRADE by Robert Middleton

TRADE EFFECTS OF PuBLIC SuBSIDIES TO PRIVATE ENTERPRISE by Geoffrey Denton, Seamus O'Cleireacain and Sally Ash

INVISIBLE BARRIERS TO INVISIBLE TRADE by Brian Griffiths

TECHNOLOGY AND ECONOMIC INTERDEPENDENCE by Harry G. Johnson

THE EcoNOMICS oF THE OIL CRISIS edited by T. M. Rybczynski

PuBLIC AssiSTANCE TO INDUSTRY edited by W. M. Corden and Gerhard Fels

MEETING THE THIRD WoRLD CHALLENGE by Alasdair MacBean and V. N. Balasubramanyam

AGRICULTURE AND THE STATE edited by Brian Davey, T. E. Josling and Alister McFarquhar

PRICE ELASTICITIES IN INTERNATIONAL TRADE by Robert M. Stern, Jonathan Francis and Bruce Schumacher

TARIFF PREFERENCES IN MEDITERRANEAN DIPLOMACY by Alfred Tovias

NucLEAR PowER AND THE ENERGY CRISis by Duncan Burn

NORTH SEA OIL IN THE FUTURE by Colin Robinson and Jon Morgan

East-West Trade and the GATT System

M. M. KOSTECKI

for the Trade Policy Research Centre London

© M. M. Kostecki and the Trade Policy Research Centre 1979 Softcover reprint of the hardcover lst edition 1979 978-0-333-23548-5

All rights reserved. No part of this publication may be reproduced or transmitted, in any form or by any means,

without permission

First published 1979 by THE MACMILLAN PRESS LTD

London and Basingstoke Associated companies in Delhi

Dublin Hong Kong Johannesburg Lagos Melbourne New York Singapore Tokyo

British Library Cataloguing in Publication Data

Kostecki, M. M. East-West trade and the GATT system I. East-West trade (1945 ~) 2. General Agreement on Tariffs and Trade I. Title II. Trade Policy Research Centre 382.7'3'09182 HF499

ISBN 978-1-349-03694-3 ISBN 978-1-349-03692-9 (eBook) DOI 10.1007/978-1-349-03692-9

This book is sold subject to the standard conditions

of the Net Book Agreement

Trade Policy Research Centre The Trade Policy Research Centre in London was established in 1968 to promote independent analysis and public discussion of commercial and other international economic policy issues. It is a privately sponsored non-profit organisation and is essentially an entrepreneurial centre under the auspices of which a variety of activities are conducted. As such, the Centre provides a focal point for those in business, the universities and public affairs who are interested in international economic questions.

The Centre is managed by a Council which is headed by Sir Frank McFadzean. The members of the Council, set out below, represent a wide range of experience and expertise.

SIR FRANK McF ADZEAN Chairman

PROFESSOR JoHN AsHTON FRANCO MATTEI SiR ALEC CAIRNCROSS PETER OPPENHEIMER

JAMES A. CLAY PROFESSOR HANS MERKLE PROFESSOR w. M. CORDEN PROFESSOR THEO PEETERS

PROFESSOR GERARD CURZON ALAN F. PETERS DIRK DE BRUYNE T. M. RYBCZYNSKI

PROFESSOR HERBERT GiERSCH CHAUNCEY SCHMIDT SIDNEY GoLT HoN. MAXWELL STAMP

PROFESSOR T. H. HEIDHUES PROFESSOR LIONEL STOLERU PRoFEssoR AssAR LINDBECK SIR ERic WYNDHAM WHITE

HARALD B. MALMGREN MAURICE ZINKIN

HuGH CoRBET Director

Having general terms of reference, the Centre does not represent any consensus of opinion. Intense international competition, technological advances in industry and agriculture and new and expanding markets, together with large-scale capital flows, are having profound and

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continuing effects on international production and trading patterns. With the increasing integration and interdependence of the world economy there is thus a growing necessity to increase public understand­ing of the problems now being posed and of the kind of solutions that will be required to overcome them.

The principal function of the Centre is the sponsorship of research programmes on policy problems of national and international impor­tance. Specialists in universities and private firms are commissioned to carry out the research and the results are published and circulated in academic, business and government circles throughout the European Community and in other countries. Meetings and seminars are also organised from time to time.

Publications are presented as professionally competent studies worthy of public consideration. The interpretations and conclusions in them are those of their authors and do not purport to represent the views of the Council and others associated with the Centre.

The Centre is registered in the United Kingdom as an educational trust under the Charities Act 1960. It and its research programmes are financed by foundation grants, corporate donations and membership subscriptions.

To Willi and Maja Roduner

Contents Trade Policy Research Centre List of Tables List of Figures Biographical Note Preface Abbreviations

MULTILATERAL TRADING SYSTEM AND EASTERN EUROPE Post-war Controversy

Historical Preliminaries Controversy on Principles of Trade East European Concept of Trade Organization

East-West Trade and the GATT The GATT as a World Trade Organization East European Interest in the GATT Attitude of the West Summary and Conclusions

2 RELATIONs OF THE EAsT EuROPEAN CouNTRIES WITH THE GATT Precursory Experience

Czechoslovakia in the GATT Yugoslavia's Path to the GATT

Negotiating with State-trading Countries Poland and Romania Hungary

3 STATE-TRADING SYSTEMS AND THE GATT FRAMEWORK Principles of the GATT

Non-discrimination

IX

v xu

X Ill XIV XV

XVIll

1 I 1 '3 7 9 9

10 14 16

23 23 23 25 27 27 31

35 35 35

X Contents

Reciprocity 36 Tariffs- Main Protective Element 41 Adaptability 42 Consultations and Information 42

State Trading 43 Occasional State Trading 43 Stade-trading Systems 46

Trade Control 51 Direct Trade Control 51 Non-discrimination under Direct Trade Control 52 Tariffs 55 Exchange Rates and Exchange Restrictions 55 Subsidies 56 Domestic Price Formation 57

Discriminatory Trade Arrangements 58 Bilateral Trade Arrangements 58 Regional Integration 59 Summary and Conclusions 60

4 STATE TRADING IN HuNGARY, PoLAND AND RoMANIA 65 State Trading 65

State Monopoly of Foreign Trade 65 Commercial Criteria 69 Non-competitive Enterprise 70

Trade Control 72 Quota and Licensing 72 Customs Tariffs 73 Exchange Rates 75 Subsidies 77 Price Formation 79

Discriminatory Trade Arrangements 81 Bilateral Trade Arrangements with Market Economies 81 Trade Arrangements with Centrally-planned Economies 83 Summary and Conclusions 86

5 MECHANICS OF EAST-WEST TRADE IN THE GATT 91 Reciprocity 91

Reciprocity between Tariff- and Target-protected Economies 91 Polish Reciprocity Formula 93 Romanian Reciprocity Formula 95 Hungarian Reciprocity Formula 97

Non-discrimination 98

Contents xi

Access to the Western Markets 98 Access to the East European Markets 100 Intra-CMEA Trade and Non-discrimination 104

Escape Clause and Consultation 106 Dumping and Safeguard Clause 106 Consultations and Information 108 Summary and Conclusions 109

6 GATT EXPERIENCE WITH THE STATE-TRADING SYSTEMS 114 Reduction of Barriers to Trade 114

Appraisal of East European Concessions 114 Western Concessions 120

New Developments and the GATT Principles 123

Non-discrimination and Fair Import Expansion 123 M ultilateralism 125 Reciprocity 127 Consultations and Information 128 Summary and Conclusions 130

7 PROPOSALS FOR EAST-WEST TRADE UNDER THE GATT SYSTEM 134 Conclusions 134

Mechanics 134 Politics 137

Proposals and Prospects 139 Improving the Existing Arrangements 139 Considering New Approaches 144

Bibliography 147

Index 153

List of Tables 1.1 Chronology of Relations between East European Count-

ries and the GATT 11 4.1 Exchange Rate of Hungary, Poland and Romania (1970) 76 4.2 Area Composition of Imports of Some CMEA Countries 84 6.1 Nominal and Real Import Increase Required of Poland

under the GATT 115 6.2 Poland's Foreign Trade with GATT Countries and

Poland's GNP 117 6.3 Romanian Foreign Trade with the Countries of the

GATT 119 6.4 Discriminatory QRs against Polish Exports in 1971 122 6.5 Geographical Distribution of Polish Imports 124 6.6 Bilateral Payment Agreements 126

Xll

List of Figures 3.1 Internal Pressure and Support in Commercial Policy

Bargains 39 3.2 State-trading Link and Trade Control 47 4.1 Planning Foreign Trade 68

xiii

Biographical Note M. M. KOSTECKI has been a Visiting Professor at the Graduate School of Business Administration at the University of Montreal, Canada, since 1976, where he specialises in international economic relations. Previously Dr Kostecki worked in the field of operations research and mathematical economics at the University of Zurich, Switzerland (1975-76), having completed his doctoral thesis on East-West trade at the Graduate Institute of International Studies, University of Geneva, Switzerland.

Dr Kostecki graduated from the Central School of Planning and Statistics, Warsaw, Poland.

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Preface East-West trade cooperation has been widely debated by economists and others in recent years. But the significant role of the General Agreement on Tariffs and Trade (GATT) in the development of such cooperation has somehow been neglected. This volume, sponsored by the Trade Policy Research Centre, aims to fill that gap.

Czechoslovakia is an original signatory to the GATT. Yugoslavia joined the General Agreement in 1966. Poland, Romania and Hungary acceded to the GATT in 1967, 1971 and 1973 respectively. This last development was an important political event, since it marked a new period in the history of East-West economic relations. Yet the participation of the centrally-planned economies in the GATT necessi­tated the solution of many purely technical issues. It called for the elaboration of a mechanism to accommodate the East European systems, relying on economic centralisation, to the much more liberal commercial order reflected in the principles of the GATT. As far as Poland and Romania were concerned, that mechanism had to provide, first of all, for a reciprocity formula regulating the exchange of concessions between tariff-protected and target-protected economies. For Yugoslavia and Hungary, who claimed to use tariff protection, an agreement had to be reached on the validity of the traditional GATT approach to reciprocity. Non-discrimination, dumping and safeguard arrangements, also, had to be considered and the respective provisions of the GATT adjusted to new circumstances.

Last but not least, there was the difficult issue of East European economic integration. The centrally-planned economies which joined the GATT maintained their membership in the Council for Mutual Economic Aid (CMEA), sometimes referred to as COMECON (Yugoslavia as an associate member). It was therefore necessary to examine the conformity of CMEA rules and objectives against those of the GATT.

Several years of East European membership of the General Agreement permits a certain evaluation of the suitability of the arrangements adopted. East-West trade cooperation within the GATT thus provides valuable experience which must not be over looked in any

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discussion of the new international economic order. This study focuses on Poland, Romania and Hungary- who are

state-trading countries- whose experience in the GATT has been particularly interesting. The relationships of Czechoslovakia and Yugo­slavia with the other signatory countries have already been written about, but they are of rather limited significance in a general context. When Yugoslavia entered the GATT, it was no longer a state-trading country in the GATT sense. Czechoslovakia, although now a state­trading country, is a special case; it did not renegotiate its terms of participation in the General Agreement after the state-trading system was introduced in the late 1940s. This study therefore deals with these two cases only in so far as they provide precursory experience for other centrally-planned economies.

Analysis of the technicalities of GATT mechanisms relating to East­West trade accounts for the largest part of this book. Chapters 3 and 4 analyze the traditional GATT concept of trading from the perspective of state-trading systems and the essential features of the Polish, Romanian and Hungarian systems of state-trading, in order to show what types of adjustment were necessary on both sides. The essential institutional arrangements that were designed to provide a framework for East-West trade cooperation in the GATT are re-examined in Chapter 5. Chapter 6 evaluates the impact of these arrangements on trade policies and techniques, both in Eastern Europe and in the West. Finally, Chapter 7 considers some prospects and proposals.

It seemed that these technical analyses should be placed in the context of some wider remarks on the evolution of socialist bloc attitudes towards the multilateral trading system, in general, and the GATT, in particular. Astonishingly little has been written on this topic. These problems, together with a more extensive analysis of the economic and political forces which led to the East European presence in the GATT, are dealt with in Chapters 1 and 2.

The research was carried out at the Institut Universitaire de Hautes Etudes Internationales in the University of Geneva. I am grateful to Harriet Matejka- who closely supervised the work on which this study is based- for her advice, help and encouragement. I owe a special debt to Frieder Roessler and Ake Linden, of the GATT Secretariat, who took a close interest in the general progress of the study. Another large debt of thanks must go to my professors, Gerard Curzon, Jacques L'Huillier, Olivier Long and Jean Siotis, for their comments on earlier drafts.

Finally, I would like to thank the Fondation pour !'Etude des Relations Internationales en Suisse (FERIS) and the Ecole des Hautes Etudes Commerciales in Montreal for generous financial support; and, last but lot least, the Trade Policy Research Centre, in London, for sponsoring the study and Hugh Corbet, the Director of the Centre, for his comments on the earlier draft.

Preface xvii

In sponsoring the volume, the Trade Policy Research Centre's interest in East-West trade has been assisted institutionally by a grant from the Ford Foundation, in New York, which has also facilitated a number of 'new' fields of enquiry being made for the Centre.

None of the above can be held responsible for the facts and opinions set out in the study. That responsibility is mine alone.

Montreal August, 1977

M. M. KosTECKI

Abbreviations c.i.f. CMEA

ECE ECOSOC EFTA f.o.b. GATT GMP IBEC IBRD

IMF ITO MFN

OECD

OEEC OTC QRs UNCTAD

cost, insurance and freight Council for Mutual Economic Aid; also referred to as COMECON Economic Commission for Europe United Nations Economic and Social Council European Free Trade Association free-on-board General Agreement on Tariffs and Trade gross, material product International Bank for Economic Cooperation International Bank for Reconstruction and Develop­ment; also referred to as the World Bank International Monetary Fund International Trade Organization most-favoured-nation clause of the GATT, expressing the principle of non-discrimination Organization for Economic Cooperation and Development Organization for European Economic Cooperation Organization for Trade Cooperation quantitative restrictions on imports United Nations Conference on Trade and Development

XVlll