General Agreement on Tariffs and Trade: Uruguay Round Final Act Should
Produce Overall U.S. Economic Gains (Volume 1) (Letter Report, 07/29/94,
GAO/GGD-94-83A).

The Final Act resulting from the Uruguay Round of negotiations of the
General Agreement on Tariffs and Trade was signed on April 15, 1994.
Because Congress will be considering legislation to implement the Final
Act for the United States, GAO reviewed the negotiating objectives for
the round, assessed what was accomplished, and analyzed the projected
impact the Final Act would have in a number of areas. The first of two
volumes presents GAO's overall analysis and conclusions about the
results of the negations. In GAO's view, the Final Act could produce
overall economic gains for the United States, although some sectors of
the U.S. economy would shoulder a disproportionate burden as a result of
foreign competition. For example, four different studies have projected
job losses, ranging from 72,000 to 255,000 over 10 years, for the
textile and apparel industries under complete trade liberalization.
Because the Final Act is expected to dislocate workers, their needs must
be considered. Both deficit reduction and liberalized trade are
important to the long-term health of the U.S. economy. Finding offsets
to the 5-year tariff revenue losses as required by the Budget
Enforcement Act would preserve the overall economic gains of the Final
Act and maintain deficit neutrality.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-94-83A
     TITLE:  General Agreement on Tariffs and Trade: Uruguay Round Final 
             Act Should Produce Overall U.S. Economic Gains
             (Volume 1)
      DATE:  07/29/94
   SUBJECT:  Restrictive trade practices
             Foreign trade agreements
             Foreign trade policies
             International trade
             International economic relations
             Tariffs
             International trade restriction
             International trade regulation
             Economic growth
             International organizations
IDENTIFIER:  NAFTA
             North American Free Trade Agreement
             Fair Trade in Financial Services Act
             Trade Adjustment Assistance Program
             DOL Economic Dislocation and Worker Adjustment Assistance 
             Program
             
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Cover
================================================================ COVER


Report to the Congress

July 1994

THE GENERAL AGREEMENT ON TARIFFS
AND TRADE - URUGUAY ROUND FINAL
ACT SHOULD PRODUCE OVERALL U.S. 
ECONOMIC GAINS

GAO/GGD-94-83a Volume 1

GAO/GGD-94-83a

Uruguay Round Final Act


Abbreviations
=============================================================== ABBREV

  GATT - General Agreement on Tariffs and Trade
  WTO - World Trade Organization
  USTR - U.S.  Trade Representative
  ITC - International Trade Commission
  OECD - Organization for Economic Cooperation and Development

Letter
=============================================================== LETTER


B-256944

July 29, 1994

To the President of the Senate and the
Speaker of the House of Representatives

The Final Act resulting from the Uruguay Round of negotiations of the
General Agreement on Tariffs and Trade (GATT) was signed on April 15,
1994.  The negotiations, begun in great part at the initiative of the
United States, resulted in the most comprehensive GATT agreement to
date.  Since Congress will be considering legislation to implement
the Final Act for the United States, we reviewed the negotiating
objectives for the round, assessed what was accomplished, and
analyzed the projected impact the Final Act would have in a variety
of areas. 

The results of our review are summarized in two volumes.  In this
volume, we present our overall analysis and conclusions about the
results of the negotiations.\1 That analysis is based in part on our
detailed review of individual areas of negotiation, such as
agriculture, services, and subsidies, presented in volume 2.  In each
area, we

  identify the original trading problems that led to the
     negotiations;

  identify the U.S.' specific negotiating objectives (and, in some
     cases, those of other nations) aimed at resolving those
     problems;

  present the results of negotiations as provisions of the Final Act;

  analyze the impact of the Final Act, including the likelihood that
     it will resolve the original trading problems; and

  discuss issues that remain unresolved and those that require time
     and attention. 

In conducting our review, we analyzed the Final Act and examined
numerous other documents created both during the negotiations and
after the round's conclusion.  These documents were produced by U.S. 
agencies, industry groups, domestic interest groups, and research
organizations, and by foreign governments and the GATT Secretariat. 
They covered negotiating objectives, industry positions on various
issues, and analyses of the several agreements contained in the Final
Act.  We examined the leading studies of the economic effects of the
round completed in 1993 or later, conducted by international
organizations, U.S.  agencies, and private research organizations. 
We did not, however, evaluate their methodologies or validate their
results.  We interviewed officials of the same organizations,
conducting almost 100 interviews with foreign government officials,
GATT officials, and U.S.  officials at overseas posts.  We also
interviewed attorneys engaged in international trade law and
representatives of industry groups that have analyzed the Final Act
as it affects their interests.  (See vol.  2, ch.  1, for a more
complete description of our objectives, scope, and methodology.)

We did our work between August 1993 and June 1994 in Washington,
D.C.; Geneva, Switzerland; Brussels, Belgium; and Marrakesh, Morocco. 
We conducted our work in accordance with generally accepted
government auditing standards. 


--------------------
\1 We testified earlier this year on the results of the Uruguay Round
negotiations before the Subcommittee on Trade, House Committee on
Ways and Means.  See International Trade:  Observations on the
Uruguay Round Agreement (GAO/T-GGD-94-98, Feb.  22, 1994). 


   RESULTS OF OUR ANALYSIS
------------------------------------------------------------ Letter :1

While Congress will have to weigh many varied and sometimes competing
interests in deciding whether to implement the Final Act of the
Uruguay Round, we believe that the Final Act would produce overall
economic gains for the United States.  In achieving these gains,
though, some sectors of the U.S.  economy would experience adverse
economic effects from increased foreign competition.  Moreover, the
new organizations, rules, and procedures contained in the Final Act
could create new dynamics in the GATT system that are difficult to
predict.  Therefore, we have outlined some specific issues that later
would require continued attention if Congress votes to approve the
Final Act implementing legislation. 

The Final Act generally achieved the negotiating objectives
established by Congress in the Omnibus Trade and Competitiveness Act
of 1988\2 to benefit U.S.  trading interests.  The Final Act would
reduce tariff and nontariff barriers (such as subsidies and import
licensing requirements) to further open markets; create stronger,
more timely dispute settlement procedures; extend GATT principles to
areas important to the United States but previously either not
covered or only partly covered, such as services, intellectual
property, and agriculture; and strengthen GATT as an institution. 

Moreover, all the economic studies of the Final Act that we reviewed
projected that it would increase international trade and U.S. 
national income.  Figures varied among the studies, reflecting their
different methodologies and focuses.  The Council of Economic
Advisers, which attempted to include the fullest potential effects of
the Final Act, estimated that implementing it would increase annual
U.S.  national income between $100 billion and $200 billion in the
tenth year after it is made effective.  This would be a cumulative
effect of about 1.5 to 3 percent of current gross domestic product
(GDP).  Other studies also projected economic gains overall and for
various sectors of the U.S.  economy if the Final Act is implemented. 
For example, the Washington, D.C.-based Economic Strategy Institute
has projected an increase in annual exports of services of $3 billion
between the years 2000 and 2003.  In addition, the U.S.  Department
of Agriculture estimated that annual U.S.  agricultural exports would
increase between $4.7 billion and $8.7 billion by 2005. 

However, some sectors, such as textiles and apparel, are expected to
be adversely affected by increased foreign competition.  Several
studies have estimated that workers in these two industries would
lose a total of 72,000 to 255,000 jobs under trade liberalization. 
Since preserving these jobs has resulted in higher product costs to
consumers, the economy as a whole is expected to benefit from the
increased competition.  But the needs of dislocated workers should be
recognized.  We reported in testimony earlier this year\3 that the
current patchwork of worker adjustment assistance programs may not
adequately cover all workers needing assistance, such as those who
might be dislocated as a result of implementing the Final Act.  Thus,
Congress may want to consider having in place an effective program to
assist those workers if the Final Act is implemented. 

Some industry organizations and domestic interest groups have
expressed concerns about how specific provisions of the Final Act
might adversely affect matters of particular importance to them.  For
example, the Final Act would create a new World Trade Organization
(WTO) as a successor to GATT.  Doing so would, among other things,
bring all member countries under more of the multilateral trade
disciplines, a key U.S.  negotiating objective.  However, some feared
that creating WTO and strengthening dispute settlement procedures
could adversely affect some U.S.  interests because other nations
could (1) outvote the United States on important matters in WTO; (2)
employ the stronger dispute settlement procedures to curtail the
U.S.' unilateral use of its trade laws; or (3) use the procedures to
challenge a host of other U.S.  laws, such as those designed to
protect the environment, health, and safety. 

It is difficult to predict in the abstract the outcomes of any
potential votes or dispute settlement actions under the new
provisions of the Final Act.  However, our review of voting
procedures in the Final Act disclosed that they contain provisions
designed to prevent misuse.  The Final Act would require WTO members
to try to make decisions by consensus, as is now the practice.  Where
consensus cannot be reached on substantive matters, the Final Act
contains fallback voting procedures.  For example, proposed
amendments affecting WTO members' rights and obligations could only
be considered if two-thirds of them voted to do so; if ratified, such
amendments would apply only to members that voted for them.  WTO
members could, by a three-fourths majority vote, decide that a
country not accepting an amendment could leave WTO, or remain with
consent of the other members.  However, the current GATT has a
similar provision that requires only a majority vote, and it has
never been invoked.  Therefore, since the current GATT also has
fallback voting procedures but normally has used consensus
decision-making, it is hard to speculate on how the new WTO
membership might use the revised provisions. 

Our review of the dispute settlement procedures and their effect on
U.S.  laws and regulations indicates that the United States would
still be able to use its trade laws and other domestic policies,
including employing unilateral trade actions.  However, should the
United States be challenged and found to be in violation of WTO
rules, the costs--in the form of compensation or sanctions--would be
more explicitly imposed under the Final Act. 

Some industry groups also expressed concerns about the new subsidies
agreement contained in the Final Act.  The agreement contains a new
category of permissible government subsidies that could not be
challenged under WTO rules.  Some felt that other nations could use
these subsidies in ways that could put U.S.  firms at a competitive
disadvantage.  For example, they said that subsidies permitted for
updating manufacturing plants to improve environmental protection
could be used instead to make more general efficiency improvements
aimed at achieving competitive gains.  Again, it is difficult to
speculate how foreign governments might employ the new permissible
subsidies or the impact they might have on U.S.  firms. 

Given the difficulty of predicting the outcomes in these areas at
this time, we believe that they would warrant continued attention as
the various provisions are implemented if the Final Act is approved
by Congress.  In addition to these two areas, in volume 2 we have
identified provisions in other complex areas of negotiation that
concern some U.S.  industries that would bear watching. 

A final issue stems from problems posed by the budget rules governing
the approval of legislation to implement the Final Act.  Under the
Budget Enforcement Act of 1990 (Title XIII of P.L.  101-508)
pay-as-you-go (PAYGO) rules, changes in revenue or direct spending
programs may not increase the federal deficit in the first 5 years. 
Revenue losses must be offset by reductions in direct spending and/or
increases in revenues within the PAYGO-controlled portion of the
budget.  These provisions are problematic for the Final Act because,
despite its projected long-term economic gains, it would increase the
budget deficit in the shorter term by reducing tariff revenues. 

Finding funds to offset this revenue loss has proven difficult.  The
Congressional Budget Office (CBO) has estimated the net revenue loss
for the first 5 years after the Final Act's implementation at a
little over $10 billion.  We believe that this revenue loss should be
offset; doing so would maintain deficit neutrality while liberalizing
trade. 


--------------------
\2 Public Law 100-418.  The negotiating objectives are contained in
title I, subtitle A, part 1. 

\3 See Multiple Employment Training Programs:  Major Overhaul Is
Needed (GAO/T-HEHS-94-109, Mar.  3, 1994). 


   BACKGROUND
------------------------------------------------------------ Letter :2

Created in 1947, GATT is the primary multilateral agreement governing
international trade and was founded on the belief that more
liberalized trade would help the economies of all nations grow.  (See
vol.  2, ch.  1, for a detailed discussion of GATT's history.) GATT
is based on several principles designed to foster more liberalized
trade.  One is nondiscrimination, embodying the concepts of "most
favored nation" and "national treatment." Under the former concept,
all contracting parties are bound to grant to each other treatment as
favorable as they give to any country with regard to trade matters. 
Under the latter concept, the parties must treat other countries'
industries no less favorably than they do their own domestic
industries, once foreign goods have entered the domestic market. 

Another important principle is that, while GATT does not prohibit
protection for domestic industries, it does require that such
protection be extended primarily through tariffs.  Experts generally
agree that using tariffs makes the extent of protection clearer than
other types of protection and is less trade distorting.  GATT
generally prohibits quantitative restrictions, such as import quotas,
except in special circumstances, such as correcting
balance-of-payment problems.  Successive rounds of negotiations under
GATT sponsorship incrementally lowered tariffs and created special
rules covering nontariff measures and trade in certain industries
(such as textiles and apparel).  After the Tokyo Round of
negotiations, which preceded the Uruguay Round, weighted average
tariffs on manufactured products in the world's nine major industrial
markets fell to 4.7 percent, compared to about 35 percent in the late
1940s. 

World leaders felt in the early 1980s that the implementation of GATT
was weakening.  GATT members had increasingly used bilateral
arrangements--such as voluntary restraint agreements--and other
trade-distorting actions--such as granting subsidies to certain
industries--that stemmed from protectionist domestic policies.  The
leaders also felt that the multilateral trading system needed to
become more relevant to the new global trading environment,
principally by expanding GATT coverage to important business areas
not then covered--such as protecting intellectual property, trade in
services, trade-related investment measures, and textiles--or to
areas only partly covered--such as agriculture.  Finally, they felt
that the multilateral trade organization needed to be strengthened to
eliminate a variety of institutional problems, such as the fact that
some newer GATT obligations were not applicable to all members. 

Meeting in Punta del Este, Uruguay, ministers from GATT member
nations decided to begin a round of negotiations in September 1986. 
The ministers set out what they considered to be the most ambitious
negotiating goals ever, designed to resolve recognized problems by
opening markets through reductions in tariff and nontariff barriers,
broadening GATT coverage, improving GATT disciplines over unfair
trading practices, and strengthening GATT as an institution.  The
United States established negotiating objectives when the Uruguay
Round began and modified some of them during the negotiations. 
Congress set out its objectives in the Omnibus Trade and
Competitiveness Act of 1988.  The U.S.' objectives in general
paralleled those set by the GATT ministers, but they were more
specifically targeted to lowering foreign barriers to U.S.  firms. 
Negotiations for the United States were managed overall by the U.S. 
Trade Representative's office (USTR).\4

Trade has become increasingly important to the U.S.  economy.  In
1993, imports and exports of goods and services equaled about 21.7
percent of GDP.  Consequently, as we observed in a 1985 report
analyzing trading problems, having a well-functioning multilateral
trading system is in the U.S.' interests.\5


--------------------
\4 Authorized originally in the Trade Expansion Act of 1962 (P.L. 
87-794) and established as an agency of the Executive Office of the
President by the Trade Act of 1974 (section 141 of P.L.  93-618, 19
U.S.C.  2171), the U.S.  Trade Representative is a cabinet-level
official with the rank of ambassador and is the President's principal
adviser on international trade policy. 

\5 See Current Issues in U.S.  Participation in the Multilateral
Trading System (GAO/NSIAD-85-118,
Sept.  23, 1985). 


   URUGUAY ROUND FINAL ACT
   SUPPORTS U.S.  AND GLOBAL
   ECONOMIC INTERESTS
------------------------------------------------------------ Letter :3


      AGREEMENTS ACHIEVED WOULD
      HELP RESOLVE TRADING
      PROBLEMS AND BENEFIT U.S. 
      ECONOMIC INTERESTS
---------------------------------------------------------- Letter :3.1

As mentioned earlier, in 1986 the United States and other GATT member
countries set several key objectives designed to solve problems that
had developed in world trade.  Those objectives were generally
achieved in the Uruguay Round, and the United States is expected to
benefit from their attainment.


         STRENGTHENING GATT AS AN
         INSTITUTION
-------------------------------------------------------- Letter :3.1.1

Most trade experts we spoke with in the United States and other
countries viewed the conclusion of the Uruguay Round itself as a
major accomplishment that would boost world trade, and many felt the
creation of WTO was also a major achievement.  The United States had
not originally supported the establishment of a new trade
organization like WTO, but it did seek to improve GATT's overall
effectiveness, decision-making, and coordination with other
international organizations created after World War II to promote
economic growth and stability.\6 Establishment of WTO would benefit
the United States by requiring all parties to abide by more GATT
disciplines, thus making more countries subject to rules of conduct
in a greater number of areas.  The United States would also benefit
from the WTO surveillance and oversight function, which would help
ensure that members fulfill their obligations under the Final Act and
in accordance with panel decisions.  (See vol.  2, ch.  3.) The
Director General of GATT noted that the establishment of WTO would
fill a gap in the institutional structure designed to promote postwar
economic development established at Bretton Woods.  He stated that
the confidence of traders, producers, and consumers in the stability
of trade would be greatly enhanced. 


--------------------
\6 A conference was held in Bretton Woods, New Hampshire, in 1944 to
work out solutions to international foreign exchange and payments
problems.  The conference resulted in the creation of the
International Bank for Reconstruction and Development (World Bank)
and of the International Monetary Fund. 


         EXTENDING COVERAGE TO NEW
         AREAS
-------------------------------------------------------- Letter :3.1.2

Agreements extending coverage to new areas were concluded that would
bring services, trade-related investment measures, and trade-related
intellectual property rights under GATT disciplines for the first
time.  The United States saw covering these areas as an important
objective because, for example, in 1993 U.S.  services exports
totaled $200.2 billion, yielding a $67-billion surplus.  The precise
impact the expanded coverage would have is difficult to project,
because appropriate data are not readily available.  The Economic
Strategy Institute has estimated that, as a result of the Final Act,
U.S.  services exports would increase by $3 billion annually between
the years 2000 and 2003.  GATT officials and the industry advisory
groups we spoke to told us that having a framework in
place--including a commitment to basic GATT principles--would be a
significant achievement.  Also, U.S.  services providers covered by
the Final Act could use the strengthened GATT dispute settlement
rules to help them address unfair trading practices.  (See vol.  2,
ch.  5.) The officials and industry representatives also pointed out,
however, that these achievements would be tempered by the fact that
some key services sectors--notably financial services, audiovisual
services, and telecommunications--were not included in the Final Act
due to unresolved negotiations. 

The potential benefits of extending GATT disciplines to intellectual
property rights are also difficult to measure.  The U.S. 
International Trade Commission (ITC) reported from a survey in 1987
that 167 U.S.  firms believed they lost $23.8 billion from foreign
infringements of patents, copyrights, and trademarks.\7 While this
estimate is not precise, we believe it shows that U.S.  firms are in
a position to gain from the Final Act.  But some industry
representatives we spoke to were disappointed by certain intellectual
property rights provisions.  For example, while the pharmaceutical
industry representatives praised the trade-related intellectual
property agreement as the first that would effectively protect U.S. 
patents, they expressed concern that the Final Act would not protect
pharmaceutical products that are currently in the regulatory approval
process.  (See vol.  2, ch.  5.)

Under the Final Act, trade in agricultural products would be more
completely covered by GATT disciplines, and tariff and nontariff
barriers would be reduced.  The United States, being the world's
largest agricultural exporter, was particularly interested in opening
markets.  The Agreement on Agriculture would require member countries
to make specific reductions in market access restrictions, export
subsidies, and internal support over a 6-year period, beginning in
1995.  The U.S.  Department of Agriculture projected that the Final
Act would increase annual U.S.  agricultural exports by between $4.7
billion and $8.7 billion by 2005 and that it would create an
additional 105,000 to 190,000 jobs by the same year.\8 (See vol.  2,
ch.  6.)


--------------------
\7 See Foreign Protection of Intellectual Property Rights and the
Effect on U.S.  Industry and Trade, U.S.  ITC, Publication 2065
(Washington, D.C.:  Feb.  1988). 

\8 We are separately evaluating the Agriculture Department's study of
the act's impact on the U.S.  agriculture sector for the House of
Representatives' Committee on Agriculture. 


         STRENGTHENING DISCIPLINES
         OVER UNFAIR TRADING
         PRACTICES
-------------------------------------------------------- Letter :3.1.3

Disciplines over unfair trading practices would be strengthened.  The
United States has been one of the most frequent users of GATT dispute
settlement panels, but it has been increasingly frustrated by delays
and by other nations' blocking of dispute panel decisions. 
Enforcement measures are contained in several parts of the Final Act,
including the agreements on services, antidumping of goods, and
trade-related intellectual property.  Overall, the new dispute
settlement mechanism would set stricter time limits for each step in
the dispute settlement process.  The process includes a guaranteed
right to a panel and a right to appellate review of panel decisions. 
More of the process would be "automatic":  countries could not block
the adoption of a panel finding (as they can now), and members could
take trade actions or receive compensation if others fail to act as
recommended.  The process also would be more open, because members
could disclose their submissions and positions to the public and
would have to provide public summaries of their panel submissions
upon request of another member.  (See vol.  2, ch.  3.)

The subsidies agreement would establish clearer rules and stronger
disciplines in the subsidies area.  Although many trading
nations--including the United States--use subsidies to some extent,
the United States has historically wanted more disciplines covering
their use.  Unlike the current subsidies code, the Final Act clearly
defines subsidies and the conditions under which they could be
actionable (challengeable) under GATT rules.  The agreement would
create three categories:  (1) permissible and nonactionable
("green-lighted") subsidies that would be allowed, (2) permissible
subsidies that could be actionable under certain conditions
("yellow"), and (3) prohibited subsidies ("red").  Further, it
extends and clarifies the list of prohibited subsidies, and it covers
domestic subsidies that are trade distorting.  With the creation of
WTO, all signatories would be subject to the subsidies code,
extending coverage to developing countries.  (See vol.  2, ch.  4.)


         OPENING MARKETS BY
         REDUCING TARIFF AND
         NONTARIFF BARRIERS
-------------------------------------------------------- Letter :3.1.4

The Final Act would meet the original target of reducing tariffs by
one-third overall.  Some tariffs in major industrial markets would be
eliminated or reduced significantly, and others would be harmonized
with the tariffs of developed and developing nations.  For the first
time, many more countries would commit to setting maximum limits on
tariffs on many items.  The Final Act would permanently lower or
eliminate tariff and nontariff barriers in sectors important to some
U.S.  firms' exports.  (See vol.  2, ch.  2.)


      FINAL ACT WOULD HELP U.S. 
      ECONOMY AND WORLD ECONOMIES
      GROW
---------------------------------------------------------- Letter :3.2

All the studies we reviewed of the expected impact of the Final Act
projected net overall gains to the U.S.  economy and the world
economies.  Although the size of projected gains varied according to
methodologies used in the studies, benefits were anticipated from
efficiencies gained by resources being reallocated among economic
sectors and from an increase in real income for consumers and
downstream producers due to cheaper prices on imported goods. 
Economists refer to these onetime effects as "static" gains.  Some of
the studies we reviewed also projected that additional economic
benefits would be derived from "dynamic" gains--ones that could be
achieved as the result of higher productivity, due either to higher
rates of investment or improvements in technology.  Though economists
who have studied dynamic gains believe they would be substantial,
they are difficult to estimate.\9

Several studies have estimated the anticipated economic benefits of
the Uruguay Round.  In 1994, a GATT Secretariat study estimated that
world merchandise trade would be about $755 billion higher (in 1992
dollars) in 2005 than it would have been without the tariff offers
agreed to in the Final Act.  The study also estimated that, after
gradual annual increases, world income would be $235 billion more in
the same year.\10 The study considered only static and not dynamic
gains.  Also, it only considered effects from increased trade in
goods. 

In a joint 1993 study, the Organization for Economic Cooperation and
Development (OECD) and the World Bank estimated that world income
would be $213 billion more in 2002 (in 1992 dollars) with the Final
Act--again after gradual annual increases--reflecting about a
one-third cut in tariffs and agricultural nontariff barriers.  In a
follow-up study, OECD made an adjustment to reflect the reductions of
nontariff barriers in manufacturing sectors as well.  This adjustment
increased OECD's estimated world income benefit to $274 billion by
2002.  OECD also estimated an increase in U.S.  income of almost $28
billion.  Neither study considered gains due to trade in services or
increased intellectual property protection, and neither one included
dynamic gains.\11

The Council of Economic Advisers estimated both the static and
dynamic gains for the U.S.  economy.  In the 1994 Economic Report of
the President, the Council projected that 10 years after the Final
Act is implemented, it would add between $100 billion and $200
billion to U.S.  GDP, following gradual annual increases.  The size
of that projection, however, was challenged by the Washington,
D.C.-based Economic Policy Institute, which stated that the Council's
estimate greatly overstated the economic gains from the Final Act. 
The Institute based its challenge partly on how the Council's
methodology treated tariff revenue losses and partly because of its
assumptions about dynamic gains.  Because we did not set out to
review each study's methodology, we did not analyze the Institute's
criticism.  But, as we stated earlier, dynamic gains are hard to
estimate and the results should be interpreted with caution. 

In March 1994, the Economic Strategy Institute published a
quantitative evaluation of the major provisions of the Final Act.\12
The Economic Strategy Institute concluded that, of the provisions it
could measure, the Final Act would improve the U.S.  trade deficit by
between $13.5 billion and $24.6 billion annually, which would
translate to a gain in GDP of between $32.3 billion and $48.9 billion
by 2003.  However, the Economic Strategy Institute cautioned that
provisions regarding subsidies, antidumping measures, and new dispute
settlement mechanisms could limit the U.S.  government's ability to
deter predatory trade practices (such as dumping of goods).  In turn,
the Economic Strategy Institute felt that those practices could
offset some of the cited gains. 

The International Trade Commission completed an analysis of the
likely effects of the Final Act in June 1994.\13 After reviewing
other studies of the overall economic effects, ITC concluded that
overall economic gains would be realized.  In its sectoral analysis,
ITC projected that 48 sectors would experience net trade effects of 5
percent or less (35 having positive effects, and 13 negative).  Seven
sectors would likely see effects of between 5 and 15 percent (6
positive and 1 negative).  Three sectors would likely experience net
trade effects of greater than 15 percent (1 positive and 2 negative). 


--------------------
\9 See Richard E.  Baldwin, "Measurable Dynamic Gains from Trade,"
Journal of Political Economy, 100:1 (Feb.  1992).  Also see The
Dynamic Effects of Trade Liberalization:  A Survey, U.S.  ITC,
Publication 2608 (Washington, D.C.:  Feb.  1993). 

\10 These estimates were based on the tariff offers received and
processed by the Secretariat as of March 15, 1994.  See Increases in
Market Access Resulting from the Uruguay Round, GATT Secretariat
(Geneva, Switzerland:  Apr.  12, 1994). 

\11 See Ian Goldin, Odin Knudsen, and Dominique van der Mensbrugghe,
Trade Liberalization:  Global Economic Implications, OECD and the
World Bank (Paris:  1993); and Assessing the Effects of the Uruguay
Round, OECD (Paris:  1993). 

\12 The Economic Strategy Institute study used a different
methodology than did the other studies described earlier.  Whereas
the others used computable general equilibrium models, the Economic
Strategy Institute surveyed and modified existing estimates of
effects on key U.S.  industries and summed them to estimate the
impact on the whole economy.  See Clyde F.  Prestowitz, Jr., Lawrence
Chimerine, and Robert Cohen, The Uruguay Round:  A "Bottom-Up"
Analysis, Economic Strategy Institute (Washington, D.C.:  Mar. 
1994). 

\13 See Potential Impact on the U.S.  Economy and Industries of the
GATT Uruguay Round Agreements, Investigation No.  332-353, U.S.  ITC
Publication 2790 (Washington, D.C.:  June 1994). 


         SOME SECTORS WOULD SUFFER
         LOSSES
-------------------------------------------------------- Letter :3.2.1

While the Final Act is expected to lead to overall economic gains for
the United States and for the global trading system, it would also
impose some costs on specific sectors.  Liberalized trade, as
demonstrated in the postwar period, results in the reallocation of
resources among various national economic sectors.  The reallocation
under the Final Act would bring disproportionate costs to some
sectors more greatly affected by foreign competition, thereby
dislocating workers.  In the United States, the textiles and apparel
industries, for example, could suffer losses if the Final Act were
implemented.  Four different studies have projected job losses for
the textile and apparel industries under complete trade
liberalization.  Estimated job losses range from 72,000 to 255,000
over 10 years.\14

Notwithstanding the job losses, U.S.  consumers as a whole could
benefit from lowering the costs associated with maintaining special
protection aimed at benefiting industries that are less competitive
in the world economy, such as the textiles and apparel industries. 
According to a study by researchers at the Washington, D.C.-based
Institute for International Economics, the cost to U.S.  consumers of
the special protections for the textiles and apparel industries--such
as voluntary trading restraints--amounted to $24 billion in 1990. 
The study estimated that each job preserved in the apparel industry
cost consumers almost $139,000 in 1990, due mostly to higher prices
for goods.  It stated that textiles and apparel accounted for 75
percent of total costs of special protection of
21 sectors examined.\15

Two major federal programs currently exist to aid the adjustment of
workers who have lost their jobs:  Trade Adjustment Assistance, and
Economic Dislocation and Worker Adjustment Assistance.  In addition,
in response to congressional concerns about the possible effects of
the
1993 North American Free Trade Agreement, special funds were
earmarked for workers dislocated by increased imports resulting from
that agreement. 

We have issued several reports in the last year on shortcomings in
these and other worker assistance programs, including delays in
providing help, limitations in the services offered, and inadequacies
in tailoring services to meet the specific needs of individual
participants.  For example, in October 1993 we testified that the
Trade Adjustment Assistance Program fell short of meeting key goals,
thereby limiting its effectiveness.  Moreover, in March 1994 we
testified that the current fragmented system of 154 federal programs
aimed at providing employment training assistance, including these
two programs, was confusing and often did not meet the needs of
targeted populations.  Thus, questions remain about whether all
workers dislocated by the Final Act would have effective adjustment
assistance available.\16


--------------------
\14 See Prestowitz, Chimerine, and Cohen, The Uruguay Round; Gary
Clyde Hufbauer and Kimberly Ann Elliot, Measuring the Cost of
Protection in the United States, Institute for International
Economics (Washington, D.C.:  Jan.  1994); The Impact of Eliminating
the Multi-Fiber Arrangement on the U.S.  Economy, WEFA Group (Bala
Cynwyd, PA.:  Jan.  1992); U.S.  International Trade Commission, The
Economic Effects of Significant U.S.  Imports Restraints, Publication
2699.  (Washington, D.C.:  Nov.  1993). 

\15 Hufbauer and Elliot, Measuring the Cost of Protection. 

\16 See GAO/T-HEHS-94-109, Mar.  3, 1994; and Trade Adjustment
Assistance Program Flawed (GAO/T-HRD-94-4, Oct.  19, 1993). 


   ISSUES WARRANTING CONTINUED
   ATTENTION IF FINAL ACT IS
   IMPLEMENTED
------------------------------------------------------------ Letter :4


      AGREEMENTS NOT ALWAYS FULLY
      IMPLEMENTED
---------------------------------------------------------- Letter :4.1

As we cautioned in our 1992 Transition Series Report on International
Trade, signing agreements does not assure they will be implemented;
the results have to be actively followed up.\17 As mentioned earlier,
GATT disciplines were weakened after the end of the Tokyo Round
because many members began using protectionist bilateral and
unilateral actions.  As we reported in 1985, these members--placing
domestic policy priorities over international disciplines--applied
numerous exemptions, waivers, exceptions to GATT principles, and
import restrictions in favor of their own industries. 

A special study group formed by the GATT Director General also
reported on the erosion of trading rules in 1985, stating, "[t]oday,
more and more countries are increasingly ignoring the trading rules,
and concluding bilateral, discriminatory and restrictive agreements
outside the GATT rules." The group pointed out that the restrictions
were employed in a wide variety of industries, including steel,
agriculture, footwear, automobiles, machinery, and consumer
electronics.  As we observed, such developments raised questions
about the effectiveness of the entire multilateral trading system,
and they gave impetus for opening the Uruguay Round.\18


--------------------
\17 See International Trade Issues (GAO/OCG-93-11TR, Dec.  1992). 

\18 See GAO/NSIAD-85-118, Sept.  23, 1985; Trade Policies for a
Better Future:  Proposals for Action, GATT (Geneva, Switzerland: 
Mar.  1985). 


      EFFECTS OF WTO ON U.S. 
      INTERESTS
---------------------------------------------------------- Letter :4.2

Some industry groups, trade lawyers, and Members of Congress have
expressed a variety of concerns about how different provisions of the
Final Act might affect the U.S.' ability to conduct trade and pursue
other domestic policies.  They share a general apprehension that the
United States would lose some "sovereignty" to the newly created WTO. 
Although the issues are complex and interrelated, we have condensed
them into three areas of concern:  (1) the creation of WTO and its
decision-making processes, (2) the effects of the new dispute
settlement system on the U.S.' ability to take unilateral trade
actions, and (3) the ability of other nations to use the new
mechanisms to challenge U.S.  laws and regulations in a variety of
domestic policy areas.  These issues are treated comprehensively in
volume 2, chapter 3, of this report.  The concerns and our views are
summarized in the subsections that follow. 


         WTO DECISION-MAKING
-------------------------------------------------------- Letter :4.2.1

As explained earlier, the Final Act would create for the first time
an institutional structure--WTO--encompassing all GATT disciplines. 
The Final Act also would revise decision-making procedures for
amending agreements, interpreting provisions, and waiving
requirements.  Some Members of Congress and industry representatives
have expressed concerns that, under the new procedures, members of
WTO could approve requirements that would run counter to U.S. 
interests.  Further, they have stated the belief that WTO could
become a highly politicized organization in which a large number of
members would vote against the United States because of political
differences. 

USTR, some other industry representatives, and some other trade
lawyers we interviewed maintained that the WTO voting procedures
contain safeguards to make such an event unlikely.  Our review of the
procedures showed that the Final Act specifically requires members of
the principal decision-making bodies--the Ministerial Conference or
the General Council--to attempt to reach decisions by consensus. 
Absent consensus, various fallback voting provisions were designed. 
For instance, amending the most-favored-nation and decision-making
provisions of the Final Act could only become effective after all WTO
members accepted them.  Proposed amendments affecting the rights and
obligations of members could only be considered by the members if
two-thirds of them vote to do so; if ratified, these amendments would
only be applied to member nations that voted for them.  WTO member
nations could, by a three-fourths majority vote, decide whether a
member not accepting an amendment may leave WTO or remain with the
consent of the other members.  However, this provision is similar to
Article 30 of the current GATT, which requires only a majority vote
on such matters.  It has never been invoked, according to USTR. 
Although the current GATT has other fallback voting procedures, too,
members have normally tried to make decisions by consensus.  Thus, it
is hard to speculate on the circumstances in which WTO members might
use revised procedures to vote against the United States.  Much could
depend on the dynamics of individual situations. 


         DISPUTE SETTLEMENT
-------------------------------------------------------- Letter :4.2.2

The Final Act would create a new Dispute Settlement Body, comprised
of representatives of WTO members, operating under revised rules for
administering and settling disputes.  Some U.S.  industries have
raised concerns that, with the automatic progression of procedures
under strict time limits, the United States would be more limited in
its ability to use its own trade laws unilaterally to serve its own
interests.  The European Commission has also stated that it feels the
Final Act would limit U.S.  unilateral trade actions, particularly
under Section 301 of the 1974 Trade Act (19 U.S.C.  2411).  This law
requires USTR to take all appropriate actions to obtain the removal
of any act, policy, or practice of a foreign government that violates
an international agreement or is unjustifiable, unreasonable, or
discriminatory, and burdens or restricts U.S.  commerce.  It has
become a principal means for addressing unfair foreign trade
practices. 

Responding to these concerns, USTR and some industry groups and trade
lawyers we spoke to stated that the Final Act would not prevent the
United States from employing its own trade remedies.  They said the
United States could still apply Section 301 under the new dispute
settlement procedures, or even on a unilateral basis if necessary. 
However, USTR acknowledged that if the United States (or any other
nation) should choose to act unilaterally in a way that would violate
a WTO obligation or principle, the Final Act would more expressly
provide for imposing sanctions on the United States (or other
country).  The broader coverage of WTO would also require using
multilateral processes rather than strictly unilateral actions in
more cases. 


         EFFECTS ON OTHER DOMESTIC
         LAWS AND REGULATIONS
-------------------------------------------------------- Letter :4.2.3

Consumer groups, environmental organizations, trade attorneys, and
some Members of Congress have stated they believe that other nations
could use the stronger WTO procedures to challenge and weaken U.S. 
laws and regulations protecting health, safety, and the environment. 
These groups shared some of the concerns previously mentioned about
WTO voting and dispute settlement procedures.  They also stated that
the Final Act would generally subordinate environmental, health, and
safety restrictions to trade interests in part by requiring those
kinds of restrictions to be no more trade distorting than necessary. 
In addition, they criticized the dispute settlement processes as not
being sufficiently open to public participation, thereby decreasing
the amount of public scrutiny and influence that could be brought to
bear on the procedures. 

As we point out in volume 2, chapter 6, of this report, the Final Act
contains provisions in several areas--such as technical barriers to
trade, and plant and animal health and safety--that could pertain to
laws and regulations designed to protect the environment, health, and
safety, such as controls over contaminants and toxins.  USTR has
stated that under the Final Act the United States could still
establish its own standards for protecting health and safety.  Our
review disclosed that, in the case of food safety measures, under the
Final Act a country's protective measure would not be considered too
trade restrictive unless there is another measure that would achieve
the appropriate level of protection and be less restrictive. 
Finally, with regard to the openness of dispute settlement
procedures, we pointed out earlier in this report that the procedures
have requirements that would publicly disclose information about
dispute settlement cases.  But USTR has also stated that it would
work for greater openness in dispute settlement deliberations. 

In analyzing these three areas of concern, it is difficult to predict
how WTO and the new dispute settlement mechanisms would operate in
every circumstance.  Individual votes and individual dispute cases
would have their own complexities, and considerations about overall
political and economic relations could color the debate on any of
them.  While the United States could benefit from stronger
international dispute mechanisms, for example, it would also be bound
by them as it would in any international convention it signs. 

Our analysis indicates that, under the Final Act of the Uruguay
Round, the United States would still be able to use its trade laws
and other domestic policies, even utilizing unilateral trade actions. 
However, if it were to act strictly unilaterally in ways that
violated WTO obligations, rules, or decisions, the United States
would have to weigh the resulting costs.  One cost would be the
specific trade sanctions authorized by WTO if, for example, the
United States were to refuse to comply with a decision made by a
dispute settlement panel.  Another cost would be undermining support
for a system that the United States sought to strengthen because it
felt that doing so would be in its best overall interests. 

Given that it would be hard to predict the outcome of all the effects
of new operating procedures at this time, in order to determine how
the new WTO and its procedures ultimately affect the balance of U.S. 
interests, the following issues would warrant attention if the Final
Act is implemented: 

  how the use of new voting procedures evolves and how these
     procedures affect the use of U.S.  laws and regulations;

  how other countries react to the continued use of U.S.  trade laws
     to address perceived unfair foreign trade practices;

  how U.S.  firms' interests are affected by dispute settlement panel
     decisions; and

  which nontrade domestic laws and regulations are challenged, on
     what basis they are challenged, and how panels decide the cases. 


      USE OF PERMISSIBLE SUBSIDIES
---------------------------------------------------------- Letter :4.3

Subsidies have historically been a troublesome area for negotiation. 
On the one hand, the current GATT subsidies code recognizes that
governments can use domestic subsidies to promote legitimate social
and economic objectives.  On the other hand, the code also notes that
subsidies could have harmful effects on trade and production. 

Some industry groups and legal authorities have pointed out to us a
number of potential concerns in the new subsidies agreement.  One is
that other nations could take advantage of the "green-lighted"
subsidies to give their industries competitive advantages.  They
could, for example, use subsidies allowed for improving the
environmental safety of manufacturing facilities instead to make
other efficiency improvements that might yield competitive gains. 
Other governments could use green-lighted subsidies designed to
support research and development to target assistance to favored
industries, causing the United States to use subsidies to keep its
own industries competitive.  Finally, some industry advisory
committees have reported the concern that the definition of a subsidy
in the Final Act--as a "financial contribution by a government"--may
be too narrow; it might not cover various government benefits
previously considered actionable, such as preferential access to
credit.  (See vol.  2, ch.  4.)

It is difficult to predict in the abstract how other governments
might use the permissible subsidies.  However, since we observed the
increased use of subsidies after the Tokyo Round as a way to further
protectionist interests, we believe the following issues would
warrant close tracking if the Final Act is implemented: 

  how foreign governments apply the green-lighted category of
     subsidies and how WTO panels rule on them;

  how the Department of Commerce decides on applying countervailing
     duties\19 to foreign government subsidies that Commerce
     considers to be in violation of the Final Act; and

  how the new definition of a subsidy is interpreted by WTO panels
     and how this interpretation affects the standing of U.S. 
     countervailing duty orders and future U.S.  countervailing duty
     cases. 


--------------------
\19 Countervailing duties are levies placed on imports by the
importing country to offset government subsidies in the exporting
country. 


   BUDGET ENFORCEMENT ACT REQUIRES
   OFFSETS TO REDUCE TARIFF
   REVENUES
------------------------------------------------------------ Letter :5

A final issue stems from the requirement to offset revenues that
would be lost because of the Final Act's tariff reductions.  Under
the Budget Enforcement Act of 1990, legislation affecting revenues or
direct spending (spending for mandatory programs and entitlements) is
governed by PAYGO rules.  The law requires that any changes in
revenue or spending within this category be deficit neutral both in
the first year and over a 5-year period.  That is, any revenue
reductions--including those resulting from tariff reductions--must be
offset by revenue increases and/or spending cuts within the PAYGO
category.  Senate rules require deficit neutrality for a 10-year
period. 

The CBO's preliminary estimate\20 of the offset required to achieve
deficit neutrality is a little over $10 billion over the first 5
years.  The administration has considered a variety of ways to pay
for the first 5 years.  Some have suggested using the waiver
provision of the Budget Enforcement Act of 1990.  In addition, the
administration has considered--and some supporters of the Final Act
have advocated--seeking a waiver in the Senate from that body's rules
requiring an offset for the second 5-year period.  Finding offsets
has proved difficult.  Thus, resolving the budget issue has remained
an obstacle to the Final Act's implementing legislation. 

We have consistently held that deficit reduction is important to the
long-term economic health of the nation.\21 Therefore, we believe
that the Final Act should be deficit neutral, and any revenue loss in
the first 5 years should be offset. 


--------------------
\20 This estimate was made in the absence of the implementing
legislation and hence is subject to change upon review of the final
legislative language. 

\21 See, for example, Budget Policy:  Prompt Action Necessary to
Avert Long-Term Damage to the Economy (GAO/OCG-92-2, June 1992) and
Budget Policy:  Long-Term Implications of the Deficit
(GAO/T-OCG-93-6, Mar.  25, 1993). 


   CONCLUSIONS
------------------------------------------------------------ Letter :6

The United States and the other GATT members largely achieved their
overall objectives for the Uruguay Round, and the Final Act is
expected to produce overall economic gains for the United States. 
But, in achieving these overall gains, some sectors of the U.S. 
economy could pay a disproportionate share of the costs of resource
reallocation.  While it is expected to increase economic growth, the
Final Act is also expected to dislocate workers, and their needs
should be considered. 

Both deficit reduction and liberalized trade are important to the
long-term health of the U.S.  economy.  Therefore, finding offsets to
the 5-year tariff revenue losses as required by the Budget
Enforcement Act would preserve the overall economic gains of the
Final Act and maintain deficit neutrality. 


   MATTERS FOR CONGRESSIONAL
   CONSIDERATION
------------------------------------------------------------ Letter :7

If Congress approves legislation to implement the Final Act, it may
also wish to ensure that an effective worker adjustment assistance
program is in place to facilitate the structural adjustment that
would be needed in the workplace. 

Also, in deciding whether to approve implementing legislation,
Congress should consider ways to offset the projected tariff revenue
losses to assure deficit neutrality over the first 5 years as
required by the Budget Enforcement Act. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :8

On July 13, 1994, we met with the Counselor to USTR, the Assistant
USTR for Economic Affairs, and the Deputy Assistant USTR for
Multilateral Trade Negotiations to obtain their comments on our
report.  The USTR officials agreed with the report's basic message
that the agreement is in the overall national economic interest and
felt it was balanced in its presentation of the issues. 
Specifically, they stated that our presentation of the issues
surrounding WTO, permissible subsidies, and GATT's budget
implications was accurate and fair, as was our discussion of
negotiating objectives achieved and the economic benefits and costs
of the Final Act. 

USTR officials suggested that additional balance would be added to
the issue of job losses in the U.S.  textile and apparel industry due
to implementation of the Final Act by including job loss figures on
this issue from ITC's November 1993 study, The Economic Effects of
Significant U.S.  Imports Restraints.  We made the appropriate
changes to the report based on our review of the ITC study. 

To assure the technical accuracy of our report, in May 1994 we
discussed various sections of our report with program officials from
the Office of the U.S.  Trade Representative; the U.S.  Departments
of Agriculture, Commerce, and the Treasury; officials at the GATT
Secretariat; some industry representatives; and experts in trade law. 
We made some technical changes to specific parts of the report based
on their comments.  A more complete description of officials who gave
us these technical comments is provided in volume 2. 


---------------------------------------------------------- Letter :8.1

We are sending copies of this report to Members of Congress; the U.S. 
Trade Representative; the Secretaries of Agriculture, Commerce,
State, and the Treasury; the Chairman of the U.S.  International
Trade Commission; the Director of the Office of Management and
Budget; and other interested parties.  Copies will also be made
available to others upon request. 

This report was prepared under the direction of Allan I. 
Mendelowitz, Managing Director, and JayEtta Z.  Hecker, Director,
International Trade, Finance, and Competitiveness, who may be reached
on (202) 512-5889 if you or your staff have any questions.  Other
major contributors to this report are listed in volume 2, appendix
II. 

Charles A.  Bowsher
Comptroller General
of the United States
