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REPORT
ANALYZING VIET NAMS TRADE DEFICIT AND THE BALANCE-OF-PAYMENTS PROVISIONS OF THE WTO

ACTIVITY CODE: WTO-8

Version: Final draft Ha Noi, 5 October 2009

Authored by: Peter Naray (Coordinator, Trade Policy Expert) and Paul Baker (Macroeconomist) DMI experts Assistance from: Truong Dinh Tuyen, Dinh Van An, Le Trieu Dung Ngo Chung Khanh PTF experts
This document has been prepared with financial assistance from the Commission of the European Union. The views expressed herein are those of the author and therefore in no way reflect the official opinion of the Commission nor the Ministry of Industry and Trade

TABLE OF CONTENTS

ABBREVIATIONS ............................................................................................................ 2 EXECUTIVE SUMMARY ................................................................................................ 3 INTRODUCTION ............................................................................................................ 10 PART I ECONOMIC ANALYSIS OF THE BALANCE OF PAYMENTS ................ 11 I.1. INTRODUCTION ............................................................................................... 11 I.2. VIET NAMS BALANCE-OF-PAYMENTS IN PERSPECTIVE ..................... 11 I.2.1 Evolution of Vietnams BOP ............................................................................ 11 I.2.2 Developments in the Trade Balance ................................................................. 15 I.3. SUSTAINABILITY AND STRUCTURAL ISSUES OF THE BOP .................... 18 I.4. SUGGESTED POLICY MEASURES ................................................................... 19 I.4.1 Suggested short-term policy measures ............................................................. 20 I.4.2 Suggested long-term policy measures .............................................................. 21 PART II - TRADE POLICY FRAMEWORK.................................................................. 23 II.1. BOP RULES OF THE WTO RELATED TO TRADE IN GOODS..................... 23 II.1.1 The Balance-of-Payment exception in the GATT/WTO System.................... 23 II.1.2 BOP Rules Applied to Developed Members................................................... 24 II.1.3 BOP Rules Applied to Developing Members ................................................. 24 II.1.3 Forms of BOP Measures ................................................................................. 24 II.1.4 The Extent, Administration, Coverage and Time Frame of Restrictions ........ 26 II.1.5 The Role of the International Monetary Fund ................................................. 27 II.1.6 Procedural Rules and Legal Aspects of BOP Consultations .......................... 31 II.2. BOP RULES OF THE WTO RELATED TO TRADE IN SERVICES ............... 39 II.3 CONSULTATIONS IN THE WTO BOP COMMITTEE ..................................... 40 II.3.1 Introduction ..................................................................................................... 40 II.3.2 The most Important Full Consultations in the WTO BOP Committee ........... 41 II.3.3 Full Consultations with LDCs ......................................................................... 45 II.3.4 Consultations with transition economies until 2000 ....................................... 45 II.3.5 Recent consultations ........................................................................................ 50 PART III. CONCLUSIONS AND RECOMMENDATIONS .......................................... 54 REFERENCES ................................................................................................................. 58

ABBREVIATIONS

ACFTA AFTA AJFTA AKFTA ASEAN BOP CAB EU FDI FTA G20 IMF KAB MUTRAP US USBTA US$ VND WB WTO LDC GATT

Asean-China FTA Asean FTA Asean-Japan FTA Asean-Korea FTA Association of South East Asian Nations Balance of payments Current Account Balance of the balance of payments European Union Foreign Direct Investment Free Trade Agreement Group of 20 countries International Monetary Fund Capital Account Balance of the balance of payments Multilateral Trade Assistance Programme United States US-Viet Nam Bilateral Trade Agreement US Dollar Viet Nam Dong World Bank World Trade Organisation Less Developed Country General Agreement on Trade and Tariff

EXECUTIVE SUMMARY Since 2002, Viet Nam has recorded a systematic and increasing trade deficit, which has now reached historical levels. The structural trade deficit has been a serious burden on the countrys balance of payments (BOP), and as a result its current account has been in deficit in recent years. Though the countrys BOP situation cannot be qualified as alarming, it certainly calls for a deep economic and trade policy analysis of the underlying causes and the eventual steps which could alleviate the problems. This MUTRAP study takes into account the deep transformation which has been made in the structure and functioning of the Vietnamese economy since the start of the socialist market economy reform process in the mid 1990s and the substantial import liberalization which has been taking place in the last several years as a result of Viet Nams WTO membership and increasing participation in regional and bilateral free trade agreements. The accelerating integration of the country in the world economy has also reshaped Viet Nams trade policy environment and its international commitments in the area of trade which determine the responses which can be given to the challenges affecting the BOP. ECONOMIC POLICY ANALYSIS After implementing significant market reforms, opening up to international trade and attracting foreign investment, Viet Nam has experienced rapid economic growth, a surge in investment and increased its integration in the world economy. In recent years, Viet Nam faced an overheating economy, a surge in capital inflows and an expanding current account deficit, primarily as a reflection of increasing trade imbalances. The current account deficit reached US$ 9 billion in 2008. As a result of the world financial crisis which started in 2007, Viet Nams large capital inflows Fig i. Evolution of international reserves, 2002-2009 have dried up, and some disinvestment and forein indirect investment (FII) capital flight has taken place, with a resulting twin deficit in the current and financial accounts. In 2009, international monetary reserves are expected to reach a low level of around 3 months of next years imports, though prices of imported goods have Source: IMF (2009) International Financial Statistics, September 2009; IMF (2009) Article IV consultation, April reduced considerably Note: * Total reserves denote reserves at May 2009 comparing to in 2008 (see Fig i). This has caused growing concern amongst policy makers as to the sustainability of past policies and spurred a reflection on the need to introduce trade policy measures to remedy the structural trade deficit, as a channel for improving the balance of payments of Viet Nam. A careful analysis of the causes and nature of the evolution of the balance of payments has revealed some stylized facts which need to be considered before introducing any trade policy changes. Moreover, an introduction of temporary import restrictions, as permitted under the rules of the WTO, requires a careful analysis of the entire balance of 3

payments situation to be considered WTO compatible. The study makes a strong case for the fact that macroeconomic imbalances are the principal determinants of the balance of payments situation which Viet Nam experiences. The study also highlights the fact that though the trade account has a structural imbalance, the trade account per se is not the cause of the rapid depletion of international reserves. Viet Nams current account position is composed primarily of the balance of trade in goods and the balance of transfers, with services and income representing a smaller contribution to the current account position. Transfers Fig ii. Evolution of Viet Nams Current Account, 2000-09 have been marked by a sharp decline in 2008, owing in part to the global financial crisis, so that remittances have dropped, and disinvestment took place from the diaspora1. The balance of income reflects the repatriation of profits from foreign investments in Viet Nam and has traditionally been in deficit. The trade in Source: IMF (2009) International Financial Statistics, September 2009; IMF (2009) Article IV services balance is closely consultation, April linked to the trade in goods balance owing to the fact that recorded services comprise principally transportation and insurance services, though other notable services include tourism and financial services. Trade in goods is by far the largest contributor to the current account deficit, at US$12.3 billion in 2008 (see Fig ii).
10,000 5,000
Transfers

s 0 n o i l l i M $ S U-5,000

Services Income

Current Account Goods

-10,000

-15,000

2000

2001

2002

2003

2004

2005

2006

2007

2008e

2009f

Viet Nams capital account deficit2 has been traditionally in surplus, owing primarily to the large net inflows of foreign direct investment Fig iii. Evolution of Viet Nams Capital Account, 2000-09 (FDI), which peaked at US$7.8 billion in 2008. Owing to a general contraction in world investment, FDI is expected to reach barely half this level in 2009 (see Fig iii). Viet Nams access to short term debt, in the form of portfolio investments has also followed a positive (though erratic) trend. Source: IMF (2009) International Financial Statistics, September 2009; IMF (2009) Article IV However, the surge in consultation, April confidence in the
20,000
Financial Account

15,000

s 10,000 n o i l l i M $ S U 5,000

Direct

Portfolio Other

-5,000

2000

2001

2002

2003

2004

2005

2006

2007

2008e

2009f

Though transfers should only include remittances, it is believed that these often constitute unofficial foreign direct investment from the diaspora to Vietnamese nationals. 2 The term capital account reflects the economic terminology of what is recorded in accounting terms as the financial account of the balance of payments and reflects net foreign debt flow (capital flows) into and out of Viet Nam.

Vietnamese market experienced a rapid reversal in 2008 and portfolio flows have declined sharply. Preliminary data for the second quarter of 2009 indicates that further sharp declines were witnessed in portfolio investments, sending the capital account into a deficit. The net effect of the current account deficit and declining capital account balance has been to deplete international reserves in the second quarter of 2009. Viet Nams balance of payments situation is not considered critical for a number of reasons. The first reason is that Viet Nams short term debt obligations can be honored. The level of reserves are currently higher than in previous years and since there is little short term debt servicing requirements, there are not large demands on international reserves in the short to medium term. Reserves are also sufficiently large to cover imports and Viet Nams trade imbalances have shown signs of improving in 2009. Moreover, international capital flows are expected to resume their previous trends as the world economy picks up in 2010. It is important that Viet Nam sustains confidence in its economy so that capital flight is mitigated as much as possible. This requires not only trying to stabilize the macroeconomic situation of Viet Nam, but also to ensure that the investment environment remains attractive. In a longer term perspective, the balance of payments situation of Viet Nam is sustainable only if it can pay off its foreign debt through future trade surplus. Some structural imbalances remain which need addressing in order to ensure that the balance of payments position does not become alarming. These include the need to confront structural problems linked to the trade deficit. The principal reason for the large trade deficit is that Viet Nam imports a large amount of inputs and raw materials in order to export. By improving domestic support industries and increasing the value added of local production, the ratio of imports to exports should decline. The protectionist measures adopted by G20 member countries since the global financial crisis might further deteriorate the export performance of Viet Nam, which has seen a number of its sectors affect by protectionist measures in third markets. The trade deficit has also been exacerbated by the rapid reduction in protection which Viet Nam has introduced since,the integration in ASEAN, participation in the ASEAN, ASEAN China, ASEAN India, ASEAN Korea Free Trade Areas and culminating with membership in the WTO in 2007. Viet Nam is considering further bilateral trade agreements (BTA) through ASEAN which will potentially also lead to increased imports. A careful evaluation of these agreements and the net benefits arising to Viet Nam in signing such agreements needs to be conducted ex ante, instead of realizing the costs ex post. In 2009, Viet Nam introduced an expansionary monetary policy and loosened fiscal policy in an effort to drive up domestic absorption. These macroeconomic policies of the Government have led to another year of robust economic growth, leading to only moderate levels of inflation . However, at the same time, this had led to an increase in demand for imports, as reflected in the composition of imports. Moreover, the fiscal deficit has required an increase in debt, thereby requiring future current account surpluses to finance the repayment of this debt. The sectoral focus of FDI has traditionally been into manufacturing with a view to exporting, or into services, especially financial services and tourism. However, more recently FDI has been targeted at real estate, requiring a large demand for imports of construction materials and equipments without increasing the potential for future 5

exports.. This has strained the trade balance, and it is recommended that Viet Nam try and attract more FDI into productive sectors of the economy. Another major reason for the current account balance is the large savings and investment imbalance in Viet Nam. Although large levels of investment are positive when they are targeted into productive activities, the level of national savings is low relative to investment which requires borrowing from abroad. It would be possible to reduce the current account deficit by increasing savings in Viet Nam. Though Viet Nam remains a relatively low income country, it is important to beginning encouraging savings as Viet Nams level of income increases, so as not to rely so heavily on foreign capital. Adopting trade restrictive measures to remedy the current account deficit, from introducing import restrictions to increasing tariffs is likely to be highly detrimental to Viet Nams economic interest. In the first instance, since there is a high import requirement for Viet Nam to be able to export, the imposition of restrictive import measures would lead to a loss of export competitiveness for Viet Nam. Secondly, the adoption of such a trade policy change is likely to lead to a withdrawal or freezing of those foreign direct investment projects which require imports for their inputs or technology. Thirdly, such measures might lead to a loss of confidence by investors in the economic perspective of Viet Nam, which would lead to capital flight and strong pressures on the Viet Nam Dong to depreciate. Finally, it is important to note that a balance of payments problem is a problem of the macroeconomic structure and policies and best addressed through structural reforms and macroeconomic policy tools, such as fiscal or monetary policy, to reduce domestic absorption (and hence improve the trade balance via lower imports), or by switching the composition of expenditure from imported to domestically produced goods, through a real exchange rate depreciation. This is the preferred approach for dealing with balance of payments constraints. TRADE POLICY ANALYSIS BOP-related rules of the WTO Viet Nams accession to the WTO means that the country has to abide by the substantive and procedural rules of the organization which determine the nature, the form and extent of measures which can be taken to safeguard its external financial position and its BOP. Article XVIII:B of GATT 1994, as interpreted by the Declaration on Trade Measures Taken for Balance-of-Payments Purposes, adopted on 28 November 1979 (Declaration) and the Understanding on the Balance-of-Payments Provisions of the General Agreement on Tariffs and Trade 1994 (Understanding) lays down the rules which are applied to developing countries invoking the BOP provisions of the WTO. The basic rule says that a developing country in order to safeguard its external financial position and to ensure a level of reserves adequate for the implementation of its programme of economic development maycontrol the general level of its importsBOP measures must be temporary, price based (import surcharges, for example), transparent and applied to imports across the board. The extent of import restrictions may not exceed what is necessary to remedy the BOP problem in question.

The WTO in BOP matters cooperates very closely with the IMF. According to Article XV: 2 of GATT 1994, the WTO shall accept all findings of statistical and other facts presented by the Fund relating to foreign exchange, monetary reserves and balances of payments, and shall accept the determination of the Fund as to whether action by a Member in exchange matters is in accordance with the Articles of Agreement of the International Monetary Fund The WTO accepts the determination of the IMF as to what constitutes a serious decline in a Members monetary reserves, a very low level of its monetary reserves or a reasonable rate of increase in its monetary reserves, and as to the financial aspects of other matters covered in consultation in such cases. In general, monetary reserves should be enough to cover at least three months of imports. The necessary level of reserves may differ from country to country depending on the special situations. Members invoking the BOP provisions must notify the import restrictions they have introduced and consult with the WTO BOP Committee in accordance with the detailed rules which have been developed by the GATT/WTO. The Committee examines the countrys BOP positions and prospects, alternative measures to restore equilibrium, system and methods of the restrictions and effects of the restrictions. The IMF, the WTO Secretariat and the consulting country prepares the relevant documentations. The Committee draws conclusions and makes recommendations aimed at promoting the implementation of the relevant BOP provisions of the WTO. The Committee reports to the General Council. If there is no agreement in the Committee, the report includes the different views. Members may invoke the WTOs dispute settlement provisions to decide in disputes as it happened in a case involving India and the United States, where India refused to phase out its import restrictions introduced for BOP reasons. India lost the case and it had to eliminated its restrictions. Consultations in the BOP Committee Since the early 1970s, after the collapse of the fixed exchange rate system, the number of countries which consulted under the BOP provisions of the GATT/WTO has continuously decreased. In the 1960s, ten developing countries invoked the GATTs BOP provisions. In the 1970s and 1980s, only three and four countries did so. But most of the import restrictions introduced by these countries were maintained for a long period. India maintained its quantitative BOP restrictions for 37 years, Egypt for 32, Bangladesh for 31 and Pakistan for 41 years. In the first five years after the establishment of the WTO, in addition to BOP longtimers which maintained their import restrictions, all transition economy members of the WTO introduced import restrictions for BOP reasons under Article XII of the GATT 1994. But all countries were asked by the Committee to phase out their restrictions and use macroeconomic measures to redress the BOP situation. Between 2001 and 2008, there were no BOP consultations in the Committee. Since the outbreak of the economic crises, Ecuador and Ukraine notified BOP restrictions and consulted in the BOP Committee. Both Ukraine and Ecuador received a cold reception in the BOP Committee and were asked to phase out all restrictions within a couple of months. From the 14 years long practice of the WTO one can draw the conclusion that under the WTO consulting countries receive much less sympathy in the BOP Committee than during the GATT years. Countries which introduced import restrictions were invited to phase out BOP restrictions within very short periods and were suggested to use 7

macroeconomic measures to remedy their BOP problems. In a number of cases Members reserved their WTO rights which sent a clear message for the concerned consulting countries that in case of non-compliance, the dispute settlement provisions will be invoked. The newest tendencies are warning all countries which consider the introduction of trade restrictions under WTO cover that they will get very likely little understanding in the BOP Committee. TRADE POLICY RECOMMENDATIONS The principal conclusions of the report are a follows: Viet Nam, at present, does not have balance of payment difficulties or a critical balance-of-payments situation in the sense of WTO rules. Therefore, in the present BOP situation, it should not introduce import restrictions for BOP reasons. In the present context, if Viet Nam invoked the WTOs BOP provisions and introduced import restrictions for BOP purposes, the reception of these measures would be probably negative and Viet Nam would be asked, under threat of invoking the WTO dispute settlement provisions, to phase them out immediately; The introduction of import restrictions for BOP purposes would deteriorate the reputation of Viet Nam as a country with a predictable economic environment, it would strain its relationship with FTA and other main trading partners, including foreign investors, with serious consequences. A more direct impact would be to raise the cost of exports since around two thirds of the value of exports consist of imported inputs; Though the situation is not alarming at present, the authors recommend that in order to ensure that the current account deficit remains sustainable in the long run, that Viet Nam implement macroeconomic reforms in the shape of monetary and fiscal policy adjustments, so as to stem the growth in net foreign borrowing. The authors also recommend the need to continue to create an attractive investment climate in Viet Nam in order to maintain confidence in the Vietnamese economy and ensuring that remittances and foreign investment continues to target productive sectors of the economy and raise the value added of exports; Reducing the high propensity of imports in Viet Nam would best be addressed through supply measures. In this respect it is positive to see a small but growing shift from light manufacturing (and assembly operations) to high technology exports. This is expected to redress the trade imbalance in the long run;

Opening of Viet Nams economy to the outside world, and especially accession to the WTO and participation in free trade agreements has resulted in increased imports. If the import increase causes problems to the domestic economy, Viet Nam has a wide range of possibilities to introduce import restrictions in accordance with its domestic legislation and its international (WTO, FTA and bilateral) commitments. Following the development of the BOP situation, if Viet Nams BOP situation were to become critical, and quick measures were needed, the introduction of import restrictions can be considered, but 8

always as a last resort, due to the negative impacts associated with the introduction of such restrictions. Alternative possibilities open to Viet Nam include the following: Utilise the policy space available to Viet Nam in the form of tariff overhangs by analyzing the difference between the present applied rates and WTO bound duty rates and increase the applied rates to the level of bound rates; Consider the introduction of safeguard measures under the WTO and the safeguard clauses of FTAs;

Consider the application of anti-dumping measures;

Consider the application of countervailing duties under the WTO Agreement on Subsidies and Countervailing Duties; Consider the use of Article XXVIII of GATT 1994 (Modification of Schedules) to renegotiate accession tariff concessions.

INTRODUCTION

The objective of this MUTRAP report is to study the underlying causes of Viet Nams large trade deficit, the contribution of the trade deficit to the development of the countrys balance of payment situation and to clarify the impact of WTO accession and other trade liberalization measures implemented in the last couple of years on the increasing trade deficit. The study overviews the BOP-related WTO provisions (Articles XII, XV and XVIII:B of GATT 1994) and considers the practices of the WTO Balanceof-Payments Committee. The practical purposes of this study were twofold (1) to assist the Ministry of Industry and Trade to explain the macroeconomic roots of the persistent large trade deficit and make suggestions for working out appropriate economic measures to remedy the situation and (2) to present the possible measures of trade policy nature which might be considered to introduce in order to soften the pressure caused by increasing imports resulting from trade liberalization. This study may help the Vietnamese Government to adopt measures which are considered consistent with the countrys international obligations and will contribute to the alleviation of the problems without causing economic damage to the country and leading to protests from its trading partners. The study analyses the available practice of GATT/WTO Member countries which in the last decades introduced import restrictions for balance-of-payments purposes. For Viet Nam it is of particular importance that the since the 1970s, the invocation of the GATT/WTO balance-of-payments provisions shows a declining trend and the practice of the BOP Committee has become less tolerant towards the use of import restrictions for BOP purposes. There is no doubt that the information and analysis included in this study will assist the authorities to work out policies and measures which further promote he transformation of Viet Nam in a well functioning socialist market economy which understands the rules of international trade and applies them correctly for the advance of the country. The paper has been prepared by two European experts with the assistance of four local experts who have provided their insight in the matters under consideration and relevant statistical data.

10

PART I ECONOMIC ANALYSIS OF THE BALANCE OF PAYMENTS

I.1.

INTRODUCTION

Since the introduction of market reforms, Viet Nam has embarked on trade and investment liberalization, leading to greater exposure to international business cycles and international capital movements. As with most transition economies, Viet Nams gradual liberalisation of international trade transactions had led to a large trade deficit, which has raised serious concerns as to the sustainability of its trade policies. More recently, the trade imbalance has become more pronounced with a chronic effect on the balance of payments of Viet Nam. The contribution of other deficits in the current account of the balance of payments has had a significant impact on the position of international currency reserves. The deteriorating situation of the trade deficit has raised difficult political questions regarding the success of the trade policies adopted by Viet Nam, including its participation in the ASEAN, ASEAN+ free trade areas, accession to the WTO in 2007 and the involvement in some FTA agreements that Vietnam is now negotiating or has the intention to negotiate (FTA with Chile, Switzerland and India). The deterioration of the balance of payments position has also led to a re-examination of the role of FDI, the contribution of macroeconomic stabilisation policies introduced by the State Bank of Viet Nam (SBV) and the recent fiscal stimulus package, in strengthening the net export capacity of Viet Nam. This section of the report will focus on both the macroeconomic and microeconomic determinants of the balance of payments and provide recommendations for economic policies to redress balance of payments problems. Before doing this, however it is useful to provide a short introduction into the various accounts of the balance of payments and their performance in recent years, as well as the national identity equations which explains some of the fundamental relationships which exist between monetary, fiscal and international transactions. I.2. VIET NAMS BALANCE-OF-PAYMENTS IN PERSPECTIVE

I.2.1 Evolution of Vietnams BOP The balance of payments is an accounting system which records the international transactions taking place between a nation and the rest of the world. It is composed of two sets of accounts. The current account is made up of net transactions in goods, services, income and transfers3, while the capital account comprises net foreign direct investments, net portfolio investments and other financial flows4. Finally, changes in international reserves balance out the capital and current accounts5 (see Figs 1-3).
In the case of Viet Nam, net income almost exclusively originates from the transfer of profits generated by FDI to the parent country. Net transfers are mix of remittances to support families in Viet Nam and informal investment through family networks 4 The capital account is called so by economists owing to the fact that capital flows make up the capital account. However in balance of payments accounting, the capital account is called the financial account (IMF, 1993). 5 Net errors omissions also exists owing to statistical discrepancies and omissions. The value of net errors and omissions in Viet Nams balance of payments quarterly compilations has become very large owing to a lack of recording of financial transactions.
3

11

Fig 1. Components of the Current Account

Fig 2. Components of the Capital Account

Fig 3. System of the Balance of Payments

The current account is financed by either capital inflows (recorded as inflows into the capital account) or by drawing on international reserves. According to national accounting identity, the excess of a nations investment over its saving rate represents the current account deficit. Provided that investment levels made by a country will raise that countrys long term competitiveness in the world economy, then running a current account deficit is not inherently problematic. Indeed, many nations including the United States have run persistent current account deficits for decades without it being considered alarming, owing to the fact that these current account deficits are expected to eventually enhance the nations trade balance in the future. Another way of viewing the current account deficit is to consider that excess net imports today are an investment into the future and as such the deficit represents an intertemporal transfer of current expenses to augment domestic production capacity in the longer term. For this intertemporal condition to remain in equilibrium, the net present value of future debt servicing must not exceed the net present value of future trade surpluses6. In order for future trade surpluses to occur, imports need to be composed of intermediary or capital products which will create new export capacity, raise national production capacity and competitiveness in the long run. Thus, it is not the trade deficit per se which causes the most serious problem but rather the composition of net imports.

For an enlightening though advanced discussion on the intertemporal approach to the current account, see Obstfeld and Rogoff (1995, 1996)

12

Viet Nams current account position has moved from a small surplus of US$ 1.2 billion in 2000 to a large deficit of Fig 4. Evolution of Viet Nams and Selected Countries Current US$ 9.2 billion in 2008. Account, 1980 to 2014 Despite the steady 10 downward trend in the current account balance, the 5 values have been very erratic, with a major surge ASEAN 5 P 0 in the current account EU D G f during the Asian Financial USA o Vietnam %-5 Crisis of 19977 (see Fig 4). It is interesting to note the large deficits recorded by -10 the US since the 1980s and the cyclical variations -15 around a neutral current 2014 1980 1985 1990 1995 2000 2005 2010 account for the EU. The Source: IMF (2009) World Economic Outlook Database, April 2009 erratic behaviour of Viet Note: 2009-2014 are IMF Staff forecasts Nams current account balance matches closely that of other ASEAN 5 countries8 before the Asian crisis, although ASEAN 5 countries have managed since the Asian Financial Crisis to maintain a surplus. This switch from being deficit countries to surplus countries is explained by the strides these countries have made to move into higher value added manufacturing operations and the large total factor productivity gains. Viet Nam has remained stubbornly in deficit every year since 1980, except for three years of exceptional downturn in the economies of South East Asia 1999-2001). Viet Nams current account deficit is composed primarily of the balance of trade in goods (US$ 12.3 billion deficit in Fig 5. Evolution of Viet Nams Current Account components, 2008) and the balance of 2000-09 transfers (US$ 7.3 billion), with services and income representing a smaller contribution to the current account position (US$ 2.3 billion and US$ 2.0 billion respectively) (see Fig 5). Transfers have been marked by a sharp decline in 2008, owing in part to the global financial crisis, so that remittances have dropped9. The balance of income reflects the Source: IMF (2009) International Financial Statistics, September 2009; IMF (2009) Article IV consultation, April repatriation of profits from foreign investments in Viet Nam and has traditionally been in deficit, though this deficit has been growing owing to
10,000 5,000
Transfers

s 0 n o i l l i M $ S U-5,000

Services Income

Current Account Goods

-10,000

-15,000

2000

2001

2002

2003

2004

2005

2006

2007

2008e

2009f

As explained above, this reflects capital outflows associated with the financial crisis and since the current account mirrors to a large extent the capital account, the capital flight provoked a sharp decline in the current account. 8 ASEAN 5 is defined here as Indonesia, Malaysia, The Philippines, Singapore and Thailand 9 Though transfers should only include remittances, it is believed that these often constitute unofficial foreign direct investment from the diaspora to Vietnamese nationals.

13

the substantial stock of foreign investment in Viet Nam. The trade in services balance is closely linked to the trade in goods balance owing to the fact that recorded services comprise principally transportation and insurance services, though other notable services include tourism and financial services10. Trade in goods is by far the largest contributor to the current account deficit, at US$12.3 billion in 2008. Viet Nams capital account deficit11 has been traditionally in surplus, owing primarily to the large net inflows of foreign direct investment Fig 6. Evolution of Viet Nams Capital Account, 2000-09 (FDI), which peaked at US$7.8 billion in 2008. Owing to a general contraction in world investment, FDI is expected to reach barely half this level in 2009 (see Fig 6). Viet Nams access to short term debt, in the form of portfolio investments has also followed a positive (though erratic) trend. Source: IMF (2009) International Financial Statistics, September 2009; IMF (2009) Article IV However, the surge in consultation, April confidence in the Vietnamese market experienced a rapid reversal in 2008 and portfolio flows have declined sharply12. Preliminary data for the second quarter of 2009 indicates that further sharp declines were witnessed in portfolio investments, sending the capital account into a deficit. The net effect of twin deficits in the current account and the capital account has been to cause a deficit to the total BOP in 2009 alone and deplete Fig 7. Evolution of Viet Nams International Reserves, 2000-09 international reserves in the second quarter of 2009. However, current predictions for the whole year are that the financial account will be recording a surplus, though the current account will exceed this surplus, thereby depleting reserves by US$ 2.3 billion in 2009 (see Table 1).
20,000
Financial Account

15,000

s 10,000 n o i l l i M $ S U 5,000

Direct

Portfolio Other

-5,000

2000

2001

2002

2003

2004

2005

2006

2007

2008e

2009f

Despite a fall in the level of reserves, Viet Nams

Source: IMF (2009) International Financial Statistics, September 2009; IMF (2009) Article IV consultation, April Note: * Total reserves denote reserves at May 2009

10 The GSO applies a standard insurance and freight coefficient to trade in goods to calculate the value of these services, so that any increase in the importation of goods leads to an equal rise in services. Travel services, which include tourism are poorly recorded in the balance of payments of Viet Nam so that the service balance is expected to be under-estimated. 11 The term capital account reflects the economic terminology of what is recorded in accounting terms as the financial account of the balance of payments and reflects net foreign debt flow (capital flows) into and out of Viet Nam. 12 An important rise in gold imports was also witnessed at the start of 2009, indicating a desire to invest in a safe asset, and one not exposed to a potential exchange rate devaluation.

14

balance of payments situation is not considered critical for a number of reasons. The first reason is that Viet Nams short term debt obligations can be honored. The level of reserves are currently higher than in many previous years and since there is manageable levels of short term debt servicing requirements, the reserve requirement to service the debt is low. Reserves are also sufficiently large to cover imports for 3 months of next years imports which is higher than between 2002 and 2006 (see Fig 7). Viet Nams trade imbalances have shown signs of improving in 2009. International capital flows are expected to resume their previous trends as the world economy picks up in 2010. It is important that Viet Nam sustains confidence in its economy so that capital flight is mitigated as much as possible. This requires not only trying to stabilize the macroeconomic situation of Viet Nam, but also to ensure that the investment environment remains attractive. Table 1. Vietnams Balance of Payments Account, 2000-2009

Sources: Author and 1998-2007 data: IMF International Financial Statistics, Sept 2009; 2008-09 data: IMF Article IV consultation, April 2009 *: May 2009

I.2.2 Developments in the Trade Balance As mentioned earlier, the balance of trade in goods is the largest component in deficit, and has experienced a sharp increase in its deficit since 2007. Up to 2006, the highest record trade deficit reached US$ 2.8 billion. This increased to US$ 10.4 billion in 2007 and US$ 12.3 billion in 2008. In the first 10 months of 2009, the trade deficit reached US$ 8.78 billion and is expected to rise to over US$ 10 billion in 2009, which is lower than in 2008. The increase in the trade balance has been occurring despite a rapid 15

increase in exports, which recorded an annual growth rate of 15.6% between 2000 and 2009.

Figure 8 highlights the rapid growth in international transactions in goods which Viet Nam has recorded. This rapid increase in imports and exports can be associated with the fruition of market reforms implemented by Viet Nam Fig 8. Evolution of Viet Nams balance of Trade in Goods, 2000-09 80,000 since the mid 1990s, the 60,000 signing of bilateral trade agreements with regional 40,000 partners, accession to the 20,000 WTO, increased s n 0 o competitiveness of i l l i 2000 2001 2002 2003 2004 2005 2006 2007 2008e 2009f M $ Vietnamese exports, large 20,000 S U levels of foreign direct 40,000 investment, importation of 60,000 machinery and technology 80,000 from abroad and the large BalanceoftradeinGoods Goods:exportsf.o.b Goods:importsf.o.b infrastructural projects 100,000 Source: IMF (2009) International Financial Statistics, September 2009; IMF (2009) Article IV which demand significant consultation, April amounts of imports. More recently the composition of imports has included luxury and consumption items such as vehicles though these remain relatively small in proportion to the whole import bill. As illustrated by the strong correlation between the variations in exports and imports which reached 99.7%13, the ability for Viet Nam to export depends on its ability to source imports. This demonstrates that Vietnams investment structure is not really adding value, with little investment in areas that help develop support industries or production processes which use much local inputs. Since there is a high propensity to import in Viet Nam with a view to exporting, any measures taken to make imports relatively more costly are likely to dampen the demand for imports but also affect Viet Nams ability to export. Moreover, since Viet Nam is a transition economy, it still has a very large demand for technology and machinery which it needs to source from abroad. The influx of FDI which in the early 2000s was targeting investment in production with a view to produce for the domestic market, had high import requirements but low export potential. Since the mid 2000s, FDI has been targeted at establishing manufacturing operations with a view to exporting, causing both a surge in imports (for intermediary inputs and capital goods) and a surge in exports. In the last year or so, FDI appears to have been targeted more substantially at the construction, tourism and real estate markets, causing additional demand for importing construction materials and heavy machinery, while creating little advantage for increasing exports. Large public and private sector infrastructure projects, such as port renovations or road infrastructure investments, are likely to further widen the trade deficit but might indirectly improve export performance in the future. Another cause evoked by policy makers as to the reasons for the deterioration of the trade balance has been Viet Nams policy of gradual reduction of tariffs on imported products,
13

This refers to the Pearsons product moment correlation coefficient which measures the strength and the direction of

a linear relationship between two variables (imports and exports) authors calculations.

16

which it has implemented in line with its obligations in regional trade agreements and at the WTO. A small volume of economic research has been conducted on the impact of trade liberalisation on the trade balance and the results have shown that the effects can be relatively mixed14. In the case of Viet Nam, the impact of not only trade liberalisation but other factors such as a surge in investment, appear to underpin the rise in the trade deficit. There are structural issues inherent in Viet Nams trade imbalance and these are both due to constraints in its export capacity and autonomous import absorption. On the side of exports some important constraints to expanding exports faster than imports include: Viet Nam has failed to integrate more fully in regional supply chains and acts as an assembly operation for large multinational operations rather than for higher value added production The level of import content in exports is extremely high at around two thirds of the ex factory price. The concentration of exports is still high and dominated by a few key sectors, such as crude oil, textiles and clothing, fishery products, some agricultural products and footwear. This renders Viet Nam vulnerable to swings in commodity prices and to changes in demand overseas. The global financial crisis and recessions in developed countries have depressed the demand for Vietnamese exports causing a sharp fall in 2009. The real effective exchange rate appears overvalued though the depreciation of the US$ in mid 2009 has eased the lack of competitiveness associated with a real effective exchange rate appreciation.

On the import side, there are some weaknesses in domestic demand which cause a major dependence on imports. These include: As mentioned above, the high import content of exports makes it inevitable that any increase in exports require higher levels of imports As income in Viet Nam rises, there has been growing demand for consumer goods and luxury products The overheating of the economy, speculation in real estate and large infrastructural development projects have been the root cause for the surge in imports in excess of requirements for production in recent years Volatility in world commodity prices lead to some speculation on certain commodity stocks, so that products were imported with a view to storing them before any price hikes Speculation that the Viet Nam Dong might devalue lead a surge in the demand for gold imports in 2007, 2008 and 2009 which are considered a safe asset to invest in The introduction of trade facilitation measures and improvement in trade support services has assisted Vietnamese exports but also made it easier to import The introduction of lower tariffs on goods due to the intra ASEAN FTA (AFTA), ASEAN FTA with China (ACFTA) and accession to the WTO in 2007, have

14

Santos &Thirwall (2004) find a strong negative impact of trade liberalization on the trade balance, while Wu & Zeng (2008) find a less robust correlation between the two, though their research suggest that trade liberalization raises the absolute size of both imports and exports.

17

made imports cheaper relative to domestic products and will have made imports more affordable to the population, leading to a higher propensity to import. I.3. SUSTAINABILITY AND STRUCTURAL ISSUES OF THE BOP As mentioned in section I.2.1 above, the borrowing of foreign savings to raise domestic investment with a view to increasing Viet Nams productive capacity in the future is a positive development objective. Viet Nam needs much higher levels of human and physical capital to complete on the world market in higher value added products, such as in electronic goods. At the same time, Viet Nam is a relatively low income and transition economy which must make large investments in physical and human infrastructure in order to improve its value added in the long run. This requires investment in hospitals, schools, universities and vocational training centres, improving the transport and logistic corridors in Vietnam, lowering the cost of utilities and telecommunications, strengthening the business environment and reinforcing the level of research and development centres in Viet Nam. These investments cannot be financed with domestic savings, which remain still relatively low due to the small scale of its economy. Thus it is necessary to attract foreign investment or debt to finance these projects. The net effect of this is to also run current account deficits. The balance of payments situation remains sustainable in the long term as long as Viet Nam will have the ability in the future to generate sufficient trade surpluses to generate reserves of foreign exchange which can be used to service its foreign debt liabilities. Viet Nams ability to achieve this will depend on the success of its investment decisions and the utilisation of its foreign debt. In the shorter run, the balance of payments situation will become unsustainable if Viet Nam runs into a situation whereby it can no longer service its debt or whereby it can no longer pay for its import bill because its reserves of foreign exchange have fallen to a very low level. A low level is often considered to be around 3 months of imports though in the case of Viet Nam, it has recorded lower levels of reserves and not faced balance of payments difficulties since its foreign debt service payments is low. In the short run, Viet Nam does not face an alarming situation, and the likelihood that it would need to default on its debt or face a crisis in its supply of imports because of a foreign exchange liquidity crisis seems remote. Viet Nam does face some capital flight associated principally with an overheated economy and a high inflation rate which led to the depreciation of the Vietnamese Dong in 2008 and a global financial crisis which has affected demand and the availability of foreign investment. Nevertheless, Viet Nam is expected to grow by around 5 percent in 2009 according to the IMF. Viet Nams situation is not alarming because the following conditions are expected to remain valid for 2009 and 2010: The current account deficit is lower than in 2008 as imports have declined by more than exports. Furthermore, with an expected recovery in demand in

18

developed countries from 2010, the demand for Vietnamese exports is expected to increase15. The debt service payments are relatively modest and will not cause a large drain on international reserves FDI remains robust even if it has decreased in 2009. It is expected to pick up from 2010 The level of reserves remains at 3 months import and is expected to improve in 2010, if Vietnam could be able to effectively exploit the Vietnam Japan EPA and ASEAN 5 countries markets as well as Chinese market, as since 2010 these countries have to reduce import tariff imposed on ASEAN countries to 0% in about 90% of the tax flows. If failing to take advantage of this opportunity, the favourable conditions for improving the trade balance in 2010 are limited as according to a forecast by IMF (October 2009), import demand of developing economies would just increase by 1.5%. (In this part, it is necessary to give more analyses to clarify that Vietnamese enterprises have taken advantages of tax reduction conditions facilitated by trade partners in ASEAN, ASEAN+ FTA agreements, demonstrated through the number of enterprises using the preferential certificates of orgin when exporting goods into these markets.)

Despite this, a number of weaknesses exist in the current balance of payments situation which will need addressing. These include: FDI has recently been targeted at non productive sectors of the economy with the consequence of not raising improving the trade balance Viet Nams dependence on imports for exports needs to be addressed in the long term in order to ensure that the current account moves into a surplus Viet Nams fiscal stimulus package which reached 6.8 percent of GDP in 2009 will widen the trade deficit but will be effective in averting a recession and any deflationary pressures caused by the global financial crisis. The fiscal deficit nevertheless should not be sustained over long periods of time There has been some speculation of a devaluation of the VND, and at the end of 2008, there was some real currency appreciation. A devaluation of the VND would have the consequence of raising the cost of debt services (which is denominated in US$), increasing the relative price of imports (and thus the price of exports since such a large proportion of exports consists of imported materials), and may lead to some reversal of portfolio flows Increasing protectionist measures in third countries will stifle Viet Nams export potential and needs to be monitored carefully

I.4. SUGGESTED POLICY MEASURES The difficulties faced by Viet Nam in it balance of payments situation are primarily rooted in the economic structure and macroeconomic conditions. Therefore restructuring the economy, transforming the development model and applying macroeconomic solutions are best used to deal with such a situation rather than trade policy instruments, though the latter can be used to deal with specific sectoral difficulties. The suggested
15

Exports from emerging and developing countries are expected to increase by 4.7% in 2009, compared to a drop of 9.7% in 2008 (IMF (2009) World Economic Outlook, World Economic and Financial Surveys, October. Table A9)

19

policy measures for dealing with BOP difficulties have been categorised according to whether the nature of the problem is short or long term. I.4.1. Suggested short-term policy measures Macroeconomic tools can be employed to adjust external imbalances and the two channels through which to achieve this are to employ fiscal policy or monetary policy: Fiscal or monetary tightening can be used to reduce domestic absorption, which in turn will reduce the demand for imports. Currently Vietnam has introduced monetary easing (via an interest subsidy scheme) and fiscal expansion (via the fiscal stimulus package). Both these policies will deteriorate the balance of payments situation of Vietnam. The Government can encourage consumers to switch the composition of their expenditure by favouring domestic over foreign expenditures though a real exchange rate depreciation. The depreciation has the effect of making the relative price of domestic goods cheaper in comparison to foreign goods.

Another manner in which the current account be alleviated is to try and reduce the demand for imports via an increase in tariffs. Under the WTO, members are permitted to raise the applied tariff rates to the bound rate. In the case of Vietnam, the tariff overhang (the difference between bound and applied rates) is Fig 9. Viet Nam tariff overhang in selected sectors in 2009 quite significant and can be used as an instrument for braking import surges. Figure 9 highlights the large tariff overhangs in different sectors. The policy space available to Vietnam is particularly high in transport equipment, beverages and tobacco and processed foods. Vietnam may also invoke import restrictions Source: WTO/ITC (2008) World Tariff profiles 2008, Geneva on the basis of balance of payments difficulties under certain stringent conditions, which are explored in Part II of this study. Nevertheless, the introduction of higher tariffs within the permitted bound limits or the application of import restrictions under the condition of balance of payments difficulties has associated consequence which may be very negative in the long run for Vietnam. The possible impact of such a policy choice include (i) affecting export performance since exports rely so heavily on imported contents; (ii) raising the trade balance if the elasticity of imports is less than unity; (iii) affecting consumer welfare by raising the cost of consumption; (iv) reducing the predictability of the business environment in Viet Nam from this policy reversal, which may affect foreign direct investment; (v) reducing investor confidence in Vietnam if the introduction of protectionist measures signals a crisis to investors. Moreover, the use of import surcharges has the same effect in reducing imports as does exchange rate depreciation, but it fails to achieve the beneficial effects on the export side.

20

For the time being, Viet Nam has only introduced a limited number of protectionist measures since the onset of the global financial crisis. Between March and April 2009, Vietnam introduced the following increases in tariffs: Increase of import tariffs for 15 dairy products. Increase of import tariffs on meat and poultry (from 17% to 33%), frozen beef (from 17% to 20%) and fresh pork (from 24% to 28%). Increase of import tariffs on steel, such as semi-finished steel products (from 5% to 8%); steel products for construction (from 12% to 15%); cold rolled steel.sheets and coils (from 7% to 8%); and coated steel sheets and coils (from 12% to 13%). Increase of import tariffs on alloy steel from 0% to 10%.

The authors of the report recommend keeping restraint on introducing new protectionist measures and only applying targeted measures where this is necessary. This can be done via the applied tariff rate or by introducing safeguards, subsidies or countervailing measures within the conditions set out by the WTO. I.4.2. Suggested long-term policy measures In terms of dealing long term structural issues, it is recommended that Viet Nam focus on the following suggestions to improve the long term outlook of its balance of payments position. Carefully evaluate the economic benefits of future FTAs that Vietnam signs with third countries in order to ensure that it benefits from these agreements and does not become vulnerable to large net imports. This would be very important for the impending Asean China, Asean- Korea FTA (AKFTA) and Asean-Japan FTA (AJFTA), especially FTAs that Vietnam plans to be involved in. Seek to improve value added in Vietnamese production and diversify exports with a view to reducing Viet Nams vulnerability to commodity price fluctuations and world market fluctuations. Address any macroeconomic imbalances by adjusting the level of the fiscal deficit and strengthening monetary policy. Continue to strengthen domestic support services, improve trade facilitation measures, enhance the transport and logistics network and continue with institutional reforms and administrative procedures to cut down transaction costs and improve competitiveness of the exported goods. Maintain an attractive investment climate to sustain significant investment and raise the competitiveness of Viet Nam. Improve the level of human capital in Viet Nam by enhancing the education system since human capital is the key to developing higher value added operations in the country. Reduce the incidence of smuggling across Viet Nams borders and improve the monitoring and quality of imported goods, as well as monitor dumping practices.. Monitor and lobby for the removal of protectionist measures or disguised forms of protection applied by G-20 countries against imports of Vietnam16.

16

See Evenett (2009)

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22

PART II - TRADE POLICY FRAMEWORK

II.1. BALANCE-OF-PAYMENTS RULES OF THE WTO RELATED TO TRADE IN GOODS II.1.1 The Balance-of-Payment exception in the GATT/WTO System The philosophy of the GATT/WTO system is based on the principle that freer trade generates more economic and social welfare for all Members. Therefore, rules of the WTO establish a system which puts the obligation on Members to liberalize their trading regime and lays down a set of rules which prevent the introduction of new trade restrictive measures. There are, however, wide-ranging exceptions to these obligations because governments, in pursuing different societal values and interests, take measures or adopt laws which are trade-restrictive. The WTO recognizes a number of situations when these trade restrictive legislations and measures are accepted, subject to certain conditions, as legal exceptions. The main exceptions are the following: The general exceptions of Article XX of the GATT 1994 and Article XIV of the GATS; The security exceptions of Article XXI of the GATT 1994 and Article XIV bis of the GATS; The economic emergency exceptions of Article XIX of the GATT 1994 and the Agreement on Safeguards; The regional integration exceptions of Article XXIV of the GATT 1994 and Article V of the GATS; The economic development exceptions of Article XVIII:A of the GATT 1994 and the Enabling Clause, and The balance of payments (BOP) exceptions of Articles XII and XVIII:B of the GATT 1994 and Article XII of the GATS.

Under the BOP exception rules WTO members, in certain specific BOP situations, are allowed to introduce such trade restrictive measures which otherwise would have been prohibited. It should be noted that the BOP exception can only be used if a countrys external financial position and balance-of-payments are under threat. It means that BOP rules of the WTO cannot be invoked, and import restrictions cannot be introduced, if the deficit concerns only one of the components of the balance-of-payments, the trade account, for example, but the external financial position of the country is sound. It is very important to keep in mind that since the introduction of a flexible exchange rate system in 1970s, the economic justification for BOP measures has been under attack. The main argument against the invocation of the GATT/WTO BOP rules has been that in case of BOP difficulties exchange rate and other economic policy measures should be taken rather than trade restrictions.

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II.1.2 BOP Rules Applied to Developed Members (Article XII of the GATT 1994) Article XI of the GATT 1994 establishes the general prohibition of using quantitative trade restrictions. Article XII lays down the basic BOP exception rules for developed members from the discipline established by Article XI. Under these rules, any Member Notwithstanding the provisions of paragraph 1 of Article XI... in order to safeguard its external financial position and its balance-of-payments, may restrict the quantity or value of merchandise permitted to be imported subject to conditions laid down by the article. Paragraph 2 (a). of Article XII says that import restrictions instituted, maintained or intensified shall not exceed those necessary: (i) to forestall the imminent threat of, or to stop, a serious decline in its monetary reserves, or (ii) in the case of a Member with very low monetary reserves, to achieve a reasonable rate of increase in its reserves. Paragraph 2 (b) provides that Members applying restrictions shall progressively relax them as such conditions improve, maintaining them only to the extent that the conditions specified in that sub-paragraph still justify their application. They shall eliminate the restrictions when conditions would no longer justify their institution or maintenance under that subparagraph.

II.1.3 BOP Rules Applied to Developing Members (Article XVIII:B of the GATT 1994) The rules of GATT 1994 take into account the special situation of developing countries in respect of BOP-related matters. As it was recognized by the Doha Ministerial Conference in 2001, Article XVIII is a special and differential treatment provision for developing country Members and recourse to it should be less onerous than to Article XII.17 Therefore, Section B of Article XVIII, paragraphs 8 to 12, provides for a special BOP exception for developing country Members. Paragraph 9 says: In order to safeguard its external financial position and to ensure a level of reserves adequate for the implementation of its programme of economic development, a Member coming within the scope of paragraph 4 (a) of this Article may, subject to the provisions of paragraphs 10 to 12, control the general level of its imports by restricting the quantity or value of merchandise permitted to be imported. A comparison of Article XII and Section B of Article XVIII indicates that a developed Member can restrict imports for BOP reasons only in order to safeguard its external financial position and its balance of payments, while in case of a developing Member the possibilities are larger as the objective of BOP measures may also include ensuring a level of reserves for the implementation of its economic development programme. II.1.3 Forms of BOP Measures Quantitative measures The provisions of GATT 1947 allowed only the use of quantitative restrictions to address BOP measures. However, it became an accepted practice to take BOP measures in form
17

Ministerial Decision on Implementation-Related Issues and Concerns, adopted on 14 November 2001, WT/MIN(01)/17, dated 20 November 2001, para.1.1.

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of tariff or similar measures, such as import surcharges. Tariff measures were formally authorized by the Tokyo Round Declaration on Trade Measures Taken for Balance of Payment Purposes which was adopted in 1979 (Declaration 1979). The Understanding on the Balance-of-Payments Provisions of the General Agreement on Tariffs and Trade 1994 (Understanding), which can be considered as the official interpretation of the BOP provisions of the GATT 1994, says the following about the nature of BOP measures: Members confirm their commitment to give preference to those measures which have the least disruptive effect on trade. Such measures (referred to in this Understanding as price-based measures) shall be understood to include import surcharges, import deposit requirements or other equivalent trade measures with an impact on the price of imported goods.18 Price based measures Price based measures can be used in excess of the bound duties. In this case, as the Understanding provides, the Member in its notification announcing the introduction of BOP measures, shall indicate the amount by which the price-based measure exceeds the bound duty clearly and separately under the notification procedures of this Understanding.19 This possibility is of special importance for Viet Nam and many newly acceded countries where the difference between applied and bound rates is not significant. In an opposite case, when the applied rates are much lower than the bound rates, the applied rates, in case of necessity, can be raised without invoking the WTO BOP provisions at the discretion of the concerned WTO member. The Understanding makes the use of quantitative restrictions exceptional. It provides that Members shall seek to avoid the imposition of new quantitative restrictions for Balanceof-Payments purposes unless, because of a critical Balance-of-Payments situation, pricebased measures cannot arrest a sharp deterioration in the external payments position. In those cases in which a Member applies quantitative restrictions, it shall provide justification as to the reasons why price-based measures are not adequate instrument to deal with the Balance-of-Payment situation.20 In the administration of quantitative restrictions, discretionary licensing can only be used when unavoidable.21 Most countries invoking the BOP provisions of the WTO are complying with the requirements of the Understanding and they use priced-based measures to restrict imports. There have been, however, some exceptions. In the consultations in the Committee of the Balance of Payments Restrictions (BOP Committee) Members routinely examine the systems, method and effects of import restrictions. In the consultation with India, for example, a number of Members noted that India had provided no justification why price-based measures were not adequate to alleviate BOP difficulties and why it used quantitative restrictions for BOP purposes.22

18 19

Paragraph 2 of the Understanding Paragraph 2 of the Understanding 20 Paragrapf 3 of the Understanding 21 Paragraph 4 of the Understanding 22 Report on the Consultation with India, WT/BOP/R/11. In a recent consultation with Ecuador in the BOP Committee several members stated that the use of quantitative restrictions was undesirable. Ecuador agreed to replace most of the quantitative restrictions for price-based measures. WT/BOP/R/91

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II.1.4 The Extent, Administration, Coverage and Time Frame of Restrictions Extent The extent of BOP restrictions introduced under Article XII or XVIII:B of the GATT 1994 is strictly regulated, they may not exceed what is necessary to remedy the BOP problem in question. In case of developing country Members which invoke Article XVIII:B, the BOP measures shall not exceed those necessary: (a) to forestall the threat of, or to stop, a serious decline in its monetary reserves, or (b) in the case of a Member with inadequate monetary reserves, to achieve a reasonable rate of increase in its reserves.23 The requirements are less strict for developing countries as they can adopt BOP measures to forestall a threat of a serious decline in monetary reserves, while developed countries can only do so to forestall an imminent threat of such decline. In addition, developing country Members with inadequate monetary reserves may adopt BOP measures to achieve a reasonable rate of increase in their reserves while developed members may only do so only when they have very low monetary reserves. Administration and coverage of measures WTO provisions establish a number of other restraints on the application of trade restrictions for BOP purposes. BOP measures must avoid unnecessary damage to the commercial or economic interests of any other Member24. They may discriminate among products, but not with respect of countries.25 The restrictions must be administered in a transparent manner in order to minimize any incidental protective effects. In respect of product coverage the Understanding has adopted a stricter interpretation than the original text of the GATT 1947 and the related practice, declaring that Members confirm that restrictive import measures taken for Balance-of-Payments purposes may only be applied to control the general level of imports and may not exceed what is necessary to address the Balance-of-Payments situation.26 Restrictions must be administered in a transparent manner.27 The authorities of the importing Member must provide adequate justification as to the criteria used to determine which products are subject to restriction. Based on Article XII and paragraph 10 of Article XVIII, governments can exclude or limit the application of restrictive measures in case of certain essential products. The term essential products shall be understood to mean products which meet basic consumption needs or which contribute to the Members efforts to improve its Balance-of-Payments situation, such as capital goods or inputs needed for production. In the administration of quantitative restrictions, a Member shall use discretionary licensing only when unavoidable and shall phase it out progressively.28 In a recent consultation Ukraine was criticized that its import surcharge was applied only to two products which covered only about 0.6 per cent of all tariff lines, affecting a volume of trade equivalent to some 7.3 per cent of total imports.29
23 24

Article XVIII:9 of the GATT 1994 Article XII(3/c) of the GATT 1994 25 Article XIII of the GATT 1994 26 Understanding, paragraph 4. 27 Understanding, paragraph 4. 28 Paragraph 4. of the Understanding 29 WT/BOP/R/93

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Time frame BOP measures are subject to time constraints. Members are under the obligation to announce publicly, as soon as possible, time-schedules for the removal of restrictive imports measures. Such time-schedules may be modified as appropriate to take into account changes in the BOP situation30 It must be added that a developing country is not required to withdraw or modify restrictions on the ground that a change in its development policy would render unnecessary the restrictions which it is applying under this section.31 But it in a specific case the concerned parties could not agree on the interpretation of development policy and the difference between development policy and macroeconomic measures. In India-Quantitative Restrictions, the Panel ruled that India could manage its BOP situation using macroeconomic policy instruments alone, without maintaining quantitative restrictions. India appealed this finding arguing that the Panel required India to change its development policy. The Appellate Body, however, upheld the Panels finding and ruled: we are of the opinion that the measure of macroeconomic policy instruments is not related to any particular development policy, but is resorted to by all Members regardless of the type of development policy they pursue.32 Summary of basic requiems vis--vis BOP measures In accordance with the existing WTO rules BOP measures must be: Temporary Price based, as a main rule Transparent and Applied to imports across the board

II.1.5 The Role of the International Monetary Fund The competence of IMF The BOP provisions of the GATT/WTO cannot apply without the exact determination what constitutes a serous decline in monetary reserves or an (imminent) threat thereof, or the determination of what constitutes very low or inadequate monetary reserves. As these issues fall within the competence of the International Monetary Fund (IMF), Article XV: 1 of the GATT 1994 provides the general cooperation obligation on both the IMF and the WTO in exchange and trade questions with the objective of pursuing a coordinated policy. According to Article XV: 2, the WTO shall accept all findings of statistical and other facts presented by the Fund relating to foreign exchange, monetary reserves and balances
30 31

Paragraph 1 of the Understanding Article XVIII: (11) of the GATT 1994 32 India-Quantitative Restrictions, Appelate Body Report, WT/DS90/AB/R, paragraph 124.

27

of payments, and shall accept the determination of the Fund as to whether action by a Member in exchange matters is in accordance with the Articles of Agreement of the International Monetary Fund The WTO, in reaching its final decision in cases involving the criteria set forth in paragraph 2(a) of Article XII or in paragraph 9 of Article XVIII, shall accept the determination of the Fund as to what constitutes a serious decline in a Members monetary reserves, a very low level of its monetary reserves or a reasonable rate of increase in its monetary reserves, and as to the financial aspects of other matters covered in consultation in such cases. Information provided by the IMF33 The IMF has regularly provided information to the BOP Committee on each consulting country's recent economic developments, focusing in particular on macroeconomic indicators that are linked to the country's current and prospective balance-of-payments situation. This has been used extensively in the BOP Committee's discussions on the parts of its consultation dealing with "balance-of-payments position and prospects" and "alternative measures to restore equilibrium", which in turn has been an important input to the Committee's consideration of the justification for the institution, maintenance, or intensification of trade restrictions for balance-of-payments purposes. The IMF is not asked to contribute directly to the BOP Committee's assessment of the justification for trade restrictions, nor is it asked to comment on the matters covered by the proviso and the Ad Note to GATT Article XVIII: 11. Between 1970 and 2009, the BOP Committee conducted around 230 consultations with Member countries. Most of those consultations have been held under the Committee's full consultation procedures, for which the IMF has contributed both a statement, which is reproduced in full in the Committee's reports, and its own consultation report on recent economic developments in the consulting country. General information provided by the IMF to the BOP Committee The IMF statement to the BOP Committee has regularly covered the following factors: recent developments in the real sector of the economy (e.g., investment, aggregate demand, output, growth and inflation); how developments in the real sector relate to the financial sector and to the macroeconomic situation, in particular the IMF's assessment of the internal macroeconomic imbalance that is causing the balance-of-payments problem focusing on fiscal, monetary, and exchange rate policies; the current and prospective balance-of-payments position, focusing on the trade and current accounts, and since the early-1980s on capital account developments too;

a description of the trade and exchange restrictions in place, and of any steps being taken to intensify or liberalize them;

33

For a detailed description of the IMF role in BOP consultations see : WT/BOP/21

28

information on the consulting country's relations with the IMF, in particular whether an IMF programme is in place or under negotiation.

The IMF has included in its statement, where applicable, reference to external factors affecting adversely the consulting country's balance-of-payments situation and prospects. Examples have been the effects of the energy crisis of the 1970s, and the recent financial and economic crises and more generally overseas trade barriers and changes in the terms of trade on a consulting country's import prices and export earnings. It has typically reviewed these factors in the context of their effect in weakening the consulting country's BOP situation, in creating more uncertain balance-of-payments prospects, and in some cases in justifying more time to phase-out trade restrictions for balance-of-payments purposes. Information on foreign debts The IMF has also included in its statement, where applicable, information on the consulting country's level of foreign debt and its foreign debt service obligations. This became a regular feature of IMF statements from the late-1970s, as a larger number of consulting countries gained access to international capital markets and raised their levels of foreign borrowing. The IMF has provided information on gross and net international monetary reserves, and where applicable it has drawn attention to the relative importance of short-term foreign debt in a consulting country's overall foreign debt profile. This has been placed in the context of the country's balance-of-payments adjustment policies and financing needs, and has been described in terms of the relative importance of foreign borrowing in bolstering the level of monetary reserves and in creating offsetting foreign exchange liabilities. Information on monetary reserves The IMF statement has regularly provided statistics and other information on the consulting country's level of monetary reserves, usually expressed in value terms, often also in terms of equivalent months of import cover, and sometimes in relation to the total size of external transactions. This information has been presented typically in the context of the expected evolution of the consulting country's balance-of-payments and foreign debt situation, in particular whether the balance-of- payments is expected to continue to deteriorate and place pressure on the level of reserves or to start improving, whether accumulated foreign liabilities are placing the level of monetary reserves under pressure, and whether further foreign borrowing presents a viable and sustainable option to finance the balance-of-payments and bolster the level of monetary reserves. The static picture of reserve holdings and adequacy has therefore been combined in the IMF statement with a dynamic assessment of expected changes in reserve holdings. Many countries consulting in the BOP Committee have held monetary reserves equivalent to about 3 months of import cover. (In WTO jargon, it is called the IMF golden rule, according to which monetary reserves should be enough to cover at least three months of imports.) In their own statements to the BOP Committee, these countries sometimes referred to this level of monetary reserves as the minimum level which their monetary authorities regarded as prudent. Some consulting countries have held much lower levels of monetary reserves at the time of their consultation in the BOP Committee, in certain cases equivalent to less than 1 month's import cover, while others have held much higher levels of monetary reserves; reserve holdings of 6-7 months of import cover have not been unusual, and in some cases monetary reserves stood at 11-12 months of 29

import cover at the time of the BOPs consultation. There is some evidence of consulting countries wishing to hold a higher level of monetary reserves in the 1990s than in the 1970s and 1980s, in light of their concern about the volatility of capital flows following periods of financial crisis. However, the evidence is not overwhelming, in part perhaps because the countries concerned were not, by and large, emerging market economies that were vulnerable to large inflows and outflows of speculative foreign capital. This issue of monetary reserves is frequently discussed in the Committee. India, for example, at the meeting of the BOP Committee in December 1995, stated that India had undergone a massive liberalization of its payments regimes and had reformed its internal market. The Indian representative believed that because of the size and complexity of the country, Indias needs for reserves should be greater than the standard of three to four month of imports34. In the context of implementation-related issues and concerns raised in the Doha Development Negotiations, a discussion took place in the BOP Committee, where India explained its position regarding financial reserve requirements. India did not agree with the basic rule of three months import cover requirement and stated that developing countries tend to experience balance-of-payments difficulties arising mainly from efforts to expand their internal markets as well as from the instability in their terms of trade when they are in a process of development. Thus, there is recognition of the tendency of development itself to generate balance-of-payments difficulties, as well as the need to safeguard the external position of developing countries and to ensure a level of reserves adequate for implementation of programmes of economic development through control of the general level of imports over a period of time as the progress of development programmes creates new demands Based on these considerations they proposed that in interpreting Article XVIII:11 of the GATT 1994 the BOP Committee should more explicitly recognize and consider the greater need for reserves of developing countries for implementing their programmes of economic development and that these programmes entail entail the financing of infrastructure needs through foreign capital.35 The competence of IMF in the light of a dispute settlement case The competence of IMF was addressed by a WTO Dispute settlement case involving the United States and India. The United States considered that quantitative restrictions maintained by India to more than 2,700 agricultural and industrial product tariff lines notified to the WTO appeared to be inconsistent with India's obligations under Articles XI:1 and XVIII:11 of GATT 1994 and Article 4.2 of the Agreement on Agriculture. Furthermore, the import licensing procedures and practices of the Government of India were inconsistent with fundamental WTO requirements as provided in Article XIII of GATT 1994 and Article 3 of the Agreement on Import Licensing Procedures. The WTO Dispute Settlement Body (DSB) established the panel on 18 November 1997. The US based its claim in respect of BOP justification of Indias measures on the position of the IMF according to which India did not face a BOP problem. The view of the IMF was that Indias external situation can be well managed using macroeconomic instruments alone; QRs are not needed for balance of payments adjustment and should be removed over a relatively short time period.36 The Appellate Body accepted the
34 35

WT/BOP/R/11 WT/BOP/R/61 36 Report on the Consultations with India, WT/BOP/R/32, IMF Statement

30

judgement of the IMF which said that India did not need to change its development policies for the reasons explained above. Indias monetary reserves were adequate, and, thus, Indias BOP measures were not necessary to forestall the threat of, or to stop, a serious decline in its monetary reserves within the meaning of Article XVIII:9; India had violated Article XVIII:11, second sentence, which provides that measures may only be maintained to the extent necessary under Article XVIII:9. Finally, India eliminated most of the restrictions maintained by 1 April 2000. From 1 April 2001, India eliminated all restrictions and thus implemented the recommendation of the DSB. (For further details on the India-Quantitative Restrictions case see the next chapter of this report). II.1.6 Procedural Rules and Legal Aspects of BOP Consultations Notifications If a WTO Member comes to the conclusion that it has BOP difficulties and it decides to apply import restrictions to remedy its BOP situation, it is under the obligation to notify to the General Council about the introduction of measures and any changes in the application of such measures. Time schedules for the removal of restrictive import measures must be announced publicly, as soon as possible, as well as any modifications in them.37 Significant changes in the application of measures taken for balance-ofpayments purposes shall be notified to the General Council prior to or not later than 30 days after their announcement. On a yearly basis, each Member shall make available to the Secretariat a consolidated notification, including all changes in the laws, regulations, policy statements or public notices, for examination by Members. Notifications shall include full information, as far as possible, at the tariff line level, on the type of measures applied, product coverage and trade flows affected.38 If any Member has any doubts or question about a notification, it may request that the concerned notification be reviewed by the BOP Committee. Such reviews are limited to the clarification of the issues raised by a notification of whether a consultation under paragraph 4(a) of Article XII or paragraph 12 (a) of Article XVIII is required.39 It may happen that a Member introduces an import restriction without indicating any reason for its introduction. If any Member has reasons to believe that the import restrictive measure was taken for BOP purposes, it may bring the matter to the attention of the BOP Committee. In such cases the Chairman of the BOP Committee requests information on the measure concerned and make it available to all Members.40 Types of BOP Consultations41 A WTO Member applying new restrictions or raising the general level of its existing restrictions by a substantial intensification of the measures is under the obligation to consult with the Committee on Balance-of-Payment Restrictions (BOP Committee) within four months of the adoption of the BOP measures. The BOP Committee conducts consultations on behalf of the WTO Members. The Member adopting import measures for BOP purposes may request consultations to be held under paragraph 4 (a) of Article XII or paragraph 12 (a) of Article XVIII of the GATT 1994 as appropriate. Developed members consult under Article XII, while developing countries under Article XVIII:B. If
37 38

Paragraphs 1. and 9. of the Understanding Paragraph 9. of the Understanding 39 Paragraph 10. of the Understanding 40 Paragraph 10. of the Understanding 41 Paragraphs 5-8. of the Understanding

31

no request for consultation has been introduced by the Member which adopted such measures, the Chairman of the BOP Committee will invite the Member to hold such consultations. The BOP Committee carries out consultations in order to review all import restrictive measures taken for BOP purposes. Earlier, membership of the Committee was open to all WTO Members indicating their wish to serve on it. Normally, all major developed and developing Members had membership in the Committee. LDCs and smaller developing countries, due to capacity reasons, normally could not afford to become Members in the BOP Committee and participate regularly in its meetings. The legal situation has changed from 3 June 2009. Since, all present and future WTO Members shall be deemed to have communicated to the Director-General their wish to serve as a Member on the Bop Committee.42 Every January, the WTO Secretariat should circulate and submit to the General Council a time schedule for the consultations to be held in that year. The schedule should be drawn up in consultation with the Members concerned and in the light of the programme and progress of the consultations of the IMF with the government concerned, so as to ensure that the most up-to-date and meaningful possible data form part of the IMFs contribution to the consultations with the WTO.43 Detailed procedures for consultations, known as full consultation procedures, have been in existence since 1970. More summary procedures, known as simplified consultation procedures are provided for the least-developed country Members and, with some limitations, for the developing country Members. The rules for full consultations were adopted on 28 April 197044, while the rules on simplified consultation procedures on 19 December 1972.45 Full consultations Full consultations can be held under Articles XII:4 and XVIII:12 of the GATT 1994. Developed Members consult annually, while developing country Members biannually, after the initial consultation. Consultations cover the nature of the BOP difficulties of the consulting Member; alternative measures which may be available and the possible effect of the restrictions on the economies of other Members. Consultations are intended to provide an opportunity for a free exchange of views contributing to a better understanding of the problems facing the consulting countries, of the various measures taken by them to deal with these problems, and of the possibilities of further progress in the direction of freer, multilateral trade. According to the Plan of Discussion for consultation under Articles XII:4 (b) and XVIII:12(b)46 the following issues should be addressed during full consultations: I. BOP position and prospects BOP situation and level of monetary reserves BOP prospects and expected movement in reserves Special considerations affecting the availability of or the need for monetary reserves

42 43

WT/BOP/R/92/Rev.1 Paragraph 7. of L/3388 44 L/3388, 27 April 1970 45 L/3772/Rev.1, 19 December 1972 46 Annex I to L/3388

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Factors, either external or internal, effecting the various elements of the BOP, such as exports and imports Effects of the restrictions on the BOP and expected duration of the restrictions Prospects of relaxation or elimination and likely effect of such action on the BOP II. Alternative measures to restore equilibrium Internal monetary and fiscal situation and other relevant matters which may affect the BOP Internal action to preserve or restore equilibrium including long-term measures such as those designed to raise productivity and export capacity or to reduce structural disequilibrium or rigidities Other measures which may help to restore the countrys balance of payments III. System and methods of the restrictions Legal and administrative basis of the restrictions Methods used in restricting imports, including the categories of goods and proportion of imports covered by each method Treatment of imports from different countries or currency areas The use of State trading or governmental monopoly in imports and the restrictive operation, if any, such regimes IV. Effects of the restrictions Protective effects of the restrictions on domestic production. Difficulties or hardship that may be expected upon relaxation or elimination of the restrictions Steps taken to reduce incidental protective effects of the restrictions Steps taken to minimize the difficulties of transition to the stage where BOP restrictions may be eliminated Steps taken in the light of Article XII: 3 (c) and the proviso to Article XVIII:10. In view of the diversities in the consulting countries BOP problems and the restrictive measures applied, the plan is not a rigid programme, it needs adaptations in individual cases. The history of consultations in the BOP Committee shows that account has been taken of all factors, both internal and external, which effected the BOP position of the consulting country. In consultations with developing countries attention should be given to the possibilities for alleviating and correcting BOP and other trade and development problems through measures that Members might take to facilitate an expansion of the export earnings of these countries.47 Simplified consultations The institution of simplified consultations were developed by the GATT in the early 1970s in the light of difficulties in arranging Article XVIII:12 (b) consultations. Regular consultations had to be postponed due to budgetary restraints and pressure of other tasks facing the GATT Secretariat and delegations concerned. As there was a general doubt about the usefulness of some of these consultations in the required form, suggestions were made to make these consultations simpler.

47

Paragraph 3. of L/3388

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Simplified consultations may be held in the case of least-developed country Members or in the case of developing country Members which are pursuing liberalization efforts in conformity with the schedule presented to the Committee in previous consultations. Simplified consultation procedures may also be used when Trade Policy Review of a developing country Member is scheduled for the same calendar year as the date fixed for the consultations.48 In such cases the decision as to whether full consultation procedures should be used will be made on the basis of the following criteria: (a) the time elapsed since the last full consultation; (b) the steps the consulting Member has taken in the light of conclusions reached on the occasion of previous consultations; (c) the changes in the overall level or nature of the trade measures taken for BOP purposes; (d) the changes in the BOP situation or prospects and (e) whether the BOP problems are structural or temporary in nature.49 Except in the case of LDC country Members, no more than two successive consultations may be held under simplified consultation procedures.50 Since 1972, the following procedures are applied in the implementation of the provisions of Article XVIII:12 (b) concerning regular consultations with developing country Members: (a) Each year the Secretariat establishes a schedule showing the members acting under Article XVIII:B which are required to consult under paragraph 12 (b) that year; (b) Each of these Members should transmit to the Members a concise written statement on the nature of the BOP difficulties, the system and methods of restriction with particular reference to any discriminatory features and changes in past two years, the effects of the restrictions and prospects for liberalization, (c) The statements received will be circulated to all Members and presented to the BOP Committee for prior consideration, so that the Committee may determine whether a full consultation is desirable. If it decides that such a consultation is not desirable, the BOP Committee will recommend to the General Council that the Member concerned be deemed to have consulted with the Members and to have fulfilled its obligations under Article XVIII:12 (b) for that year. Otherwise, the Members will consult the IMF, and the BOP Committee will follow the procedures applicable hitherto for a full consultation, and (d) Arrangements will be made with the IMF for the supply of BOP statistics for each country submitting a statement in accordance with paragraph (b) above.51 It should be noted that the rules on simplified consultations relate only to periodic consultations provided for in Article XVIII:12 (b). Consultations under Article XVIII:12
48 49

Paragraph 8. of the Understanding Paragraph 8. of the Understanding and paragraph 8. of the 1979 Declaration 50 Paragraph 8. of the Understanding 51 Paragraph 3. of L/3772/Rev.1

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(a) (initial consultations) continue to follow the original rules. There was no change in consultations with developed countries acting under Article XII; they consult annually as before. Since the establishment of the WTO, except in case of LDCs, no more than two successive consultations may be held under simplified consultation procedures.52 Consultations with the IMF Under paragraph 2 of Article XV of the GATT 1994 the WTO is required to consult with the IMF in issues covered by that paragraph. As soon as the programme of consultations for the year is drawn up and taken note of by the General Council, the Director-General of the WTO should send a communication to invite the IMF to consult with the WTO in connection with each of the WTO BOP consultations. In each case the WTO-IMF consultations takes place in the BOP Committee prior to the WTO consultation.53 The material supplied by the IMF as part of a consultation between the IMF and the WTO should be circulated to the Members of the BOP Committee as soon as possible after it is received by the WTO Secretariat. A copy may be supplied to any other Member which requests it.54 Documentation WTO rules require four documents in respect of BOP consultations. Notification The notification is prepared by the consulting Member by which it informs other Members about the introduction of trade restrictive measures taken for BOP purposes. The Basic Document for Consultation The Basic Document for Consultation, to be prepared by the consulting Member, should have the following four sections: (a) An overview of the BOP situation and prospects, including a consideration of the internal and external factors having a bearing on the BOP situation and the domestic policy measures taken in order to restore equilibrium on a sound and lasting basis; (b) A full description of the restrictions applied for BOP purposes, their legal basis and steps taken to reduce incidental protective effects; (c) Measures taken since the last consultation to liberalize import restrictions, in the light of the conclusions of the BOP Committee (d) A plan for the elimination and progressive relaxation of remaining restrictions.55 Under simplified consultation procedure, the consulting member submits a written statement containing essential information on the elements covered by the Basic Document.
52 53

Paragraph 8. of the Understanding Paragraph 8. of L/3388 54 Paragraph 9. of L/3388 55 Paragraph 11. of the Understanding

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The Basic Document should concentrate on the trade aspects of the restrictions, as the financial aspects are covered by the IMF document. A chronological account should be given of the more important changes made in the controls of restrictions in the preceding years or since the preceding consultation. In preparing the document the Secretariat, if required by the consulting country, provides technical assistance to developing countries to the preparation of the document. The basic document should be circulated at least three weeks before the date of the consultation. Factual background paper In the factual background paper the WTO Secretariat covers all important aspects of the consultation with a view to facilitating the consultations in the Committee. The factual background papers include three major chapters. The first one is dealing with recent macroeconomic and trade developments. In this chapter information is provided on the recent economic performance of the consulting country and current account developments. In the factual background paper prepared for the consultation with Ecuador in June 2009, the paper uses the latest available financial data provided by the Central Bank of Ecuador and trade data available from UN sources.56 Chapter II is devoted to trade policy features and developments. This chapter, in case of Ecuador, includes five sections, dealing with trade policy framework, tariffs, import restrictions and licensing, contingency measures and preferential access to third markets. The third chapter addresses the trade measures applied and their possible effects. According to the Understanding, the Secretariat document shall include relevant background and analytical material on the incidence of the external trading environment on the Balance-of-Payments situation and prospects of the consulting Member.57 It should be added, however, that BOP consultation papers prepared by the Secretariat are mainly factual, and rarely include deep analysis. The paper on Ecuador is a good example, as it did not address the trade and economic impact of the recent economic and financial crises and its implications for the economy of Ecuador and the drastic impact of the dollarization of the countrys economy. These aspects, however, were the main subjects of the discussion which took place in the Committee in its meeting in June 2009.58 Reports on the consultations At the conclusion of each consultation the Secretariat draws up a report which provides a succinct record and summing up of the important points discussed. The reports do not reflect the individual statements made at the meeting, with the exception of the statement made by the representative of the consulting Member and the statement made by the IMF: Other statements are summarized without indicating country names. For example: Some Members said that trade restrictive measures were not the best way to restore BOP equilibrium on a lasting basis or Some other Members considered that that the recourse to trade measures for BOP purposes was fully justifiable in the current situation. Reports include the conclusions of the BOP Committee, if applicable. The usual structure of a BOP full consultation report is the following:
56 57

Consultations with Ecuador, Background Document by the Secretariat, WT/BOP/S/15/Rev.1, 14 April 2009 Paragraph 12. of the Undersatnding. 58 Report on the Consultations with Ecuador, WT/BOP/R/91

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A. Opening statement (The statement of the representative of the consulting country is attached as Annex 1.) B. Statement by the IMF (The statement is attached as annex 2.) C. Discussion in the Committee. This part groups the statements made in the Committee under the following subtitles: (i) BOP position and prospects; alternative measures to restore equilibrium; (ii) System and method of restrictions; effects of restrictions; D. Replies by the representative of the consulting Member E. Conclusions (in case of full consultations) The reports on simplified consultations includes a summary of the main elements discussed in the Committee and a decisions on whether full consultation procedures are required.59 Legal aspects of BOP consultations Consensus in the BOP Committee as the main rule The BOP Committee reports directly on its consultations to the General Council. In case of full consultations the reports should indicate the Committees conclusions on the different elements of the plan for consultations, as well as facts and reasons on which they are based. According to the Understanding: The Committee shall endeavor to include in its conclusions proposals for recommendations aimed at promoting the implementation of Articles XII and XVIII:B, the Declaration and this Understanding. In those cases in which a time-schedule has been presented for the removal of restrictive measures taken for Balance-of-Payments purposes, the General Council may recommend that, in adhering to such time schedule, a Member shall be deemed to be in compliance with its GATT 1994 obligations. Whenever the General Council has made specific recommendations, the rights and obligations of Members shall be assessed in the light of such recommendations. In the absence of specific proposals for recommendations, the Committees conclusions should record the different views expressed in the Committee.60 Lack of consensus The Committee may come to a consensus that the BOP situation warrants the measures imposed, and that the application of the measures is consistent with the BOP provisions. But in cases when the Committee finds that the measures are not being applied consistently with the accepted criteria, it will request the consulting Member to make the necessary adjustments, e.g. convert quantitative restrictions to price-based measures, or to disinvoke the balance-of-payments provisions. If agreement can not be reached by the Committee, e.g. Members find the measures inconsistent but the consulting Member is not in a position to withdraw its BOP measures or bring them into conformity with the provisions, consultations (see the consultations with India, Nigeria, Ecuador and
59 60

Paragraph 13. of the Understanding Paragrapf 13. of the Understanding

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Ukraine), may terminate without agreed conclusions. Members may also reserve their rights, if they consider that the consulting country is not applying the balance-ofpayments provisions consistent with its obligations, to invoke the consultation and dispute settlement provisions of Article XXII and XXIII of GATT 1994. The Chairman then drafts a report, which reflects the main points of the discussion and the recommendations made by the Committee. The Committee approves this report which is submitted to the next General Council for adoption. According to Article XII:4(d) and Article XVIII:12 (d), if prima facie case of maintaining import restrictions inconsistently with the relevant GATT provisions can be established, countermeasures can be taken by the complaining member against the member which violated the rules, in accordance with the rules laid down in these two articles. The India-Quantitative restrictions case The final phase of BOP consultations with India constitutes a remarkable deviation from the normal GATT/WTO practice of reaching a consensus in the BOP Committee. India had been applying quantitative restrictions on more than 2700 eight digit HS tariff items, mainly consumer goods, for BOP purposes since 1957. From early 1990s India introduced economic reforms which included substantial liberalization of foreign direct investments and imports. In December 1995, at a joint consultation of the GATT and the WTO BOP Committees61, a number of developed Members, while commended India for the in-depth economic reforms, made critical comments about the widespread use of quantitative import restrictions. They referred to the IMF statement which said that Indias BOP prospects looked sound in the medium term, foreign exchange reserves were around six and half months of imports and according to the views of the IMF a period of two years would be enough for the country for relaxing import controls. The same members also noted that India did not provide justification why price-based measures were not adequate to alleviate BOP difficulties as required by paragraph 3. of the Understanding. Therefore, they requested India to provide a time-schedule for the progressive relaxation and removal of remaining restrictions maintained for BOP reasons as required by paragraph 1 of the Understanding. They also highlighted that the trade restrictions virtually banned the importation of consumer goods because import licenses were subject to the discretion of authorities. India did not accept the views of developed Members and the IMF and, supported by some developing Members, stated that there had been growing pressure on the overall balance-of-payments in recent months; Indias need for reserves should be greater than the standard of three to four months and price-based measures to control the level of imports consumer goods would be inappropriate. Conclusions of Committees reflected the divergent views expressed and therefore it was decided to resume the consultations in October 1996 after the announcement of the 1996/97 Export-Import Policy.62 The BOP Committee had two more consultations with India, in January and June 1997. But positions did not come closer. In the meeting in January 1997, the Committee invited India to present a plan for the elimination of measures notified under Article XVIII:B and

61 Countries which started BOP consultations under the GATT 1947 and continued under the GATT 1994, had their first consultation after 1 January 1995 in a joint session of the GATT and the WTO BOP Committees. 62 For details see: Report on the Consultation with India, WT/BOP/R/11

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to conclude the consultations consistently with all relevant BOP provisions.63 India provided a nine-year phase out plan of the existing measures which consisted three threeyear periods, beginning on 1 April 1997. The Committee held two meetings in June. As a result of the negotiations, India reduced the period for the elimination of import restrictions for five years. This, however, was not acceptable for a number of developed countries, especially the United States which qualified the new shorter Plan unsatisfactory. The US, referring to the statement of the IMF, stated that there was a significant increase in Indias reserves in 1996 and 1997 and the IMF confirmed that there was no threat of to the BOP situation. At the end of the meeting, the Chairman, in the light of the divergences in views, asked the Secretariat to produce a record reflecting the different positions. The Committee forwarded its report to the General Council.64 Afterwards the United States invoked the WTOs dispute settlement provisions. In the India-Quantitative Restrictions case India argued that it had the right to maintain BOP measures until the BOP Committee of the General Council ordered it to eliminate or relax these measures. The Panel did not accept this position. The Panel noted that the obligation of Article XVIII:11 to eliminate or relax BOP measures is not conditioned on any BOP Committee or General Council decisions.65India also argued, on the basis of footnote 1 to the Understanding, that dispute settlement panels had no authority to examine Members justifications of BOP measures.66 In views of India the meaning of this footnote was that the dispute settlement system could be invoked in respect of the specific use of a BOP measure or the manner in which the measure is applied in a specific case, but not in respect to the question of the balance-of-payment justification of these measures. The review of BOP measures was the task of the BOP Committee and the General Council, the political bodies of the organization. Panels and the Appellate Body, the judicial organs, must refrain from such review. The Panel did not accept Indias arguments. According to the Panel decision, in light of the footnote 1 to the BOP understanding, a dispute relating to the justification of balance-of-payments restrictions is clearly within the scope of matters to which the dispute settlement provisions of Article XXIII of the GATT 1994, as elaborated and applied by the DSU, are applicable67 It was also clearly expressed by the Panel and the Appellate Body that the panels and the BOP Committee although both have the competence to address issues relating to BOP measures, but they have different functions. II.2. BALANCE-OF-PAYMENTS RULES OF THE WTO RELATED TO TRADE IN SERVICES Article XII of the General Agreement on Trade in Services (GATS) (Restrictions to Safeguard the Balance of Payments) includes BOP related substantive and procedural provisions which are very similar to those of the GATT 1994. The basic rule is that In the event of serious balance-of-payments and external difficulties or threat of thereof, a Member may adopt or maintain restrictions on trade in services on which it has
63 64

WT/BOP/R/22 WT/BOP/R/32 65 Panel Report, India-Quantitative Restrictions, paragraph 5.79. 66 Nothing in this Understanding is intended to modify the rights and obligations of Members under Articles XII or XVIII:B of GATT 1994. The provisions of Articles XXII and XXIII of GATT 1994 as elaborated and applied by the Dispute Settlement Understanding may be invoked with respect to any matters arising from the application of restrictive import measures taken for balance-of-payments purposes.
67

Appelate Body Report, India-Quantitative Restrictions, paragraph 95.

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undertaken specific commitments, including on payments or transfers for transactions related to such commitments.68 This article also recognizes that particular pressures on the balance-of-payments of a Member in the process of economic development or economic transition may necessitate the use of restrictions to ensure the maintenance of a level of financial services adequate for the implementation of its programme of economic development or economic transition. It is important to note that the text of the GATS recognizes explicitly the specific difficulties which may be phased by transition economies in their economic transition process. The restrictions shall not Discriminate among members; Be consistent with the Articles of Agreement of the IMF; Avoid unnecessary damage to the commercial, economic and financial interests of any Member; Exceed those necessary to deal with the circumstance Be temporary and phased out progressively The rules relating to notification of BOP measures, consultations with the BOP Committee, and the phase-out of restrictions are the same as those of the GATT 1994. Article XII of the GATS has not been invoked until present. II.3 CONSULTATIONS IN THE WTO BOP COMMITTEE II.3.1 Introduction As explained earlier, the flexible exchange rate system has diminished the economic justification of the introduction of import restrictions for BOP reasons. In theory, equilibrium can be reached where trade and payments are balanced at a given exchange rate. In case of a large trade deficit, depreciation of the national currency may correct a trade deficit. But there are cases when developing countries are not willing to use that option because it may result in high social costs. A declining exchange rate would make internal prices higher, which would include basic necessities and it may also cause inflation. Another difficulty is that the required adjustments need time. This raises the liquidity question, meaning that the country running the trade deficit should have enough reserves to be able to continue importing the items which are absolutely necessary until equilibrium is established. These considerations indicate that in the BOP issue abstract theoretical arguments in a given case are not always decisive. One can observe that since the early 1970s, the number of countries which consulted under the BOP provisions of the GATT/WTO has continuously decreased. In the 1960s, ten developing countries invoked the GATTs BOP provisions.69 In the 1970s and 1980s, only three and four countries did so. But most of the import restrictions introduced by these countries were maintained for a long period. India maintained its quantitative BOP restrictions for 37 years, Egypt for 32, Bangladesh for 31 and Pakistan for 41 years.
Paragrapf 1. of the General Agreement on Trade in Services AITIC has recently prepared a useful Background note in the matter. The WTO Balance-of-Payments Consultations: Back in Vogue? www.aitic.org
69 68

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In the first five years after the establishment of the WTO, in addition to BOP longtimers, practically all transition economy members of the WTO (Bulgaria, the Czech Republic, Hungary, Poland, Romania and Slovakia) introduced import restrictions for relatively short periods for BOP reasons under Article XII of the GATT 1994. Ukraine, also a transition economy, notified BOP restrictions in early 2009 and consulted in the BOP Committee. The frequent use of the BOP provisions by transition economies, which is very important also for Viet Nam, indicates that economic transition generates economic conditions which put extra burden on the BOP. In addition to Ukraine, Ecuador, also a victim of the recent economic crisis, also introduced import restrictions for BOP reasons. Both Ukraine and Ecuador received a cold reception in the BOP Committee and were asked to phase out all restrictions within a couple of months. Other countries which consulted in the BOP Committee gradually all disinvoked the WTO BOP provisions. So, between 2001 and 2008, there were no BOP consultations in the WTO. The last country which disinvoked was Bangladesh which eliminated the last restrictions in 2008. From the 14 years long practice of the WTO one can draw the conclusion that under the WTO consulting countries receive much less sympathy in the BOP Committee that during the GATT years. Countries which introduced import restrictions were invited to phase out BOP restrictions within very short periods and were suggested to use macroeconomic measures to remedy their BOP problems. In a number of cases Members reserved their WTO rights which sent a clear message for the concerned consulting countries that in case of non-compliance, the dispute settlement provisions will be invoked. In one case, as discussed above, the dispute between the US and India was decided by a dispute settlement panel and the Appellate Body. The newest tendencies are warning all countries which consider the introduction of trade restrictions under WTO cover that they will get very likely little understanding in the BOP Committee. II.3.2 The most Important Full Consultations in the WTO BOP Committee with Developing Countries until 2000 Developing countries India70 India, as described earlier, consulted with the WTO BOP Committee in 1995 and 1997. Foreign exchange reserves covered around 6.5 months of imports. The IMF stated that Indias BOP prospects looked sound in the medium term. It was not faced with the threat of a serious decline in its monetary reserves. According to the IMF the quantitative restrictions imposed by India were not necessary to achieve a reasonable rate of increase in reserves. India, had maintained quantitative restrictions on more than 2700 HS items, mainly in the consumer goods category and administered them through a complicated system of import licensing. During the BOP consultations many Members of the BOP Committee remarked that India had a stable external position therefore, the continued maintenance of import restrictions were not justified under the WTO BOP provisions. In addition, it was also stated that India did not provide justification on the use quantitative restrictions, which
70

A number of aspects of the Indian BOP consultations were described in detail in earlier sections of this report.

41

was in conflict with the rule of the Understanding that Members are committed to use price-based measures. The majority of the countries asked India to eliminate its import restrictions maintained under Article XVIII:B of the GATT 1994 immediately. In the 1997 consultations India proposed to phase the restrictions during 9, later 7 and 5 years. This was not acceptable for a number of Members of the Committee which reserved their rights under the WTO. The US initiated a dispute settlement case which it won. India eliminated the import restrictions maintained for BOP reasons in 2000. Sri Lanka In the documentation provided for the 1995 BOP consultation with Sri Lanka, the IMF reported that the countrys official reserves increased to about 5 months of imports. There was a large current account deficit which amounted to 7 per cent of GDP. The fiscal situation continued to be a major concern. The budget deficit, partly due to the intensification of the civil war, reached 9.5 per cent of the GDP. Sri Lanka maintained import restrictions on about 200 items for national security, public health, public moral and environmental considerations. Some food items were subjected to quantitative import restrictions for BOP considerations which was criticized by a number of Members, as being not price-based. The BOP Committee came to the conclusions that most members did not perceive a threat of a serious decline in Sri Lankas international reserves as set out in paragraph 9 of article XVIII, nor a critical balance-of-payment situation as set out in paragraph 3 of the UnderstandingThe Committee considered that, even if a balance-of-payments problem existed, given the limited impact of the import licensing measures on agricultural imports in general and on the trade balance as a whole, such measures would not resolve the problem. On the basis of the above considerations, and in the light of all relevant provisions of GATT 1994, the Committees recommended to Sri Lanka not to have recourse to the provisions of Article XVIII:B.71 In 1998 Sri Lanka disinvoked Article XVIII:B of the GATT 1994 and eliminated all import restrictions maintained for BOP reasons.72 Nigeria Nigeria started its BOP consultations with the GATT BOP Committee in 1984, which were continued in the WTO in 1996, 1997 and 1998. According to the IMF, Nigerias economic performance deteriorated markedly since 1990. During 1990-93, the external trade surplus was more than halved, and the external current account balance shifted from a surplus of almost 10 per cent of GDP to a deficit of 3 per cent. At the same time, gross reserves fell from the equivalent of five months of imports to about one monthThere was a six fold increase in the Federal Governments overall fiscal deficit during 1990-93. The external debt reached US$ 31 billion, equivalent to 91 per cent of GDP at the end of 1994the external position is expected to remain fragile and official reserves relatively low over the next several years. Despite this very bad external position of the country the suggestion of the IMF was steadfast
71 72

WT/BOP/R/8 WT/BOP/R/44

42

implementation of strong macroeconomic policies, rather than resort to trade restrictions to achieve lasting improvements. The Fund staff encourages the early unification of the exchange rates , and the adoption of a specific timetable for the elimination of exchange rate restrictions.73 Members of the Committee questioned the appropriateness of maintaining import prohibitions to overcome the BOP problem. The import prohibitions maintained on maize, sorghum, millet, wheat floor, vegetable oils, barites and bentonites, gypsum, domestic articles made of plastic, retraded tires, textile fabrics of all types and articles made thereof, motor vehicles and motor cycles above 8 years old, furniture and gaming machines, were not consistent with the WTO provisions. The imports of wheat flour and gypsum were restricted under GATT Article XIX, while those of motor vehicles and gaming machines under Article XX. Quantitative restrictions were not applied to control the general level of imports and Nigeria had not demonstrated why price-based measures were not adequate to alleviate BOP programmes without distorting trade. Moreover, the bulk of imports into Nigeria consisted of chemicals, manufacturing goods, machinery and transport equipment whereas import prohibitions on balance-of-payments grounds applied on a few sectors selectively protecting these sectorsimport prohibitions in place exceeded what was necessary to address the balance-of-payments situations.74 At the resumed consultation the Committee came to the conclusions than the import prohibitions in Nigeria could no longer be justified under Article XVIII:B and the Understanding and asked Nigeria to notify its relevant decisions to the Committee. And members reserved their rights under GATT 1994.75 At the next consultation Nigeria was called on by the Committee to draw up a time-schedule for the elimination of the WTO incompatible measures.76 In later consultations Nigeria introduced an 8 year time schedule for the elimination of the restrictions which was not acceptable for most Members of the Committee. The consultations in July 1997 and February remained unsuccessful, therefore the Chairman recorded the divergent views in the Committee and made its report to the General Council accordingly.77 Invocation of the WTO dispute settlement provisions could be avoided because Nigeria informed the Committee that it would phase out all restrictions by 1/01/2000.78 Tunisia At the consultation with Tunisia in June 1996, the IMF reported that the country in 1994 had an overall fiscal deficit of 3 per cent of GDP, which rose to 4.2 per cent in the next year. The budget deficit reached 5.3 per cent of GDP. In 1994, the current account deficit, excluding grants, narrowed to the equivalent of 2.9 per cent of GDP, from 7.7 per cent in 1993. According to estimation the current account deficit was supposed to reach 4.5 per cent of GDP in 1995. The overall BOPs recorded a surplus of 2 per cent of GDP in 1994 which declined to 0.3 per cent of GDP in 1995. Gross official reserves at the end of 1995 declined to an equivalent of 2.6 months of imports and were estimated at the equivalent of two months of imports at end-April 1996. The IMF report provided an analysis on
73 74

WT/BOP/R/13 WT/BOP/R/13 75 WT/BOP/R/18 76 WT/BOP/R/25 77 WT/BOP/R/35 and 41 78 WT/BOP/R/47

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Tunisias economic reforms, and finally the Fund encouraged the authorities to promptly eliminate all remaining trade restrictions maintained for BOP purposes. Members of the Committee in the June 1996 meeting recognized that the BOP situation of the country was fragile, but stated that the remaining quantitative restrictions maintained on the imports of motor vehicles were neither price-based nor applied to control the general level of imports.79 In the resumed consultation in June 1997 the IMF reported that the countrys reserves were on an upward trend (3.2 months of imports) and the external current account deficit narrowed to 3 per cent of GDP in 1996, reflecting improvements in both the trade balance and services. The IMF again encouraged the authorities to promptly eliminate remaining quantitative restrictions maintained for BOP purposes. At the meeting the Committee welcomed the phase out plan presented by Tunisia, consisting of four phases of liberalization, starting on 1 July 1997 with the last stage to be implemented on 31 December 2000. In the light of this plan, the Committee recommended to the General Council that in adhering to its phase out plan, Tunisia be deemed to be in compliance with its GATT 1994 obligations.80 Tunisia dismantled the remaining import restrictions by 31 December 2000, as foreseen by the phase out plan.81 Pakistan Pakistan was a regular client of the GATT BOP Committee, it started its consultations in 1960. At the April 1997 consultation with the WTO BOP Committee the IMF representative recognized the countrys fragile BOP situation. The external current account deficit was about 6.8 per cent of GDP, reflecting a large trade deficit. End-March 1997 official reserves were at the level of 3.6 weeks of imports. The budget deficit reached 4.8 per cent of GDP. At the time of consultation, Pakistan maintained imports restrictions (QRs and special duties) on 68 items on grounds of health, safety, public morals or security.82 Members of the Committee recognized that Pakistan was facing a serious BOP problem and agreed that it was justified in resorting to measures in accordance with Article XVIII:B of GATT 1994. Members requested Pakistan to notify which items were restricted under Article XVIII:B.83 The Committee had further consultations with Pakistan in November 1997 and in May and November 2000. The BOP situation of the country remained fragile, reserves in early 2000 were at just over one month of imports. Nevertheless, the Committee asked Pakistan to introduce a plan for removal of its BOP restrictions and implement it. In December 2001 Pakistan notified that by June 2002 it would eliminate its last import restriction maintained for BOP reason.84

WT/BOP/R/14 WT/BOP/R/31 81 WT/BOP/N/58 82 The items included : meat, palm stearin, tobacco, cigarettes, chemicals, paper and paper products, certain machinery, ball bearings, metal boilers, some electric items, armored security vans, yachts and medical instruments. 34 products could only be imported if satisfied heath and safety requirements. 83 WT/BOP/R/27 84 WT/BOP/R/51, 56 and WT/BOP/N/59
80

79

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II.3.3 Full Consultations with LDCs In the WTO there was only one full consultation with an LDC, namely Bangladesh, which started its consultations in GATT in the 1970s. There is no need to go into details regarding the Bangladeshs consultations in the BOP Committee as Bangladesh is an LDC and its treatment cannot be used a precedent from point of view of Viet Nam. Nevertheless, it is interesting to note that the Committee in the last two consultations, in 2004 and 2007, pushed even an LDC to prepare a plan for the elimination of import restrictions maintained for BOP reasons to implement it correctly.85 As a result, Bangladesh notified in April 2007 that it would eliminate its last import restriction on salt and chicks by 31 December 2008.86 II.3.4 Consultations with transition economies under Article XII of the GATT 1994 until 2000 In the early 1990s and between 1995 and 2000, all transition economy Members of the GATT/WTO introduced import restrictions for BOP reasons due to the their serious BOP problems. The consultations demonstrated that the underlying causes for the worsening BOP situation were to be found in difficulties or developments which are very strictly linked to the economic transition process. These included: Collapse of their traditional trade flows due to the demise of the Council of Mutual Economic Assistance (CMEA) and the need to re-orient trading relations towards convertible currency markets; sharp decline in GDP; need to change the basic structure of economy and trade; increasing trade and current account deficit; decreasing foreign exchange reserves; lack of current account convertibility, large budget deficit; increasing foreign debts; privatization; establishment of market mechanisms; liberalization; deregulation; restructuring social security systems; high inflation; exchange rate instability; growing external debt etc. As a result, all GATT/WTO Member transition economies in this period introduced import restrictions under Article XII of GATT, mainly in the form of import surcharges, to forestall the imminent threat of, or to stop, a serious decline in their monetary reserves. The BOP Committee asked the consulting countries to bring the measures in harmony with the requirements of the WTO and eliminate them as soon as possible. The IMF in all cases expressed the view that the introduced import restrictive measures were not appropriate and emphasized that sustained implementation of correct macroeconomic policies and structural reforms would safeguard BOP viability. As all restrictions were phased out within relatively short periods (1 to 2 years), no recourse to the WTO dispute settlement procedures occurred. The case of Viet Nam is very similar to the cases of European transition economies, but it is even more complicated as Viet Nam is at a lower level of economic development than the Central and Eastern European countries were in the 1990s. Viet Nam in its transition process to a socialist market economy faces all the hurdles mentioned above, in addition to the difficulties which result from its developing country status. For these reasons it is quite important to study the experience of the European transition economies in the WTO in general and more specifically in the area of BOP consultations because it is very likely that in any eventual invocation of the BOP provisions by a developing country
85 86

WT/BOP/R/76 and 86 WT/BOP/N/64 and WT/BOP/R/88

45

transition economy the experience of the consultations with Central and Eastern European transition economies would be used. Slovakia The Slovak Republic consulted with the GATT and later with the WTO BOP Committee since 1994. The Slovak economic transition process was especially long and painful, with many ups and downs, which explains why the country applied different import restrictions for BOP reasons until 2001. In 1994 the economic situation of the country was critical which could be explained by the split of the former Czechoslovakia into two countries. Declining GDP, large trade and current account deficit, very low foreign exchange reserves (equivalent to less than one month of imports) characterized the situation. In March 1994 Slovakia introduced a temporary import surcharge of 10 per cent applied to consumer goods and foodstuffs, which covered 13 per cent of total imports. Slovakia was criticized in the BOP Committee that it did nor phase out the surcharge by the end of 1994, as it was promised by the authorities. After the introduction of the surcharge, the economic situation of the country improved substantially. The IMF reported that real GDP rose by 5 per cent, exchange reserves almost quadrupled, inflation was halved to 12 per cent, the fiscal deficit declined by 5 percentage points to 2.5 per cent of GDP. Economic performance continued to be favorable in 1995, but the Slovak authorities decided to maintain the surcharge as they considered the BOP situation sensitive. The BOP Committee in its conclusions regretted that Slovakia did not adhered to its declared intention to eliminate the surcharge by the end of 1994 and stressed that under the relevant GATT/WTO rules trade measures were to be used only in the case of severe BOP difficulties. The Committee requested Slovakia to eliminate the import surcharge by the end of 1995, if possible, but in any case before 30 June 1996.87 But Slovakia did not phase out the surcharge by 30 June 1996, however, it lowered it to 7.5 per cent. In 1995 the macroeconomic situation of the country improved; according to the IMF official foreign exchange reserves rose to the equivalent of over 4.4 months of imports. The main negative development was that the current account deficit registered a deficit of over 8 per cent of GDP reflecting continued high import growth while exports stagnated. The IMF, at the BOP Consultation in June 1996, urged the Slovak authorities to phase out the surcharge and stressed that financial policies, rather than the import surcharge are the most appropriate tool to respond to balance-of-payment imbalance.88 In its conclusions The Committee notedthat despite the improvement in its reserve position, Slovakia had not fulfilled its previous undertakings to the WTO. The Committee recalled once again that balance-of-payments measures should be temporary, and that they should not be used for fiscal or protective purposes. The Committee expressed its strong concern over the continuing use of the import surcharge. In addition, the Committee stated its objection to the application of the surcharge on a selective basis.89 In 1996 and 1997 the current account deficit of Slovakia further deteriorated, it exceeded 9 per cent of GDP and the official foreign exchange reserves declined to cover three months of imports. In January 1997 Slovakia abolished the import surcharge on consumer goods, but introduced a new surcharge in July 1997 to redress the difficult
87 88

WT/BOP/R/4 WT/BOP/R/15, IMF Statement 89 WT/BOP/R/15

46

BOP situation and a low level of foreign currency reserves.90 The 7 per cent surcharge applied to all products with the exception of some agricultural items, basic raw materials and inputs (brown coal, energy, iron ore, natural gas, and some inputs for the textile and tanning industry). The BOP Committee, at its meeting of October and December 1997, accepted the plan of the Slovak authorities that the surcharge would be eliminated by 1 October 1998 and declared that the Slovak Republic should be deemed in compliance with its obligations under GATT 1994, provided it adhered to its modified timeschedule. The IMF regretted the imposition of the surcharge and stressed that the surcharge cannot be a substitute for appropriate fiscal tightening to reduce the external deficit to sustainable level91 But the saga of Slovakias BOP consultations did not come to an end by that. By 1 October Slovakia phased out the import surcharge it introduced in 1997, but from 1 June 1999 it introduced a new 7 per cent import surcharge which was applied to 74 per cent of imports. The surcharge did not apply to basic raw materials, pharmaceuticals and investment technologies, in order not to discourage foreign investments. The surcharge was applied to all trading partners, including FTA and customs union members. The reason for introducing the new surcharge was that the current account deficit exceeded 10 per cent of GDP, total external deficit constituted more than 60 per cent of GDP and official foreign reserves decreased to an equivalent of 2.5 months of imports. At September 1999 meeting of the BOP Committee Members felt that the Slovak experience demonstrated that border measures cannot solve the balance of payments problem but required a range of macroeconomic measures to tackle weakness in the economy. The IMF maintained its position expressed at earlier consultations and again it expressed its regret over the imposition of the surcharge.92 Slovakias last consultation with the BOP Committee took place in September 2000, when its representative announced that the surcharge would be eliminated by the end of 2000.93 Hungary After about 4-5 years of economic transition process, the Hungarian economy faced a serious situation. The external current account deficit increased to close to 10 per cent of GDP in 1993 and 1994, mainly due to a very large trade deficit which reached 9 per cent of GDP. The budget deficit was at the level of 6 per cent of GDP, while the foreign exchange reserves declined to 5.7 months of imports. In early 1995 problems aggravated. In March 1995, the Hungarian Government introduced a number of drastic economic measures to remedy situation. The measures included an 8 per cent import surcharge with effect of 20 March. The Hungarian WTO notification stated that the deterioration of the BOP position posed an imminent threat of a serous decline in the foreign exchange reserves. The surcharge was applied to imports of all sources and it covered most goods, only primary energy carriers and machinery for investment purposes were exempted.94 In addition, the Hungarian currency was devalued by 9 per cent and a pre-announced crawling peg was introduced.

90 91

WT/BOP/N/46 WT/BOP/R/40 92 WT/BOP/48 93 WT/BOP/R/52 94 WT/BOP/N/2

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The BOP Committee at the consultation in June 1995 recognized Hungarys BOP difficulties and expressed its hope that by the time of next consultation, to be held in summer 1996, Hungary would be in a position to evaluate the effects of the surcharge on its balance of payments and to elaborate on its intention to replace the surcharge by permanent structural measures. The Committee requested Hungary also to present for the next consultation a concrete time-table for the reduction and elimination of the import surcharge.95 The IMF representative, at the next meeting of the Committee in September 1996, stated that the adjustment programme undertaken since early 1995 has yielded important results in terms of macroeconomic stabilization. Official reserves rose to a level equivalent to 9.5 months of imports at the end of 1995. The Committee concluded that there was no longer an imminent threat of a serious decline in the level of Hungarys monetary reserves, as set out in Article XII:2(a) of GATT 199496 On 1 July 1997 Hungary eliminated the surcharge. The Czech Republic According to the IMF report, the current account deficit widened by 5,5 percentage points to 5.5 per cent of GDP in 1996, and further to 10 percent of GDP in the year to March 1997, reflecting strong import demand and sluggish exports. Official reserves amounted to the equivalent of 3.5 months of imports at end-May 1997. In April 1997, in response to the continued deterioration in the external accounts, the Czech authorities introduced an import deposit scheme, which applied to consumer goods and foodstuffs (about 30 per cent of total imports) and required a six-month noninterest-bearing deposit equal to 20 per cent of import value. The scheme is expected to contribute to forestall an imminent threat of a serious threat of a serious decline in the foreign reserves.97 The Czech import deposit scheme was received negatively by the Committee. A majority of Members of the Committee argued that the measure was inappropriate, particularly in that its coverage of imports was selective, and ill-designed to redress macroeconomic imbalances. They urged the Czech authorities to eliminate it98 In view of its unsustainability, on 21 August 1997, just five months after its introduction, the import deposit scheme was abolished.99 Bulgaria Bulgaria, due to its economic transition-related imbalances, introduced a 3 per cent temporary imports surcharge prior to its WTO accession, already in August 1993 to forestall the imminent threat of a serious decline in foreign exchange reserves. The surcharge was reduced and on 1 January 1996 eliminated. After its WTO accession Bulgaria introduced a new 6 per cent import surcharge on 4 June 1996 to safeguard its balance-of-payments. The surcharge was applied mainly to consumer goods and intermediary products, representing about 50 per cent of total imports. It was reduced to 4 per cent in July 1997, to 2 per cent in July 1998 and the surcharge was eliminated in January 1999.

95 96

WT/BOP/R/3 WT/BOP/R/17 97 WT/BOP/N/19 98 WT/BOP/R/33 99 WT/BOP/R/37

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Bulgaria introduced import restrictions because it had a serious BOP problem. According to the IMF, the BOP recorded a large overall deficit, mainly resulting from capital flight and large external debt service payments. Official reserves declined to less than one month of 1996 imports. The BOP Committee at its meeting in July 1997 recognized Bulgarias delicate BOP situation and found that recourse to Article XII of GATT 1994 was justified. The Committee welcomed the fact that the surcharge was transparent, non-discriminatory and, as a price-based measure, least disruptive to trade. The Committee decided to recommend to the General Council that Bulgaria be deemed in compliance with its WTO obligations.100 At the next and last consultation, the WTO Committee commended Bulgaria for sustaining its commitment to reform and liberalization and welcomed the decision to eliminate the import restrictions maintained for BOP reasons 18 months earlier than originally envisaged. The IMF reported that official reserves rebounded to an equivalent of 4.8 months of imports and a large current account surplus (4.3 per cent of GDP) which was due to the crises induced import compression.101 Romania In 1997-98 Romanias economic situation substantially deteriorated. According to IMF data, real GDP declined by an estimated 5.5 per cent in 1998, against 6.5 per cent in 1997. The current account deficit widened and it reached 7.5 per cent of GDP, reflecting in part a sizable real appreciation of the leu and intensified competition from East Asian exporters. Gross foreign reserves declined to 2.2 months of merchandise imports at end1998. The general government deficit was about 4 per cent of GDP in 1998. According to the IMF, Romanias economic performance was largely the consequence of an unbalanced financial policy mix, and structural weakness in the enterprise and banking sectors. For these reasons the IMF staff advised against the introduction of any import surcharge.102 In October 1998, Romania introduced a 6 per cent import surcharge to redress a difficult balance-of-payments situation. The surcharge was applied applies to imports from all sources and all products, with the exception of energy, medicines and investments goods, covering about 60 per cent of total imports.103 At the consultation held in February 1999, Members sympathized with the economic difficulties faced by Romania and the seriousness of the BOP problem. But sought clarification regarding the coverage of the surcharge which could be wider. Members recommended that Romania pursue a lasting solution to its balance-of-payments difficulties through fundamental macroeconomic reform, including fiscal tightening, an appropriate exchange rate policy and rapid economic restructuring.The Committee found Romania in conformity with its obligations under Article XII of GATT 1994.104 In 1999 Romanias economic situation improved. GDP grew by an estimated 1-1.5 per cent in the first half of 2000, the current account deficit declined to 1.2 per cent of GDP,
100 101

WT/BOPIR/34 WT/BOP/R/43 102 WT/BOP/R/45, Annex 2, Statement by the IMF representative 103 WT/BOP/N/42 104 WTO/BOP/R/45

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gross foreign reserves reached 2.7 months of total imports, fiscal deficit was about 3.5 per cent. The Committee, at its meeting in September 2000, welcomed the countrys adherence to the phase out schedule and appreciated that, in spite of existing conditions, it would terminate the import surcharge by the end of the year. The Committee agreed that Romania was in full conformity with its obligations under Article XII of GATT 1994.105 Romania ceased to apply the surcharge as from 1 January 2001.106 Poland Poland did not consult in the WTO BOP Committee because it eliminated the 5 per cent import surcharge, which was introduced under GATT 1947 in December 1992, by 1 January 1996. The surcharge was introduced to forestall the imminent threat of a serious decline in Polands foreign exchange reserves which was at the level of five months of imports.107 II.3.5 Recent consultations Between 2001 and 2008, there were no consultations in BOP Committee. No countries invoked Article XII or XVIII:B. The financial and economic crises, however, resulted in the recent invokation of the BOP Articles by Ecuador and Ukraine. The response of the most influential WTO Members was fast and unequivocal, the tolerance towards import restrictions introduced for BOP reasons was narrowing. Both countries, under the threat of invoking the dispute settlement provisions, were called upon to eliminate/transform the measures immediately Ecuador Since August 2008, Ecuadors economic environment deteriorated sharply. Oil prices fell, non-oil exports and worker remittances were also adversely affected. Ecuador dollarized moneratary regime constrained monetary options to respond to shocks. Official reserves declined to a level of 2.2 months of imports in April 2009. Real GDP was expected to contract by 2 per cent in 2009. IMF staff projected the external account to shift from a surplus of 2.5 per cent in 2008, to a deficit of 3.5 per cent of GDP in 2009. Net Foreign Assets (the term used for foreign currency reserves by the IMF in a country which uses US$ as a national currency) are estimated to decline below 2 months of imports by end-2009. In January 2009, Ecuador imposed one-year trade measures for balance of payments purposes, including both price-based measures (tariff increases) and quantitative restrictions to imports. The trade measures applied by Ecuador covered 630 HS subheadings, at a 10 digit level, or some 8.7% of all tariff lines; they were mostly durable consumer goods and transport equipment, as well as textile and clothing products, and footwear. The measures applied on imports from all trading partners. The price-based measures consisted of: (a) a tariff increase of 30 or 35% ad valorem on 75 HS tariff subheadings (slightly over 1% of all tariff lines); (b) a tariff increase consisted of the application of a specific tariff to be applied on top of the ad valorem rate in place, for 284 subheadings, representing some 3.9% of all tariff lines. The specific rate was US$12/kilo for textile and clothing products, and US$10/pair for footwear. The
105 106

WTO/BOP/R/53 WTO/BOP/N/56 107 BOP/R/228, WT/BOP/N/8

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tariff increases adopted through the recent measures came on top of those described previously, which took place in 2008, and raised the applied rates of these products to their WTO bindings. The quantitative restrictions adopted applied to 271 subheadings, accounting for 3.7% of all tariff lines; for 248 of these lines, a quota equivalent to 70% of their 2008 import value was set; for the other 23 lines the quota was equivalent to 65% of 2008 imports. Quotas were not distributed by country, but by importer; they were pre-assigned to importers taking into account their imports in the 2006-08 period. New importers were assigned 5% of the quota for each subheading. Quotas were to be filled on a quarterly basis; they were not transferable or negotiable. Quotas not used in the first two quarters of a year were cancelled. The measures applied by Ecuador affected a volume of trade of US$4.3 billion (2008), equivalent to some 23% of its total 2008 c.i.f. imports. Imports of the products subject to the measures, as a group, increased by some 25% in value terms between 2007 and 2008. Total quotas imposed on these products for 2009 are US$2.28 billion, of which US$702.97 million correspond to products subject to quotas of 65% of their 2008 import volume, and US$1,425.47 million to products subject to quotas equivalent to 70% of their 2008 import level.108 In the consultation in April 2009, many members of the Committee expressed concern about the policy mix chosen by Ecuador, particularly its over reliance on trade restrictions relative to the extent of macroeconomic economic policy adjustment. Some Members said that trade restrictions were not the best way to restore BOP equilibrium on a lasting basis. The representative of the IMF also said at the meeting that import restrictions would not be helpful in solving fiscal problems. Reduction in spending was needed, given that recent expenditure levels were no longer sustainable in light of sharp decline in revenues. Some Members also stated that the use of quantitative restrictions was undesirable and less effective that price-based measures and the use of quantitative restrictions was not sufficiently justified and lacked transparency. According to some Members the measures were not WTO consistent. It was also noted that the measures affected less than 9 per cent of tariff lines and some 23 per cent of total imports. Under the pressure of the BOP Committee, Ecuador agreed to replace most of the quantitative restrictions for price-based measures no later than 1 September 2009. The Committee welcomed Ecuadors commitment to remove all trade measures for BOP proposes no later than 22 January 2010. The conclusions of the Committee ended with a threatening sentence: While the measures described remain in force, Members reserve their rights under GATT 1994 109
Ukraine

On 4 March 2009, Ukraine notified to the WTO the introduction, as of 7 March 2009, an import surcharge of 13%, on imports of certain products for balance-of-payments purposes for a period of up to six calendar months. The initial regulation was applied to a number of products covering 24 HS Chapters.110 The surcharge applies in addition to the customs value of the goods, before payment of internal taxes if any (e.g. VAT, excise

108 109

WT/BOP/S/15/Rev1 WT/BOP/R/91 110 Tariff headings 0202, 0203, 0206 - 0210, 0504 - 0506, 0509, 0511 (except item 0511 10 00 00), 0808, 1601 - 1605, 1701, 1702 (except for starch treacle in item 1702 30 99 00), 2204 - 2208, 2701, 4203, 4303, 57, 60 - 65, 6806, 6901, 7201, 7301, 7321, 8401, 8414, 8418, 8501, 8516, 8702, 8703, 8704.

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duties); thus for example if the MFN tariff is 10%, the total duty paid on the import including the surcharge will amount to 23%. On 14 May 2009, Ukraine notified the WTO that the 13% import surcharge had been eliminated on all imports except refrigerators (HS 8418) and motor vehicles (HS 8703).111 The surcharge on these goods was envisaged to be imposed for six months, thus until 7 September 2009. The IMF reported that Ukraine's economy recorded very rapid growth since 2000 with average growth in excess of 7 percent. By early 2008, however, the economy was overheating. Credit growth exceeded 70 percent, CPI inflation had risen above 30 percent, and a buoyant property market pushed valuations to high levels. Imports surged at a 5060 percent annual rate and the current account deficit reached 7 percent of GDP by June 2008, leaving the rigidly managed currency overvalued by an estimated 1020 percent. Broadly coinciding with the deepening of the global financial crisis in the summer of 2008, Ukraine was hit by a sharp terms-of-trade shock. In particular, in line with the plunge in global commodity prices, steel prices declined by around 80 percent from the peak levels reached earlier in the year. At the same time, on the import side, Russia phased out remaining subsidies on imported gas. In the context of the global financial turmoil, Ukraine was also subject to a sharp reversal of external capital flows and was effectively shut out of international capital markets, although direct credit lines have been for the most part rolled over. In 2008 the current account deficit accounted to 7.2 per cent of GDP, but for 2009, in light of signs of economic stabilization, the IMF forecast a 2 per cent deficit. According to the IMF, international reserves were at comfortable level.112 The Committee noted that the trade measures currently applied by Ukraine cover only about 0.6 percent of all tariff lines, affecting a volume of trade equivalent to some 7.3 percent of its total 2008 c.i.f. imports. Ukraine's measures, therefore, do not, in the view of the Committee, control the general level of its imports, and they can not be expected to assist in redressing the balance-of-payments situation. Furthermore, the Committee noted that Ukraine's preferential partners were exempted from the trade measures, whereas no allowance for any such exemption is made in Article XII, the Understanding, or Article XXIV. The Committee concluded that the current measures are not justified by Ukraine's current balance-of-payments situation, in light of the requirements set forth in Article XII of GATT 1994 and are not applied in a manner consistent with the requirements set forth in
Article XII of GATT 1994 and the Understanding. Accordingly, the Committee took note of Ukraine's commitments to eliminate the measures no later than 7 September as set out by the legislation, to firmly endeavour to eliminate them by mid July, and to immediately notify to the Committee the action taken. The Committee will then convene to consider the action taken

On the basis of this request, and in the light of the commitments taken by Ukraine reflected above, the Committee agreed to conclude the consultations.

111 112

WTO document WT/BOP/N/68, 18 May 2009. WT/BOP/S/16

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While the measures described remain in force, Members reserve their rights under GATT 1994.113

113

WT/BOP/R/93

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PART III. CONCLUSIONS AND RECOMMENDATIONS

Since the introduction of its economic reform policies in the middle of 1990s, Viet Nam has implemented gradual trade and capital market reforms. This has made it more difficult for policy makers to deal with macroeconomic shocks faced by open economies. In particular, Viet Nam manages a managed float exchange rate by pegging the Viet Nam Dong (VND) to the US Dollar, yet Viet Nam has substantially liberalized its trade and capital movements. Without the exchange rate to smooth out short run movements in the international capital markets, Viet Nam has found it challenging to adjust to changes in capital flow or trade flows. In recent years, Viet Nam has witnessed: High rates of economic growth driven by high levels of investment, government spending and exports Significant reliance on imports of machinery and inputs in the manufacturing and construction sectors Persistent and sharply fluctuating trade and current account deficits Low levels of foreign exchange reserves At times, an overvalued real effective exchange rate Increasing, though erratic, capital inflows A large informal economy and significant investment held outside of the banking system

The analyses included in this report focused primarily on the causes of the large trade deficit and the balance-of-payment provisions and practices of the WTO with the objective of assisting Viet Nam to work out strategies to overcome the identified balanceof-payments related problems. The main conclusions of the study are the following. Economic Policy Conclusions The cause of Viet Nams large current account deficit reflects large deficits in the goods and services account, as well as small but persistent deficits in the income account. Transfers in the form of remittances and informal investment from overseas Vietnamese nationals have contributed to reduce the high levels of the current account deficit, although 2008 marked a decline in remittances amid pressures from the international financial crises and a reduction in confidence in the Vietnamese economy. The current account deficit has been financed by long term debt, in the form of foreign direct investment, which has traditionally been geared towards the manufacturing and the export sectors. Since 2008, a large proportion of FDI appears to be directed at real estate speculation and in services, as opposed to manufacturing, with the effect of not contributing to the future trade performance of Viet Nam. Thus the quality of FDI appears to be less beneficial to Viet Nam than in the past. Moreover, a surge in portfolio investment has also been used to finance the current account deficit in recent years. This short term and more volatile source of debt also raises concerns as to the impact of a change in investor sentiment or difficulties in the balance of payments.

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Despite the recent trends of increasing trade imbalances and more volatile and less productive capital inflows, the situation of the balance of payments does not appear alarming because the level of reserves, though low, remain sufficient to honour short term debt servicing requirement and to cover the import bill. In the longer term, some macroeconomic adjustments will be necessary to reduce debt and switch to internal consumption and reduce dependence on imports. However at present, the situation of the balance of payments is sustainable. A major cause of the imbalances in the international transactions of Viet Nam reflect macroeconomic imbalances, caused by exogenous factors such as the slump in world demand for imports, the international financial crises and the bearish investment climate, low interest rates across the developed countries, and endogenous factors such as the loosening of fiscal policy for large infrastructural projects and expansionary monetary policy in the form of interest rate subsidies. The expansionary fiscal and monetary policies have increased the demand for imports and raised the demand for external debt in the face of insufficient domestic savings to cover domestic investment. The study considers trade weaknesses in the current trade performance of Viet Nam and suggests channels to tackle these weaknesses in order to redress the trade imbalance. These include enhancing the value added of domestic production to raise the terms of trade, improve the level of human capital, improve the usage of BTAs to the advantage of Viet Nam, and make use of safeguards or other permitted trade defense instruments when necessary. However, the study highlights that the principal cause for the loss of reserves has not been trade related (though it is one factor) but instead it reflects a savingsinvestment deficit in Viet Nam, loose fiscal policy, declining foreign investment and lower remittances.

Trade Policy Conclusions Viet Nam, at present, does not have balance of payment difficulties or a critical balance-of-payments situation in the sense of Article XVIII: B of GATT 1994 and the Understanding on the Balance-of-Payments Provisions of the General Agreement on Tariffs and Trade 1994. Therefore, in the present BOP situation, there is no recognized need to introduce import restrictions in order to safeguard the countrys external financial position and to ensure a level of reserves adequate for the implementation of programme of economic development; If in the near future Viet Nam invoked the WTOs BOP provisions and introduced import restrictions for BOP purposes, the reception of these measures, would be very likely negative. Viet Nam would be reminded by both influential Committee Members and the IMF that for the solution of its economic problems the use of macroeconomic policy measures would be appropriate and its trade restrictions would be qualified WTO inconsistent and would be asked, under he threat of invoking the WTO dispute settlement provisions, to phase them out immediately; The introduction of import restrictions for BOP purposes would spoil the reputation of Viet Nam as a country with a predictable economic environment, it would strain its relationship with FTA and other main trading partners including with foreign investors with very serious economic consequences. 55

Trade Policy Recommendations Opening of Viet Nams economy to the outside world, and especially accession to the WTO and participation in free trade agreements has resulted in increased imports. If the import increase causes problems to the domestic economy, Viet Nam has a wide range of possibilities to introduce import restrictions in accordance with its domestic legislation and its international (WTO, FTA and bilateral) commitments. The suggestions of trade policy nature include the following: Analyzing the difference between the present applied rates and WTO bound duty rates and increase the applied rates to the level of bound rates; Considering the introduction of safeguard measures under the WTO and the safeguard clauses of FTAs. (Under the WTO a Member may take a safeguard action (i.e., restrict imports of a product temporarily to protect a specific domestic industry from an increase in imports of any product which is causing, or which is threatening to cause, serious injury to the industry. Until the end of 2008, the initiation of 168 safeguard actions were reported to the WTO Secretariat); Considering the application of anti-dumping measures. (Under the WTO rules, if a company exports a product at a price lower than the price it normally charges on its own home market, it is said to be dumping the product. The WTO Anti-Dumping Agreement defines rules on how governments can or cannot react to dumping it disciplines anti-dumping actions. In 2008, 208 antidumping investigations were initiated); Considering the application of countervailing duties under the WTO Agreement on Subsidies and Countervailing Duties. (According to the Agreement, a country can use the WTOs dispute-settlement procedure to seek the withdrawal of the subsidy or the removal of its adverse effects. Or the country can launch its own investigation and ultimately charge extra duty (countervailing duty) on subsidized imports that are found to be hurting domestic producers. In 2008, the initiation of 14 countervailing duty procedures were reported to the WTO); Considering the use of Article XXVIII of GATT 1994 (Modification of Schedules) to renegotiate accession tariff concessions. (These renegotiations normally address the issue of compensation for the tariff decrease demanded); Following the development of the BOP situation. If Viet Nams BOP situation is becoming critical, and quick action is needed, the introduction of import restrictions for BOP purposes can be considered, but always as a last resort, due to the negative impacts associated with the introduction of such restrictions.

To ensure that the Conclusion reflects full content of the presented ideas and to help buid an overview for the Government to consider, the Conclusion part should be formed based on the following contents: 1. Structure policy: A project on economic restructuring and transformation of the development model to increase the localization content and added values of goods 56

should be promptly prepared, partly put into practice in 2010 and stepped up in the 2011 2015 period, until 2020. Re-directing the attraction of foreign investment should be taken into account, with a focus on attraction of investment projects that create new capacities for export. 2. Financial and monetary policies (macroeconomic tools; exchange rate, fiscal policies). Limitations in applying these policies should be analyzed according to their side effects. 3. Reform institutional and administrative procedures to attract FDI, reduce transaction costs for enterprises and improve the competitiveness of exported goods. 4. Trade policies: - Give detailed analysis on the period before the participation of FTAs, RTAs, and improve abilities to take advantage of RTAs, FTAs, especially from 2010. By this time, about 90% of the import tariff flows in ASEAN 6 and China shall be cut down to 0%. - Diversify export markets, especially markets where export turnover of a specific kind of product is small but grows fast. - Break down in more detail the export stastistics. Curently, export turnover of goods recorded in the other goods category by Customs Department is large (approximately USD 9 billion) with very fast growth rate (about 35%/year), however, without identification of the specific kinds of goods, relevant policies on production encouragement and trade promotion support could not be made. - Consider to increase tax on some kinds of goods other than materials for exported goods production or goods for replacement of imported goods (in the context of low inflation rate) to the ceiling level in commitments. - Apply anti-dumping, anti-subsidy investigation measures, and trade defence measures in accordance with WTO or FTA regulations. 5. BOP measures

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REFERENCES ADB (2009) Key Indicators for Asia and the Pacific 2009, 9th Edition, August Evenett, S. J. (ed) (2009) Broken Promises: A G-20 Summit Report by Global Trade Alert, Centre for Economic Policy Research, 17 September Hoekman, B., A. Matoo & P. English (eds) (2002) Development, Trade and the WTO: A Handbook, The World Bank, Washington D.C. IMF (2009) International Financial Statistics, September, Washington D.C. IMF (2009) Article IV Consultation-Staff Report; Staff Supplement and Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Vietnam, IMF Country Report No.09/11, April, Washington D.C. IMF (1993) Balance of Payments Manual, Fifth Edition, Washington D.C. Obstfeld, M. & K. Rogoff (1996) Foundations of International Macroeconomics, MIT Press Obstfeld, M. & K. Rogoff (1995) Intertemporal Approach of the Current Account, in Grossman, G. M. & K. Rogoff (eds) Handbook of International Economics Vol 3, North-Holland Press Santos-Paulino, A. & A. P. Thirwall (2004) Trade Liberalisation and Economic Performance in Developing Countries, in The Economic Journal, 114, February Wu, Y. & L. Zeng (2008) The Impact of Trade Liberalization on the Trade Balance of Developing Countries, in IMF Working Paper, WP/08/14, January

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