International Monetary Fund: Trade Policies of IMF Borrowers (Letter
Report, 06/22/1999, GAO/NSIAD/GGD-99-174).

GAO is required to report on the extent to which International Monetary
Fund (IMF) borrowers restrict free and open trade and whether their
export policies could harm or result in unfair trade practices against
U.S. companies. The 98 current IMF borrowers include several countries
that have received large-scale IMF financial assistance since the Asian
financial crisis began in 1997. This report (1) identifies the extent to
which current IMF borrower countries restrict international trade and
the borrowers whose trade has the potential to affect the United States;
(2) describes the reported trade barriers and export policies of four
IMF borrowers--Brazil, Indonesia, the Republic of Korea, and
Thailand--that are among those with the greatest capacity to affect the
United States and recent steps taken to reduce those barriers and modify
policies; (3) identifies actions the four countries have taken or plan
to take to liberalize their trading systems; and (4) determines the
extent to which the impact of the four countries' export policies on the
United States can be predicted and measured and which U.S. industry
sectors might be affected by recent changes in trade from these
countries.

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

 REPORTNUM:  NSIAD/GGD-99-174
     TITLE:  International Monetary Fund: Trade Policies of IMF
	     Borrowers
      DATE:  06/22/1999
   SUBJECT:  Macroeconomic analysis
	     Foreign financial assistance
	     International trade regulation
	     Tariffs
	     Foreign trade agreements
	     Exporting
	     International economic relations
	     Import restriction
	     Foreign governments
IDENTIFIER:  Brazil
	     Indonesia
	     Korea
	     Thailand
	     Japan
	     European Union
	     NAFTA
	     North American Free Trade Agreement
	     India
	     Philippines
	     Mexico
	     Venezuela

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    United States General Accounting Office GAO
    Report to Congressional Committees June 1999
    INTERNATIONAL MONETARY FUND Trade Policies of IMF Borrowers
    GAO/NSIAD/GGD-99-174 United States General Accounting Office
    National Security and Washington, D.C.  20548
    International Affairs Division June 22, 1999 Congressional
    Committees: To facilitate congressional oversight of U.S. policy
    concerning the International Monetary Fund (IMF),1 the Omnibus
    Appropriations Act for 1999 (P.L. 105-277) required us to report
    on the degree to which IMF borrowers2 restrict free and open trade
    and whether their export policies may adversely affect, or result
    in unfair trade practices against, U.S. companies.3 The 98 current
    IMF borrowers include a number of countries that have received
    large-scale IMF financial assistance since the Asian financial
    crisis began in 1997. The specific objectives of this report are
    to (1) identify the extent to which current IMF borrower countries
    restrict international trade and the borrowers whose trade has the
    potential to affect the United States; (2) describe the reported
    trade barriers and export policies 4 of four IMF borrowers that
    are among those with the greatest capacity to affect the United
    States-Brazil, Indonesia, the Republic of Korea (hereafter
    referred to as Korea), and Thailand-and recent actions reported to
    have been taken to reduce those barriers or modify policies; (3)
    identify actions, in the context of their recent IMF financing
    arrangements, the four countries have taken or are committed to
    take to liberalize their trading systems; and (4) determine the
    extent to which the impact of the four countries' export 1 The IMF
    is an organization of 182 member countries that was established to
    promote international monetary cooperation and exchange rate
    stability and to provide short-term lending to member countries
    that experience balance-of-payments difficulties. 2 With the
    exception of some financing for low-income countries, the IMF does
    not loan funds to a country, per se. Rather, the country
    "purchases" the currency it needs from the IMF with an equal
    amount of its own currency and then later "repurchases" its own
    currency on terms established by the IMF. For the purposes of this
    report, we will use the terms "financial arrangement,"
    disbursement," and "loan" to refer to "purchases," and
    "repayments" to refer to "repurchases." 3 The Omnibus
    Appropriations Act for fiscal year 1999 (P.L. 105-277, Oct. 21,
    1998) appropriated about $18 billion for the IMF and required us
    to report on a seven-point mandate for reviews of the IMF. We have
    divided this mandate into three reports-this report on the trade
    policies of countries that borrow from IMF, one on the terms and
    conditions of IMF financial assistance (International Monetary
    Fund: Approach Used to Establish and Monitor Conditions for
    Financial Assistance GAO/GGD/NSIAD-99-168, June 22, 1999); and a
    third that addresses the IMF's financial condition, to be issued
    by September 30, 1999. 4 For purposes of this report, "trade
    barriers" are broadly defined as government laws, regulations,
    policies, or practices that protect domestic products from foreign
    competition. Trade barriers include tariffs and other import
    charges; and nontariff import barriers such as quantitative
    restrictions, state trade monopolies, restrictive foreign exchange
    practices that affect a country's trade system, and quality
    controls and customs procedures that act as trade restrictions.
    Export policies include export- related subsidies; export
    restrictions, such as export taxes; and performance requirements,
    such as the requirement that companies export a certain percentage
    of their production. Page 1
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825
    policies on the United States can be predicted and measured and
    which U.S. industry sectors might be affected by recent changes in
    trade from these countries. We selected Brazil, Indonesia, Korea,
    and Thailand because, in addition to being significant U.S.
    trading partners, they are among the top 10 top current IMF
    borrowers and have current IMF financing arrangements. Unless
    otherwise noted, data in this report are current as of April 30,
    1999. Although the 98 current IMF borrowers all restrict trade to
    some extent, Results in Brief    only a few are large enough
    traders to affect individual sectors of the U.S. economy.
    According to IMF and other measures of trade restrictiveness,
    borrowers have generally reduced their tariff and nontariff
    barriers since 1990. However, according to the IMF measure, about
    one-half still maintain moderate to restrictive barriers.
    Borrowers' levels of trade restrictiveness are similar to
    nonborrowers'. Few borrowers are large enough traders to
    significantly affect even individual U.S. industry sectors-90
    borrowers accounted for 5 percent of U.S. trade in 1998 while the
    8 other borrowers accounted for 21 percent. However, a few
    borrowers are significant U.S. trading partners and important
    competitors to U.S. producers in world markets. We studied four of
    the eight countries-Brazil, Indonesia, Korea, and Thailand.
    Average tariff rates in all four countries have fallen over the
    past decade. According to the Office of the U.S. Trade
    Representative (USTR) and other sources, in 1998 Thailand had an
    average tariff rate of about 18 percent, Korea had an average
    tariff rate of about 8 percent, and Brazil's and Indonesia's rates
    fell in between. In comparison, 1998 average tariff rates for the
    United States, Japan, and European Union (EU)5 countries were
    between 3 percent and 7 percent.6 Also, each of the four countries
    maintained nontariff import barriers that the IMF considers to be
    significant. Like about two-thirds of current IMF borrowers,
    Brazil, Indonesia, Korea, and Thailand are all members of the
    World Trade Organization (WTO), which establishes rules for
    international trade and provides a forum for resolving trade
    disputes. In recent years, the United States and other countries
    have used WTO dispute procedures to challenge restrictive trade
    policies in the four nations. 5 The European Union is a treaty-
    based, institutional framework that defines and manages economic
    and political cooperation among its 15 European member states:
    Austria, Belgium, Denmark, Finland, France, Germany, Greece,
    Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain,
    Sweden, and the United Kingdom. 6 As the IMF pointed out in
    commenting on a draft of this report, these average tariff rates
    are only for those products with tariffs that are a percentage of
    the value of the product (known as "ad valorem" tariffs). Other
    tariffs are per unit ("specific") or a combination of ad valorem
    and specific tariffs. When these other types of tariffs are taken
    into account, a country's average tariff rate increases. Page 2
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825
    Brazil, Indonesia, Korea, and Thailand have experienced either
    rising trade surpluses or falling trade deficits with the United
    States and other countries since their recent financial crises
    began. The changes in the countries' U.S. trade balances were due
    primarily to a large decline in U.S. exports to them. U.S. exports
    to these countries declined because the countries' currency
    devaluations made U.S. and other countries' exports to them more
    expensive and because recessions in the four countries lowered
    their demand for imported products, including those from the
    United States. Even before the crises, the U.S. government was
    particularly concerned about certain trade practices in these
    countries, especially in Korea. The United States continues to
    press such issues even as it gives priority to restoring the
    overall health of crisis countries for their own and the U.S.'
    benefit. Korean trade policies of concern have included barriers
    to imports and distribution of beef, automobiles, and distilled
    spirits; discriminatory airport procurement practices; and
    possible subsidies that support steel exports. Policies of U.S.
    concern in the other three countries have included possible
    Brazilian subsidies to its steel industry, restrictions on
    automobile imports in Thailand, and inadequate protection of
    intellectual property rights, especially in Indonesia. The U.S.
    government and others have reported some progress in the last 3
    years in eliminating or modifying some of these trade policies as
    part of the countries' commitments to the WTO and other
    multilateral forums, and bilaterally, through trade agreements
    with the United States. Countries in an IMF financing arrangement
    sometimes have liberalized their trade systems within the context
    of their arrangements, although in many cases the liberalization
    has not been a condition of receiving disbursements of IMF funds.
    As part of their recent arrangements, Brazil, Indonesia, and Korea
    have made changes to trade policies.7 For example, under its IMF
    program, Korea has eliminated four subsidies. Indonesia has
    reduced or eliminated some import tariffs and export restrictions
    that encouraged local processing; it also has committed to phase
    out most remaining nontariff import barriers and export
    restrictions by the time its IMF program ends in the year 2000.
    However, the IMF programs in Brazil, Indonesia, Korea, and
    Thailand focus primarily on macroeconomic and structural reforms
    other than trade reform because, according to the Treasury and the
    IMF, restrictive trade policies were not major causes of 7
    Thailand's IMF program has no trade liberalization commitments
    because, according to the Treasury Department, Thailand had fewer
    distorting trade policies than the other three countries in our
    review, and because inadequate financial supervision and central
    banking errors were the root causes of its financial problems, not
    trade-related policies or practices. Page 3
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 the
    countries' financial crises.8 Further, the trade reforms that
    Brazil, Indonesia, and Korea have undertaken are not intended to
    assist the countries' trading partners, though this may result
    from the reforms, but instead are aimed at helping the countries'
    economies operate more efficiently. In addition to trade
    liberalization measures, as part of their IMF programs, Korea,
    Indonesia, and Thailand have committed to further open their
    economies to foreign investment and to substantially restructure
    their financial and corporate sectors. These commitments, if fully
    implemented, could lead to increased U.S. investment in and trade
    with these countries. The policies maintained by Brazil,
    Indonesia, Korea, and Thailand to encourage exports could
    potentially distort trade and displace production by U.S.
    producers, even though they may benefit other U.S. companies or
    consumers. However, the large macroeconomic changes in these
    countries caused by their recent financial crises greatly
    complicate predicting and measuring the policies' impact on the
    United States because the macroeconomic changes have probably been
    a more important source of recent changes in trade flows. Our
    analysis of 1997-98 trade data reveals that overall U.S. imports
    from Brazil, Indonesia, Korea, and Thailand rose moderately in
    1998, but by less than U.S. imports from other trading partners.
    However, products accounting for about 16 percent of the value of
    U.S. imports from these four IMF borrowers registered large
    increases and falling U.S. prices during this period. Some of
    these product sectors, notably steel, have already been subject to
    petitions by U.S. industry for relief from "unfairly traded"
    imports under U.S. trade law,9 while the executive branch is
    monitoring imports of others of these products, including
    semiconductors, chemicals, and paper and paper products. 8 See our
    report on IMF terms and conditions (International Monetary Fund:
    Approach Used to Establish and Monitor Conditions for Financial
    Assistance GAO/GGD/NSIAD-99-168, June 22, 1999) for more detail on
    the causes of the recent financial crises of Brazil, Indonesia,
    and Korea as well as Argentina, Russia, and Uganda. 9 For purposes
    of this report, allegations of "unfairly traded" imports refer to
    petitions for relief by U.S. industry from harm as a result of
    imports that may be subsidized or dumped (unfairly priced).
    "Unfairly traded" imports means imports that, after investigations
    resulting in affirmative determinations by the Commerce Department
    and the International Trade Commission (ITC), are subject to
    outstanding countervailing or antidumping duty orders. Page 4
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 Most
    IMF borrower countries have reduced important barriers to trade
    Although Still                    over the past decade. Although
    progress has varied among countries and Somewhat Restrictive, over
    time, generally tariff and nontariff barriers have fallen. Despite
    this progress, many policies remain that restrict free and open
    trade, and some IMF Borrowers' Trade IMF borrowers still maintain
    very high restraints. However, borrowers' Systems Are
    restrictiveness levels are similar to those of nonborrowers, and
    about two- Liberalizing, and Few             thirds are WTO
    members. Only a few of the 98 IMF borrowers trade Are Large U.S.
    Trade              enough to have much ability to significantly
    affect any individual sectors of Partners
    the U.S. economy. We analyzed the import barriers of IMF borrower
    countries using several Borrowers' Trade
    available measures of restrictiveness, including average tariff
    rates;10 Restrictiveness Has Fallen        nontariff barriers; and
    indexes constructed by the IMF, the Heritage Foundation, and the
    Fraser Institute.11 Although these indicators do not
    comprehensively measure all the policies that countries may use to
    restrict trade, they do reflect important barriers and provide
    information on the relative restrictiveness of countries among one
    another and over time. Overall, we found that these measures
    demonstrated growing trade liberalization. The IMF conducted a
    study of 27 countries' trade policies during 1990-96, using its
    own restrictiveness measures. The study found that during this
    period the number of countries labeled "restrictive"12 fell from
    63 to 41 percent, while the number of "open" countries rose from
    11 to 33 percent. Taking the same 27 countries and reviewing their
    progress through 1998, we found that the number of restrictive
    countries further fell to 7 percent, and the number of open
    countries rose to 48 percent.13 Other indicators also confirmed
    this liberalization trend across the full group of 98 IMF
    borrowers. Despite the progress made in reducing trade barriers,
    many restraints About One-half of                 remain that
    inhibit imports into IMF borrower countries. According to the
    Borrowers Have Moderate           IMF's measure, about one-half of
    the 98 current borrowers maintain to Restrictive Trade
    moderate (38 percent of borrowers) or restrictive (14 percent of
    Barriers                          borrowers) barriers. The
    Heritage Foundation and Fraser Institute 10 Average tariff rates
    are the average of the applied rates across the entire tariff
    schedule. 11 For more information on the indicators we used, see
    appendix IV. 12 The IMF overall index combines information on
    tariff and nontariff barriers to rank countries on a 10-point
    scale. From this ranking, it classifies countries as "open"
    (generally, average tariffs less than 10 percent and limited
    nontariff barriers); "moderate" (generally, average tariffs
    between 10 and 25 percent and significant but not pervasive
    nontariff barriers); and "restrictive" (generally, average tariffs
    higher than 25 percent and pervasive nontariff barriers). For more
    information, see appendix IV. 13 Specifically, 17 out of the 27
    countries studied by the IMF were initially labeled as
    restrictive.  In 1996, 11 countries were, and by 1998, only 2
    countries remained in that category. Page 5
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825
    indicators also show a range of restrictiveness, although the
    Heritage Foundation's measure reported less openness than either
    the IMF or Fraser Institute indicator, placing over one-half of
    borrowers in its most restrictive groupings. The tariff data we
    reviewed showed that average tariffs for borrowers ranged from as
    low as 0.1 percent to over 40 percent, but the majority fell
    between 7 percent and 24 percent. In comparison, the United
    States, the EU, and Japan maintain average tariffs of
    approximately 3 to 7 percent. Thirty of the 98 borrowers are
    listed in a March 1999 U.S. government report14 that identifies
    the most significant foreign trade barriers that affect U.S.
    exports. Most of the 30 countries listed were cited for having
    inadequate intellectual property protection or for maintaining
    restrictive import policies, such as setting investment barriers
    and creating barriers to foreign participation in government
    procurement. Our analysis shows that the 98 current IMF borrowers
    restrict trade to Borrowers' Restrictiveness        about the same
    extent as the 78 IMF member countries that do not owe Levels Are
    Similar to Those funds to the IMF.15 As figure 1 shows, the IMF
    trade measure rates 48 of Nonborrowers                   percent
    of borrowers as open, compared with 53 percent of nonborrowers; 38
    percent as moderate, compared with 33 percent of nonborrowers; and
    14 percent as restrictive, compared with 14 percent of
    nonborrowers. Also, lesser economically developed borrowers and
    nonborrowers alike tended to have higher levels of
    restrictiveness. However, we did find that borrowers and
    nonborrowers tend to use different types of policies to restrict
    trade. Borrowers generally use higher tariff barriers, while
    nonborrowers tend to use higher nontariff barriers such as import
    quotas. 14 1999 National Trade Estimate Report on Foreign Trade
    Barriers (Washington, D.C.: USTR, Mar. 31, 1999). 15 The IMF did
    not calculate its trade restrictiveness indicator for 6 of its 182
    members. Page 6
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 Figure
    1: Percentage of IMF Borrowers and IMF Nonborrowers in Each IMF
    Restrictiveness Index Category Source: IMF. Of the 98 IMF
    borrowers, about two-thirds are WTO members.16 WTO Most Borrowers
    Are WTO                   membership commits them to following WTO
    disciplines on their trade Members, and One-fifth
    policies, providing some degree of market access, and complying
    with Have Been Involved as                    WTO dispute
    settlement procedures.17 Many IMF borrowers have also Respondents
    in Trade                     undertaken additional WTO
    liberalization commitments, as well as made commitments under
    bilateral agreements with the United States on Disputes
    investment and other matters. For example, 37 IMF borrowers have
    signed the WTO agreement on basic telecommunications services, and
    51 have reached bilateral accords with the United States on such
    matters as investment and intellectual property. 16 The WTO was
    created as a permanent organization to oversee implementation of
    the Uruguay Round Agreements, to provide a forum for multilateral
    trade negotiations, and to settle disputes. 17 The WTO dispute
    settlement process has four main stages: (1) consultation and
    conciliation, (2) establishment and deliberation of panels, (3)
    appellate body review, and (4) implementation. Page 7
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825
    Despite greater integration into the world trading system and
    growing trade, many borrower countries have been involved in trade
    disputes with the United States. One-fifth (17) of the 98
    borrowers have been subject to formal market access complaints
    under the WTO's dispute settlement procedures. Only a few of the
    98 IMF borrowers are large enough traders to Few Borrowers Have
    Much significantly affect any particular sectors of the U.S.
    economy. Eight Potential to Affect the U.S.      borrowers
    accounted for 21 percent of U.S. trade in 1998, while the other
    Economy                           90 borrowers accounted for 5
    percent. As figure 2 shows, of these eight countries, Mexico
    traded the most with the United States in 1998, accounting for
    about 11 percent of U.S. trade; followed by Korea with 3 percent;
    Brazil with 2 percent; and the Philippines, Thailand, Venezuela,
    India, and Indonesia, with about 1 percent each. One of the other
    90 borrowers could significantly affect U.S. companies or workers
    in certain product sectors, however, if it comprised a large share
    of U.S. trade of a particular product. For example, flat-rolled
    iron and nonalloy steel imports from Russia account for
    approximately 26 percent of U.S. imports of that product. Page 8
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 Figure
    2: IMF Countries' Shares of Total U.S. Trade, 1998 (Exports Plus
    Imports, by Country) a Next top five consist of the Philippines,
    1%; Thailand, 1%; Venezuela, 1%; India, 1%; and Indonesia, 1%.
    Source: U.S. Department of Commerce. The eight largest U.S. trade
    partners generally maintain moderate barriers to trade. According
    to the tariff and other information we analyzed, most have average
    tariffs between 10 percent and 20 percent and are rated by various
    indicators as having significant nontariff barriers. For example,
    Thailand's average tariff rate in 1998 was 18 percent, Brazil's
    was 15 percent, and Indonesia's was 10 percent. Exceptions include
    Korea, which in 1998 had an average tariff rate of 8 percent; and
    India, with a 23 percent average rate. Mexico's average tariff
    rate is about 13 percent for all countries outside of the North
    American Free Trade Agreement (NAFTA), but its average tariff rate
    on U.S. products is about 2 percent due to NAFTA. All eight of
    these U.S. trade partners are members of the WTO, and most have
    bilateral trade agreements with the United States. Page 9
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 We
    evaluated the import barriers and export policies of four of the
    eight Trade Barriers and            IMF borrowers that accounted
    for 21 percent of U.S. trade in 1998: Brazil, Export Policies of
    Indonesia, Korea, and Thailand.18 These countries accounted for
    about 7 percent of U.S. trade in 1998. Brazil, Indonesia, Korea,
    and Thailand           Financial crises in Brazil, Indonesia,
    Korea, and Thailand have substantially affected their trade with
    the United States, even as the U.S. government has remained
    concerned about various trade policies in the four countries. The
    four countries have experienced either rising trade surpluses or
    falling trade deficits with the United States since their
    financial crises began, due primarily to a large decline in U.S.
    exports to them. Even before their crises began, however, the U.S.
    government had been concerned about a number of these countries'
    trade policies. Prior to the crises, much of the executive
    branch's attention had been focused on import policies that
    affected U.S. exports to the four countries, especially in Korea.
    Import policies of concern in the four countries have included
    Korean barriers to imports and distribution of beef, automobiles,
    and distilled spirits, government procurement procedures in
    airport construction, and import clearance procedures;
    restrictions on automobile imports in Brazil and Thailand; and
    inadequate protection of intellectual property rights, especially
    in Indonesia. Export policies that the executive branch has been
    concerned about include Korean government support to its steel and
    semiconductor industries, and Indonesian government subsidies to
    its automobile industry. The United States continues to press
    these and other trade issues even as it places priority on
    restoring the overall health of crisis countries for their own and
    the U.S.' benefit. Any analysis of import barriers and export
    policies in Brazil, Indonesia, Financial Crises Have
    Korea, and Thailand must acknowledge the effects those countries'
    recent Substantially Affected the    financial crises have had on
    their economies and trade. The crises that Four Countries' Trade
    began in 1997 dramatically reduced incomes and demand for domestic
    as well as imported goods. The value of these nations' currencies
    declined, with each of the countries' currencies depreciating by
    30-50 percent or more relative to the U.S. dollar in real
    (inflation-adjusted) terms. The depreciations reduced the
    purchasing power of local currencies, making it hard for these
    countries to buy U.S. exports. The depreciations also made the
    affected nation's exports more competitive on world markets. World
    18 We selected these four countries because, in addition to being
    significant U.S. trading partners, they are among the 10 top
    current IMF borrowers and have current IMF financing arrangements.
    Mexico is the largest U.S. trading partner among these countries.
    We did not select Mexico because, although Mexico currently owes
    debts to the IMF, it is not currently in an IMF financing
    arrangement (that is, it is not eligible to borrow more funds from
    the IMF), and because a substantial share of U.S.-Mexican trade
    consists of special arrangements provided for under NAFTA. Page 10
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 prices
    for key commodities fell, particularly for oil, agricultural
    goods, and electronic products. Outflows of foreign capital and
    domestic credit crunches reduced output and stalled commerce, with
    direct implications for trade accounts.19 Even without policy
    changes, such macroeconomic disturbances have a major influence on
    overall trade levels and balances. Since their crises erupted in
    1997, Indonesia and Thailand have widened their trade surpluses
    with other countries, Korea's trade balance went from a deficit to
    a surplus, and Brazil's deficit has fallen. Most of the shift was
    caused by a decline in these nations' imports from abroad, rather
    than by increases in their exports to other countries. Even though
    the volume of their exports rose at a double-digit rate, the
    dollar value of exports from these nations was actually lower in
    1998 than it was in 1997 because dollar prices for many of their
    goods were falling dramatically. The United States, meanwhile, has
    seen a worsening of its trade deficit with all countries
    worldwide, not only in absolute terms but also relative to the
    size of its economy. From 1997 to 1998, the U.S. trade surplus
    with Brazil fell; for Korea, a U.S. surplus changed to a deficit;
    and for Indonesia and Thailand, U.S. deficits grew larger.
    According to a March 1999 USTR report, U.S. government trade
    policy in 1999 remains centered on assuring recovery in the
    nations in financial crisis. Stabilization and growth are
    necessary before customers in Brazil, Indonesia, Korea, and
    Thailand can resume buying U.S. exports at levels at or above
    those in the past. Healthy economies will also absorb more of the
    output of local producers, easing pressures on U.S. firms
    competing with these nations' suppliers. Economists also suggest
    that the U.S. economy will suffer more if crisis countries are
    unable to export as they recover. For example, a 1998 Brookings
    Institution paper that analyzed the impact of the Asian financial
    crisis on trade and capital flows reached this conclusion.20 In
    essence, a downward spiral of falling production, consumption, and
    imports would ensue, hurting both these four countries and the
    United States. At the same time, U.S. efforts to address trade
    policies of concern continue. Items being actively pursued with
    Brazil, Indonesia, Korea, and Thailand include long-standing
    import market access and export subsidy 19 Since foreign capital
    flows must balance the trade deficit, when foreign capital leaves,
    either the trade deficit must fall or the trade surplus must
    increase. 20 Warwick J. McGibbin, The Crisis in Asia:  An
    Empirical Assessment, Brookings Institution Discussion Papers in
    International Economics, No. 136 (Washington, D.C.: The Brookings
    Institution, Apr. 1998). Page 11
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825
    issues, and the need to improve protection of intellectual
    property rights. Since the crisis unfolded, two additional types
    of issues have been added to the U.S. agenda: (1) ensuring that
    the countries do not reverse the liberalization accomplished in
    prior years; and (2) more vigorously addressing governmental and
    industry practices that the U.S. government and industry believe
    may have contributed to the crisis, such as directed credit and
    other privileges for industries deemed by these nations'
    governments to be important for economic development. The U.S.
    government has focused considerable attention in the last 3 years
    U.S. Concerns About Trade     on eliminating or modifying certain
    import policies in Brazil, Indonesia, Policies Have Focused on
    Korea, and Thailand that had restricted U.S. exports to those
    countries. the Four Countries' Import    The United States has
    invoked WTO dispute settlement procedures over Barriers
    some of these policies and has signed bilateral trade agreements
    to try to resolve other policies. The United States has had more
    concerns about Korea's import policies than about the other three
    countries in our review. The United States has invoked WTO dispute
    settlement procedures against Korean policies concerning beef,
    distilled spirits, airport procurement procedures, and import
    clearance procedures that have delayed or impeded the entry of
    U.S. products into Korea. Other Korean import policies that have
    been high priorities for the executive branch include restrictions
    on imports and distribution of pharmaceutical products, motor
    vehicles, agricultural and food products, and cosmetics.  In
    Brazil, U.S. concerns have included policies that allegedly
    discriminated against U.S. automobile exports21 and that restrict
    the availability of import financing. In Indonesia, the main U.S.
    concern has been over protection of intellectual property rights.
    In Thailand, U.S. priorities have included high import duties on
    certain agricultural and food products, high automobile tariffs,
    inadequate protection of intellectual property rights, and
    inefficient customs operations. Appendix I contains more
    information on these and other U.S. priority import policies in
    Brazil, Indonesia, Korea, and Thailand. Since 1996, the United
    States has formally invoked WTO dispute U.S. Concerns Over the
    settlement procedures over a number of Brazilian, Indonesian, and
    Korean Four Countries' Export        subsidies and has found
    subsidies in Brazil, Korea, and Thailand to be Policies
    countervailable under U.S. trade law; that is, that the subsidies
    both were being provided by their governments and were conferring
    a benefit to their companies under the meaning of those laws, or
    were specifically 21 In March 1998, the United  States and Brazil
    signed an agreement settling the auto dispute. Page 12
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825
    prohibited by WTO agreements. In addition, the U.S. government has
    been concerned about possible export policies, such as Korean
    government- directed lending and support to its steel industry and
    the Brazilian government's auto sector policies. Korea: U.S.
    Concern About Steel Korea is the largest economy of the four
    countries we reviewed and the Support and Several Export
    world's seventh largest exporter. Korea was the U.S.' ninth
    largest export Policies                           market in 1998,
    dropping from its position of fifth largest in 1997 due to its
    financial crisis. The United States ran a $7.4-billion merchandise
    trade deficit with Korea in 1998, compared to a $1.9 billion
    surplus in 1997. The trade deficit resulted from a 34 percent drop
    in U.S. merchandise exports to Korea, from $25.1 billion in 1997
    to $16.5 billion in 1998, and a 3.4 percent increase in Korean
    merchandise exports to the United States, from $23.2 billion in
    1997 to $23.9 billion in 1998. Major Korean exports to the United
    States in 1998 included machinery and transport equipment, steel,
    manufactured goods, and chemicals and related products. Over the
    last 30 years, Korea has pursued a strongly export-oriented
    economic development model with considerable government
    involvement. Under this model, the Korean government has worked
    closely with Korean financial institutions and large corporate
    conglomerates to promote exports in targeted sectors, such as
    heavy and chemical industries, consumer electronics, and
    automobiles. The overinvestment in certain sectors and excessive
    corporate debt that this development strategy eventually produced
    contributed to Korea's recent financial crisis. Government
    assistance to exporters has consisted of providing a range of
    industry-specific subsidies, tax benefits, export financing,
    export marketing assistance, government-influenced lending, and
    research and development assistance.  In recent years, the United
    States has been concerned over Korean subsidies and other export
    policies. Korean Subsidies and Internal Supports-U.S.-initiated
    WTO Disputes and Countervailing Duty Cases: In February 1999, the
    United States invoked WTO dispute settlement procedures against
    Korean beef industry policies. The United States alleged that
    Korean regulations discriminated against and constrained
    opportunities for the sale of imported beef in Korea and that
    Korea provided domestic support to its cattle industry in amounts
    that exceeded its WTO tariff reduction schedule. The United States
    and Korea engaged in formal consultations over this matter in mid-
    March, and a panel to consider the matter was formed on May 26,
    1999. Also, within the last 5 years, the Commerce Department has
    determined that a number of Korean subsidies to its steel industry
    were countervailable under U.S. Page 13
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 trade
    law. 22 The three cases have involved stainless steel plate in
    coils; stainless steel sheet and strip in coils; and certain cut-
    to-length, carbon- quality steel plate. (App. II provides more
    details concerning U.S. countervailing duty law, WTO subsidies
    rules, and these specific cases.) U.S. Concerns About Other Korean
    Policies: In addition to policies that the U.S. government has
    formally raised in the WTO or found to be countervailable under
    U.S. trade law, the executive branch has been concerned about
    other Korean export and subsidy polices in the last 3 years. These
    policies have involved government-directed lending, government
    involvement in and support to the Korean steel industry,
    restructuring of corporate conglomerates (particularly in the
    automobile, steel, shipbuilding, and semiconductor industries),
    and semiconductors. Government-directed Lending: The Commerce
    Department has reported that it is monitoring whether the Korean
    government may be influencing commercial banks to lend funds at
    preferential rates to targeted industries-particularly to Korea's
    steel and semiconductor industries. The U.S. government has raised
    this issue with Korean government and industry officials on
    numerous occasions. In addition, Korea's IMF and World Bank
    programs contain reforms to Korea's financial system and corporate
    sector that help to curtail the government's ability to direct
    bank lending on noncommercial terms. As previously mentioned,
    Commerce has examined potential subsidies resulting from alleged
    government-directed lending to the Korean steel industry in three
    recent countervailing duty investigations of certain Korean steel
    products. Steel Industry: The U.S. government and U.S. steel
    industry have been concerned for some time about Korean government
    involvement in and support for its steel industry, such as below-
    market-interest-rate loans extended by government-owned banks to
    steel producers. Several actions have taken place in addition to
    the countervailing duty cases previously discussed. In June 1995,
    the U.S. Committee on Pipe and Tube Imports filed a Section 301
    petition23 alleging that Korea restricted exports of 22
    Countervailing duties are only imposed if the Commerce Department
    determines that a countervailable subsidy is being provided and if
    the International Trade Commission determines that an industry in
    the United States is materially injured or threatened with
    material injury, or that the establishment of an industry in the
    United States is materially retarded, by reason of the subject
    imports. 23 Section 301 of the Trade Act of 1974 (19 U.S.C. 2411),
    as amended, provides the U.S. Trade Representative with the
    authority to enforce U.S. rights under bilateral and multilateral
    trade agreements and to respond to unjustifiable or discriminatory
    foreign government practices that burden or restrict U.S.
    commerce. Section 301 investigations can be initiated by USTR or
    pursued by USTR in response to a petition filed by a person, firm,
    or association. Page 14
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825
    domestically produced steel sheet, controlled domestic prices
    below world prices, and diverted exports of pipe and tube products
    from the EU to the U.S. market. The Committee withdrew its
    petition in July 1995 when Korea agreed to establish a
    consultative mechanism with the United States to provide
    information about Korea's steel sheet, pipe, and tube production
    and exports. The Korean government also agreed to notify the
    United States of any measure to control steel production, pricing,
    or exports, and to not interfere in steel pricing or production.
    Although the consultative mechanism was extended for another year,
    and bilateral consultations were held in 1996 and 1997, the United
    States continued to raise concerns about Korean government
    influence over private-sector decisions concerning steel. In 1997
    and 1998, for example, the United States asked the Korean
    government to respond to specific questions concerning Hanbo
    (Korea's second largest steel producer), which collapsed
    financially and is now being sold. The United States was concerned
    that the Korean government may have provided subsidies to Hanbo
    and directed Korean banks to extend credit to the company-actions
    that may have contributed to prices that undercut competitors and
    displaced U.S. steel exports to Korea and other countries. As a
    result of a 30 percent surge in steel imports into the United
    States during the first 10 months of 1998 compared to the same
    period in 1997, of which about 6 percentage points came from Korea
    (Japan and Russia were other important suppliers), the United
    States initiated an extensive dialogue with the Korean government
    to ensure that its steel sector would operate on a market-driven
    basis rather than with Korean government help. In 1998, the Korean
    government provided written assurances that it would not support,
    or direct others to support, Hanbo and that the sale of the
    company would be market based and managed by a reputable
    international financial company. In addition, Hanbo temporarily
    shut down production at one of its plants that was of particular
    concern to the U.S. steel industry. The Korean government also
    announced its intention to privatize Korea's largest and the
    world's second largest steel producer, Pohang Iron and Steel
    Company (POSCO). Since December 1998, the Korean government has
    reduced its 33 percent stake in POSCO to 20.8 percent. The full
    privatization of POSCO would serve to remove the Korean
    government's influence from the company's pricing, production, and
    other business decisions. In addition to monitoring POSCO's
    privatization, the U.S. government is continuing to monitor steel
    import trends and any potential Korean government support to other
    steel companies. In addition, the U.S. government believes that,
    if faithfully implemented, Korea's financial and Page 15
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825
    corporate restructuring efforts-particularly those involving bank
    oversight and lending limits-should help guarantee that Korea's
    steel corporations operate on a market-oriented basis.
    Restructuring of Corporate Conglomerates: As part of Korea's
    financial arrangements with the IMF, the Korean government is
    trying to restructure the five largest Korean industrial
    conglomerates, or "chaebol," to make them more commercially
    oriented and to reduce their debt levels. These chaebol are
    swapping certain assets and subsidiaries, as part of the so-
    called "Big Deal." The World Bank is taking the lead in assisting
    Korea with its corporate sector restructuring. The U.S. government
    has flagged corporate restructuring as a systemic change that
    could not only help the Korean economy regain and sustain its
    stability but also enhance market access.  The U.S. government has
    submitted questions to the Korean government on the specifics of
    certain restructuring efforts, including in the semiconductor
    sector, and emphasized that as a whole the restructuring should
    (1) yield more efficient, market-driven Korean firms without
    uneconomic business lines that contribute to excess capacity; and
    (2) be carried out in a manner that is consistent with Korea's
    international obligations, particularly under the WTO Agreement on
    Subsidies and Countervailing Measures.  The Commerce Department
    has reported that it is monitoring whether the Korean government
    might provide certain subsidies-such as tax breaks or drastic debt
    relief-as incentives to the companies to participate in the
    restructuring. In addition to these practices, the U.S. government
    in 1998 reported that Korea uses various tax-related measures that
    benefit Korean exporters or foreign investors in Korea. These
    include tax reserves for export losses and overseas market
    development, exemptions or reductions in duties on imported
    capital equipment to be used in exports, reductions in duties for
    imported aircraft and vessel parts, tax concessions to encourage
    foreign investment, tax concessions for overseas business losses,
    tax exemptions for overseas business development, and tax credits
    for investment in facilities. The Commerce Department also
    reported on Korean subsidy practices that benefit specific
    industry sectors. These sectoral practices include incentives to
    sustain steel companies; tax exemptions or credits for firms in
    designated manufacturing industries (machinery, electronics,
    aviation, defense, fine chemicals, genetic engineering, new basic
    materials, and antipollution technologies); tax incentives for
    multinational corporations in computer software and
    telecommunications; expense deductions for firms in traditional
    industries; support to miners when mines are closed; incentives to
    the stone industry; and assistance to small and medium-sized
    enterprises. Page 16                       GAO/NSIAD/GGD-99-174
    IMF Borrowers' Trade Policies B-282825 Brazil: U.S. Focus Has Been
    on    Brazil was the U.S.' 11th largest export market in 1998. In
    1998, the United Three Subsidies                   States ran a
    $5-billion trade surplus with Brazil. Brazilian merchandise
    exports to the United States totaled about $10 billion that year
    and consisted primarily of machinery and other manufactured goods.
    The Brazilian government does not provide many direct subsidies to
    exporters; however, the United States has been concerned about
    several that it does provide. WTO Disputes and Countervailing Duty
    Cases: Since 1996, the United States has participated in WTO cases
    involving two Brazilian subsidies. The United States invoked WTO
    dispute settlement procedures and held consultations with Brazil
    regarding various aspects of its automotive regime in August 1996,
    including provisions in its WTO-notified subsidy program for
    automobiles. In March 1998, the United States and Brazil signed an
    agreement settling the dispute. (See app. I for more details on
    this case.) The other WTO dispute was brought by Canada and
    involved PROEX, a Brazilian government export financing program.
    The United States reserved its rights as a third party in the
    dispute. In April 1999, a WTO dispute resolution panel found that
    PROEX's interest equalization program was a prohibited export
    subsidy24 and that, because Brazil did not meet the conditions
    that allow developing countries more time than developed countries
    to remove prohibited export subsidies, the program must be
    withdrawn immediately. In addition to these WTO cases, in the last
    3 years the U.S. government has found one Brazilian subsidy to
    manufacturers of certain hot-rolled flat-rolled carbon-quality
    steel products to be countervailable. (See app. II for more
    information about the PROEX dispute and the steel case.) Other
    Brazilian Subsidies of U.S. Concern: The U.S. government has been
    concerned about other Brazilian export programs. These programs
    include tax and tariff exemptions for equipment and materials
    imported for the production of goods for export, excise and sales
    tax exemptions on exported products, and rebates on materials used
    in the manufacture of exported products. Exporters enjoy
    exemptions from withholding tax for remittances sent overseas for
    loan payments and marketing, as well as from the financial
    operations tax for deposit receipts on export products. Exporters
    are also eligible for a rebate on social contribution taxes paid
    on locally acquired production inputs.25 According to the Commerce
    24 The interest equalization program subsidizes Brazilian exports
    so as to equalize domestic and international interest rates for
    export financing. 25 In commenting on a draft of this report, the
    IMF stated that the subsidies described in this paragraph include
    practices that any country with sales taxes based on the
    destination principle would follow. In particular, the IMF said,
    the EU's sales taxes rebate the entire value of the value-added
    tax levied on Page 17
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825
    Department, tariff concessions Brazil introduced under its auto
    regime in December 1995 raised questions about the regime's
    consistency with the WTO's Agreement on Subsidies and
    Countervailing Measures. Indonesia: Concern About         In 1998,
    Indonesia was the seventh largest U.S. trading partner among IMF
    Automotive Subsidies             borrowers but accounted for less
    than 1 percent of U.S. imports and exports. In 1998, the United
    States ran a $7.6-billion merchandise trade deficit with
    Indonesia, an increase of $2.5 billion from 1997. The increase in
    the merchandise trade deficit was mainly the result of a fall in
    U.S. exports to Indonesia in 1998 of $2.2 billion. Indonesia is a
    significant U.S. trading partner in some sectors, such as in U.S.
    imports of wood and rubber products. Indonesia has notified the
    WTO that it maintains a small number of subsidies. In October
    1996, the United States and the EU initiated WTO dispute
    settlement procedures against two Indonesian subsidies to its
    automotive industry. One subsidy granted import duty relief to
    certain automotive parts and accessories for use in assembling or
    manufacturing motor vehicles based on the percentage of local
    content in the finished vehicles. The other subsidy permitted an
    Indonesian firm that was designated as a "pioneer" company to
    import tariff-free finished automobiles designated as "national
    cars" and to sell the national cars luxury tax-free for 3 years.26
    Indonesia eliminated the subsidy to the pioneer company in January
    1998 as a commitment to the IMF and, based on a June 1998 WTO
    appellate body ruling, Indonesia has until July 1999 to eliminate
    the local content subsidy. In addition to these automotive
    industry subsidies, in March 1999 the U.S. Commerce Department
    found that the Bank of Indonesia's rediscount export financing
    program was an export subsidy; however, Commerce did not find it
    to be countervailable due to its small size. (See app. II for more
    details.) Thailand: United States Has      Thailand was the 26th
    largest export market for U.S. goods and 13th Found Several
    Subsidies to Be    largest supplier of goods to the United States
    in 1998. That year, the U.S. Countervailable
    trade deficit with Thailand increased by about $5 billion,
    reaching an all- time high of $8.2 billion; the value of U.S.
    merchandise exports decreased by about $2 billion, while Thai
    merchandise exports increased by about $840 million. Thailand
    maintains a number of programs aimed at exports as they cross the
    border, and a similar mechanism functions in the case of
    interstate trade in the United States for certain products. Sales
    tax rates are considerably higher in Brazil than they are in U.S.
    states, according to the IMF, and the burden that would be imposed
    on exporters in the absence of such a rebate mechanism could be
    considerable. 26 Japan joined the United States and the EU in
    disputing this second Indonesian subsidy. Page 18
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825
    promoting exports in global markets, encouraging investment, and
    establishing or expanding industrial development zones. These
    programs include subsidies in the form of credits and tax
    exemptions on certain exports, and reduced tariffs on raw
    materials for products intended for reexport. In the past, the
    U.S. government has found a number of Thai subsidies to be
    countervailable, although in some cases no countervailing duty
    order was issued because the ITC did not find material injury to
    the competing U.S. industry. The countervailable Thai subsidies
    have included export packing credits (short-term, preshipment
    export loans); tax and duty exemptions that allow exporting
    companies to import machinery and equipment free of import duties
    and business and local taxes; import duty exemptions for raw
    materials that allow companies to import raw and "essential "
    materials used in the production, mixing, and assembly of exports,
    free of import duties; and assistance for trading companies, which
    provides certain incentives to eligible trading companies. (See
    app. II for more details.) In addition to programs found to be
    countervailable, the U.S. government has identified several other
    Thai government export programs that are of potential concern.
    These programs include subsidized credit on some government-to-
    government sales of Thai rice, which benefit certain processed
    agricultural products and manufactured goods. Page 19
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825
    Countries in an IMF financing arrangement sometimes have
    liberalized Trade Liberalization in their trade systems within the
    context of their arrangements, although in Brazil's, Indonesia's,
    many cases the liberalization has not been a condition of
    receiving disbursements of IMF funds. As part of their recent
    arrangements, Brazil, Korea's, and Thailand's Indonesia, and Korea
    have liberalized their trade regimes to some degree. Recent IMF
    Financing Brazil has modified one subsidy program and pledged not
    to introduce any Arrangements                     new trade
    restrictions that hinder regional integration or are inconsistent
    with the WTO. Indonesia has reduced or eliminated some import
    tariffs and export restrictions and has committed to phase out
    most remaining nontariff import barriers and export restrictions
    by the year 2000. Korea has eliminated four subsidies and plans to
    make the operation of its subsidy programs more transparent. Korea
    is also making several changes to its import certification
    procedures. Thailand's IMF program has no direct trade policy
    commitments. One reason for this, according to the U.S. Treasury,
    is that Thailand had fewer distorting trade policies than the
    other three countries. Although Brazil, Indonesia, and Korea are
    undertaking some trade reform, their IMF financing arrangements
    focus primarily on macroeconomic and other structural reforms
    rather than trade reform. According to the Treasury and the IMF,
    restrictive trade policies were not major causes of the countries'
    financial crises. Further, while several of the trade policies to
    be eliminated or modified under the three countries' IMF programs
    have been of concern to the United States and other countries, the
    stated purpose of these measures is not to assist the four
    countries' trading partners but instead it is to make their
    economies operate more efficiently. That said, measures taken in
    an effort to restore economic stability should also contribute to
    market opening. In addition, as part of their IMF programs,
    Indonesia, Korea, and Thailand plan to further open their
    economies to foreign investment and to substantially restructure
    their financial and corporate sectors. For example, Korea has
    committed to end government-directed lending, which USTR views as
    a very significant trade-related commitment. These commitments, if
    fully implemented, could lead to increased U.S. investment in and
    trade with these countries. A fundamental objective of the IMF's
    mission, as embodied in article I of Purpose of Trade
    its Articles of Agreement, is to facilitate the expansion and
    balanced Liberalization in IMF            growth of international
    trade.  According to the IMF, trade liberalization, at Financing
    Arrangements           both the national and global levels, is
    thus an integral part of structural adjustment policies
    incorporated in IMF programs and surveillance activities.  As
    such, countries that have borrowed from the IMF sometimes have
    liberalized their trade systems within the context of their
    financing arrangements. Borrowers have eliminated or reduced
    tariffs or nontariff Page 20                        GAO/NSIAD/GGD-
    99-174 IMF Borrowers' Trade Policies B-282825 barriers to imports,
    such as import quotas, licensing, or other restrictions. They also
    have ended or altered export policies, such as subsidies and
    export restrictions. In some cases, trade liberalization measures
    have been IMF "performance criteria," which are conditions that a
    borrower generally must meet in order to qualify for future
    disbursements. In many cases, however, borrowers' trade
    liberalization measures were not performance criteria, although
    this does not mean that the IMF or the borrower considered the
    measures to be unimportant to achieving the objectives of the
    financial arrangements. According to the IMF, for some borrowers
    trade reform can be a critical element of structural reforms. In
    addition, IMF financing arrangements typically require that
    countries pledge not to impose or intensify import restrictions
    for balance-of- payments reasons. Brazil, Indonesia, and Korea
    have undertaken some trade liberalization within the context of
    their recent IMF financing arrangements. Nevertheless, their
    overall IMF arrangements focus on macroeconomic and structural
    reforms other than trade reform because restrictive trade policies
    were not major causes of their financial crises, according to U.S.
    Treasury and IMF officials. Reflecting this reality, only one of
    the trade liberalization measures is a performance criterion-the
    requirement that Indonesia reduce export taxes on logs and sawn
    timber. Further, although several of the import and export
    policies to be eliminated or modified under their IMF programs
    have been of concern to the United States and other countries, the
    stated purpose of these reforms is not to assist the four
    countries' trading partners but instead it is to make their
    economies operate more efficiently and thus help achieve the IMF
    program objectives of resolving the countries' balance-of-payments
    problems and preventing their recurrence. Since December 1998,
    Brazil made several trade commitments within the Brazil Is to
    Modify Two    context of its IMF financing arrangements. As table
    1 shows, Brazil has Export Programs and Not    committed to limit
    the scope of its interest equalization export subsidy Impose
    Additional Trade    program to capital goods, and, according to
    the IMF, Brazil has kept its Restrictions               pledge not
    to impose any new trade restrictions that hinder regional
    integration, are inconsistent with the WTO, or that are for
    balance-of- payments purposes. Page 21
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 Table
    1: Trade Liberalization in Brazil's Recent IMF Financing
    Arrangements, December 2, 1998, through April 30, 1999 Measure
    Description
    Status I. Import-related measures General              Continue
    promoting economic integration with                        Tariffs
    were reduced on 98 products. No new trade restrictions MERCOSULa
    and other regional trading                                have
    been imposed that either hinder regional integration, are
    partners.
    inconsistent with the WTO, or that are for balance-of-payments
    Increase trade with countries outside the
    reasons. region. Do not impose trade restrictions that are either
    WTO inconsistent or for balance-of-payments reasons. II. Export-
    related measures Subsidies            a. Limit the scope of
    interest equalization export a. Measure was submitted to Brazil's
    Congress in December 1998 financing program to goods with a long
    but has not been approved. However, measure is in force production
    cycle (capital goods).
    (Brazilian law allows president to enact provisional measures
    before congressional ratification). Measure was submitted as part
    of a major tax reform proposal that called for a national value-
    added tax. b. Suspend, for 1999, exporters' rebates on
    b. Rebate was suspended for 1999. social contribution taxes
    aMERCOSUL is the largest preferential trade arrangement in Latin
    America and consists of Argentina, Brazil, Paraguay, and Uruguay.
    Bolivia and Chile are associate members. Sources: Brazil's letters
    of intent, IMF, U.S. Treasury Department. Since November 1997,
    Indonesia has made many changes to its trade Indonesia Is to
    Remove                            policies in the context of its
    IMF financing arrangements. As table 2 shows, Unjustifiable Trade
    Indonesia has reduced tariffs on a range of mainly agricultural
    products Restrictions                                      and
    eliminated the government's monopoly on importation and
    distribution of agricultural products. Also, Indonesia has pledged
    to eliminate all other import and export restrictions by the end
    of its IMF program in the year 2000, except for those necessary
    for health, safety, environment, or security reasons. In March
    1999 testimony, a Commerce Department official stated that the
    U.S. government has been satisfied with Indonesia's efforts to
    date in reforming its trade system.27 However, the official also
    said that the true test of these reforms will come when increased
    trade flows resume. 27 Testimony of the Honorable Patrick A.
    Mulloy, Assistant Secretary of Commerce for Market Access and
    Compliance, Before the House of Representatives, Committee on
    Banking, Housing, and Urban Affairs (Mar. 9, 1999). Page 22
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 Table
    2: Trade Liberalization in Indonesia's Recent IMF Financing
    Arrangements, November 5, 1997, through April 30, 1999 Measure
    Description
    Status I. Import-related measures Tariffs               a. Reduce
    tariffs on all items currently subject to tariffs a. Completed by
    deadline. of 15% to 25% by 5 percentage points by March 31, 1998.
    b. Reduce tariffs on all nonfood agricultural products to b. A cut
    of 5 percentage points was made on February 1, a maximum of 10% by
    2003.                                     1998. c. Reduce tariffs
    on all food products to a maximum of c. Completed on February 1,
    1998. 5%. d. Reduce tariffs on chemical, steel/metal, and fishery
    d. Chemical tariffs were reduced by 5 percentage points on
    products to 5%-10% by 2003.
    January 1, 1998. Nontariff barriers    a. Abolish import
    restrictions on new and used ships.         a. Completed in
    February 1998. b. Eliminate government monopoly on agricultural
    b. Completed as scheduled. commodity imports. c. Eliminate
    government monopoly's rice import                c. Completed by
    March 1999. subsidy. d. Abolish local content regulations on dairy
    products.       d. Completed effective February 1, 1998. e.
    Develop longer-term role for and restructure               e. To
    be done with World Bank assistance government agricultural state
    trading enterprise. f. Allow private traders to import rice.
    f. Completed in September 1998. g. Phase out all remaining
    barriers, including quantitative restrictions, by end-program,
    except for those necessary for health, safety, environmental, or
    security reasons. II. Export-related measures Subsidies
    a. Discontinue special tax, customs, and credit               a.
    National car project privileges were discontinued in privileges to
    national car project.                           January 1998. b.
    Phase out local content program by the year 2000. Aircraft program
    Discontinue budgetary and extrabudgetary support.
    Completed in January 1998. Export restrictions a. Reduce export
    taxes on logs, sawn timber, rattan,            a. Begun. See (b)
    and minerals to 10% by December 2000 and gradually replace with
    resource rent taxes. b. Reduce export taxes on logs and sawn
    timber to             b. Not completed by deadline. IMF waived
    performance 20% by December 31, 1998.a
    criteria. Completed in February 1999. c. Abolish export taxes on
    leather, cork, ores, and           c. Completed in February 1998.
    aluminum waste products. d. Lift export bans on food commodities.
    Replace              d. Bans lifted September 1998  April 1999.
    Export tax was quantitative restrictions on palm oil, olein, and
    stearin     imposed by April 22, 1998.  The tax went up from 40%
    to exports with export tax of 40% by April 22, 1998, and
    60% in mid-summer 1998, but was reduced to 40% again in reduce tax
    to 10% by December 31, 1999.                       February 1999.
    e. Abolish provincial and local government export             e.
    Completed in January 1998. taxes. f. Eliminate all other export
    restrictions by end- program, except for those deemed necessary
    for health, safety, security, or environmental reasons.
    aPerformance criterion. Sources: Indonesia's letters of intent,
    IMF, U.S. Treasury Department. Page 23
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 As
    part of its recent IMF financing arrangements, among other
    actions, Korea Has Eliminated Some Korea has reduced some import
    barriers, eliminated four trade-related Subsidies and Is Reviewing
    subsidies, and made improvements to the transparency of its
    subsidy Certain Import Policies                   programs. Korea
    has met every deadline for implementing these measures, although
    deadlines for completing some actions have not yet passed. Table 3
    shows the implementation status of trade policy measures that
    Korea has committed to the IMF to implement since its December
    1997 IMF financing program began. Table 3: Trade Liberalization in
    Korea's Recent IMF Financing Arrangements, December 4, 1997,
    through April 30, 1999 Measure
    Description                                        Status I.
    Import-related measures Tariffs
    Reduce number of items subject to                  Number of
    products covered was reduced adjustment (higher-than-normal)
    tariffs            from 62 to 38. used to protect domestic
    producers against import surges. Nontariff barriers
    a. Eliminate import diversification program, a. To be phased out
    by June 1999. Sixteen which barred imports of 113 Japanese
    items remain covered. products and affected U.S. exports to Korea
    that contained substantial Japanese content. b. Review import
    certification procedures.         b. Plan completed by deadline.
    Some By August 15, 1998, present to IMF a plan          reforms
    implemented during 1998, and to streamline and bring procedures in
    line         others planned. Reforms involve a wide with
    international practice.                       range of products,
    government ministries, and laws. II. Export-related measures
    Subsidies                                 a. Eliminate four trade-
    related subsidies:         a. All were eliminated by March 31,
    1998. (1) reserves for export losses of exporters, (2) reserves
    for exporters' overseas market development, (3) program to promote
    exporters' use of minicomputers, (4) tax incentives for foreign
    investment. b. Review all existing subsidy programs            b.
    Plan completed by deadline. Plan and their economic rationale and,
    by               proposed several measures to rationalize November
    15, 1998, present to IMF a plan           programs by enhancing
    transparency, for rationalizing programs.
    tightening supervisory control of tax benefits, and introducing in
    the long term a more systematic and transparent budgeting system
    for tax expenditures. Sources: Korea's letters of intent, IMF,
    U.S. Treasury Department. In addition to trade liberalization
    measures, as part of their IMF financing Other IMF Conditions
    Could arrangements, Korea, Indonesia, and Thailand have committed
    to further Significantly Affect the Four open their economies to
    foreign investment and to substantially Countries' Trade
    restructure their financial and corporate sectors. These
    commitments, if Page 24
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 fully
    implemented, could lead to increased U.S. investment in and trade
    with these countries. For example, Korea has eliminated the
    aggregate ceiling on foreign investment in Korean equities, as
    well as the foreign investment ceiling on domestic bonds. Other
    measures would facilitate friendly or hostile foreign mergers
    with, or acquisitions of, Korean companies, while yet others would
    ease restrictions in corporate foreign borrowing, the
    establishment of subsidiaries of foreign banks and brokerage
    houses, foreign direct investment, foreign acquisition of land,
    and foreign exchange transactions. Similarly, measures related to
    restructuring the financial sector would liberalize restrictions
    on the ability of foreign financial institutions to merge with,
    acquire, or invest in domestic Korean financial institutions and
    would allow foreigners to become bank managers. According to the
    IMF, the Korean economy has become much more open to foreign
    investment since its recent financing arrangements began.
    Indonesia, among other commitments, has pledged to open more
    sectors of its economy to foreign investment and to remove
    restrictions on permitting foreign banks to have branches in
    Indonesia. Investment liberalization could lead to more U.S. or
    other foreign direct or portfolio28 investment. This could
    increase trade, because trade tends to follow investment. In
    addition to liberalizing foreign investment, other structural
    reforms being implemented by Brazil, Indonesia, Korea, and
    Thailand within the context of their recent IMF financing
    arrangements could affect their trade. For example, according to
    the U.S. Treasury Department, under its IMF financing
    arrangements, Korea has agreed to a fundamental overhaul of its
    weak and noncompetitive financial system. Korea also has committed
    to end government-directed lending.  Brazil, Indonesia, and
    Thailand are further privatizing state-owned enterprises. If
    implemented successfully in conjunction with foreign trade and
    investment liberalization, these structural reforms could have a
    significant effect on U.S. and other foreign trade and investment
    in these economies. Finally, to the extent that their IMF programs
    as a whole lessen the duration and severity of these countries'
    economic crises, the prospects for increased foreign trade and
    investment would improve. The success of these programs depends on
    many factors, including their macroeconomic and structural policy
    changes. But success also depends on factors that are in part
    outside of the borrowers' and the IMF's control, such as investor
    confidence in the four countries' economies and macroeconomic
    conditions in other countries. 28 Portfolio investments are assets
    held in the form of marketable equity or debt securities. Page 25
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 The
    policies maintained by Brazil, Indonesia, Korea, and Thailand to
    Potential Impact of               encourage exports could
    potentially distort trade and displace production IMF Borrowers'
    Export by U.S. producers, even though they may benefit other U.S.
    companies or consumers. However, the large macroeconomic changes
    in these countries Policies on the United caused by their recent
    financial crises greatly complicate predicting and States Is
    Difficult to            measuring the policies' impact on the
    United States because the Measure
    macroeconomic changes are likely a major reason for recent changes
    in trade flows. Moreover, overall U.S. imports from these nations
    grew modestly in 1998, and many sectors registered declines.
    Imports from Brazil, Indonesia, Korea, and Thailand also grew at a
    slower pace than overall U.S. imports and than they have in
    previous years. Nevertheless, in certain sectors such as steel and
    chemicals, the United States faces substantial and growing import
    competition from suppliers from one or more of the four countries.
    Products accounting for about16 percent of the value of U.S.
    imports from these four IMF borrowers registered large increases
    in imports and falling prices over the past year. Mechanisms exist
    to investigate and remedy situations, such as steel import surges,
    where U.S. industry believes rising imports are attributable to
    foreign government policy and harm its economic interests. Export
    policies such as subsidies to producers and low-cost financing for
    Export Policies Can Distort exports can harm U.S. companies by
    displacing U.S. sales in the United Trade, but Assessing Their
    States and other world markets. At the same time, they may benefit
    U.S. Impact Is Difficult               consumers and other U.S.
    industries that use the imported products. Aside from any direct
    economic impact, U.S. trade law and international trade agreements
    such as the WTO agreements contain disciplines to limit the use of
    subsidies and provide remedies for harmful effects of trading
    partners' export policies in specified circumstances. In a prior
    section, we identified export policies maintained by Brazil,
    Indonesia, Korea, and Thailand. Relatively few of the policies
    have been major sources of U.S. industry or government concern.
    But some have been, particularly Korea's policies in the steel,
    automotive, shipbuilding, and semiconductor sectors and Brazil's
    policies in the steel and automotive sectors. Brazil and Korea
    were among the top 10 countries cited in U.S. countervailing duty
    investigations into complaints over unfairly subsidized imports
    during 1980-97. Brazil was the top country cited, accounting for
    about 11 percent of all cases filed. However, accurately weighing
    the recent impact of export policies on U.S. industries is
    difficult. First, as has been seen, the United States can expect
    to face deteriorating trade balances and heightened competition
    from key IMF borrowers because of their financial crises and the
    accompanying Page 26                        GAO/NSIAD/GGD-99-174
    IMF Borrowers' Trade Policies B-282825 sharp currency devaluations
    and shrinking demand in these markets. The strong performance of
    the U.S. economy relative to that of other nations also draws in
    imports. For now, U.S. output is rising, inflation is low, and
    unemployment is at its lowest level in 30 years. These trends
    provide a favorable backdrop for absorbing rising imports. Also,
    U.S. imports from Brazil, Indonesia, Korea, and Thailand rose at a
    slower pace than overall U.S. imports in 1998,29 and, for Brazil
    and Indonesia, rose by less in 1998 than they had in previous
    years. Indeed, substantial contractions were recorded in U.S.
    imports from each of the four countries in many sectors. Another
    factor that makes it difficult to determine the impact of export
    policies is that such an investigation requires considerable
    legal, economic, and industry information. Some of this
    information is readily available, but much of it must be estimated
    or specially collected and analyzed on a case- by-base basis. For
    example, the U.S. government agencies responsible for
    administering U.S. trade law, including the Commerce Department
    and the ITC, conduct in-depth investigations regarding specific
    allegations of improper subsidies and injurious effects on
    domestic industries. Still, as a general rule, the larger the
    distortion and the greater the trade affected, the more likely the
    policy could harm the U.S. industry. Brazil, Indonesia, Korea, and
    Thailand are leading world exporters. The The United States Is an
    U.S. market receives a substantial portion of their export
    shipments. Based Important Market for Brazil, on IMF data, the
    four nations account for 35 percent of the total world Indonesia,
    Korea, and              exports of current IMF borrowers, with
    Korea alone accounting for Thailand, and Thus Stands          16
    percent of total exports from IMF borrowers. Recent WTO data
    reveal that the four countries ranked among the world's leading
    exporters in 1998 to Be Among Those Most             and that
    Korea was the world's 7th largest exporter, while Thailand,
    Brazil, Affected by Their Export           and Indonesia ranked
    15th, 16th, and 17th, respectively. Collectively, the Policies
    four sold $287 billion abroad in 1998, which is more than Canada,
    but less than the United States and Japan. Figure 3 shows 1998
    exports of Brazil, Canada, Indonesia, Japan, Korea, Thailand, and
    the United States. 29 Total U.S. imports from all sources rose by
    5.36 percent from 1997 to 1998. U.S. imports from Brazil rose by
    4.40 percent; from Indonesia, by 3.04 percent; from Korea, by 4.22
    percent; and from Thailand by 6.87 percent. Page 27
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 Figure
    3: World Exports, by Selected Nations, 1998 Source: WTO. The
    United States is an important market for these four countries, but
    its importance as a buyer did not increase substantially relative
    to other nations in 1998. In 1998, the United States accounted for
    an estimated 19 percent of Brazil's exports, 18 percent of
    Indonesia's exports, and 16 percent of Korea's exports, according
    to the U.S. Department of State. All of these shares were similar
    to those recorded in 1997 and 1996. (Some 20 percent of Thailand's
    exports were shipped to the United States in 1997, the latest year
    for which data are available.) In 1998, the four countries
    together accounted for about 7 percent of both U.S. exports and
    imports, according to Commerce statistics. Industry analysts
    report that U.S. suppliers face head-on competition from all four
    countries in such sectors as steel and chemicals; automobiles
    (Korea); orange juice (Brazil); wood and paper products (Indonesia
    and Brazil); and poultry and pork (Thailand and Korea). However,
    in many product sectors, these nations compete more with each
    other and other nations than with U.S. suppliers. For example,
    Brazil competes with China, Italy, Spain, Indonesia, and Korea in
    footwear. Thailand competes with Mexico and the Philippines in the
    supply of electric wire and cables.  Korea and Japan compete with
    U.S. producers in the United States and with each other in Asian
    markets for semiconductor memory devices. In other industries,
    such as many chemicals from Indonesia and semiconductors from
    Thailand, the imports Page 28
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 are
    raw materials or intermediate products used in final U.S.
    production of higher value-added goods. The executive branch has
    implemented programs to detect and deter Commerce Is Monitoring
    potentially harmful effects of export subsidies by these four
    nations (as Policies and Import Surges        well as certain
    others). These programs were developed by the Commerce to Detect
    Potential Problem Department to respond to concerns by U.S.
    industries. The industry Areas
    concerns were twofold: that nations could use subsidies to export
    their way out of their financial crisis and that the IMF
    stabilization programs could allow these countries to resume
    financial practices that had previously benefited strategic
    industries to the possible detriment of U.S. firms and workers.
    Commerce's special efforts involve (1) tracking existing and
    prospective policies (export or production-related subsidies) by
    key nations; and (2) monitoring U.S. imports in selected sectors-
    including steel, semiconductors, autos, paper, and chemicals-that
    are vulnerable to import penetration and that have faced unfair
    trade practices in the past. Commerce staff report that they
    identify import surges by examining the value, quantity, and price
    of imports; the share of the U.S. market that has been captured by
    imports (import penetration); and the level of industry concern.
    The result is an early warning mechanism to flag potential
    problems for further analysis and action, if appropriate. To shed
    light on whether the export policies of Brazil, Indonesia, Korea,
    Some U.S. Imports From            and Thailand could pose a
    potential threat to U.S. producers, we the Four Countries Have
    supplemented the information on export policies presented in a
    prior Increased Markedly in the         section with an analysis
    of imports from the four IMF borrowers that Past Year
    showed large increases in U.S. imports in 1998.30 Textiles,
    apparel, and steel were the product categories that experienced
    the largest increases in imports from these countries. Other
    important categories were certain primary or processed
    agricultural and fishery products, chemicals, rubber products,
    wood and paper products, and electric and nonelectric machinery.
    The results of the multistage analysis revealed that products
    accounting for $9.4 billion, or 16 percent, of U.S. imports from
    Brazil, Indonesia, Korea, and Thailand both increased
    substantially and registered price declines in 1998. Table 4 shows
    the 62 product categories that met all of our criteria and, for
    each product, the percentage increase in imports from 30
    Specifically, we identified items that met certain value, import
    market share, and import increase criteria. We then examined
    whether prices were falling for these imports. See appendix IV for
    details. Page 29
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 the
    four countries. (An additional 300 items at a more disaggregated
    level also met our criteria and showed substantial import
    increases and price declines; these items accounted for $5.3
    billion in imports from the four IMF borrowers.) For example,
    imports of radio transmission apparatus from Korea rose by nearly
    90 percent to reach a value of $788.4 million, while imports of
    one category of flat-rolled steel from Korea rose by 36 percent,
    to $355.8 million. Paper and paperboard imports from Indonesia
    were up by 284 percent, amounting to $40.8 million. Page 30
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 Table
    4:  U.S. Imports from Brazil, Indonesia, Korea, and Thailand That
    Increased by More Than 15 Percent While Their Prices Fell, 1997-98
    (thousands of dollars)
    Change        1998 Product class
    Product name                                              1997-98
    Imports Brazil Sugars and Sugar Confectionary
    Sugars (nesoia) including Lactose, Caramel                  913.6%
    $33,077 Inorganic Chemicals; Precious & Rare Earth Metals
    Titanium Oxides                                             648.8
    3,204 Misc. Edible Preparations
    Extracts of Coffee, Tea or Mate, Roast Chicory              179.5
    41,591 Salt, Sulfur, Earth & Stone, Lime & Cement, etc.
    Kaolin and other Kaolin Clays (including Calcined)          171.1
    7,479 Coffee, Tea, Mate & Spices
    Pepper, Genus Piper, Genus Capsicum or Pimenta               68.7
    30,353 Edible Preparations of Meat, Fish, Crustaceans, etc.
    Prepared Meats, Meat Offal & Blood (nesoia)                  63.0
    104,753 Leather Art, Saddery, Handbags, etc.
    Articles of Gut (nesoia), Goldbeater's Skin, etc.            58.0
    6,754 Plastics, etc.
    Cellulose and Chemical Derivatives (nesoia)                  49.5
    9,667 Iron and Steel
    Flat-rolled Iron and Steel (600mm wide, cold rolled)         47.0
    71,052 Rubber, etc.
    Unvulcanized Rubber Forms (nesoia) and Articles              36.2
    3,344 Iron and Steel
    Pig Iron & Spiegeleisen in Pigs, Blocks, etc.                33.6
    366,229 Oreas, Slag & Ash
    Aluminum Ores and Concentrates                               25.5
    66,712 Misc. Chemical Products
    Rosin & Resin Acids, Rosin Spirit, Run Gum, etc.             22.4
    3,755 Iron and Steel
    Flat-rolled Iron and Steel (600mm wide)                      22.0
    10,555 Salt, Sulfur, Earth & Stone, Lime & Cement, etc.
    Natural Graphite                                             20.2
    6,481 Indonesia Paper & Paperboard, etc.
    Paper, Paperboard, etc.                                     284.2
    40,777 Dairy Products, Birds' Eggs, Honey, etc.
    Edible Products of Animal Origin (nesoia)                   221.1
    2,301 Aluminum, etc.
    Household Articles (pot scour, aluminum, etc.)               71.5
    45,730 Misc. Chemical Products
    Rosin & Resin Acids, Rosin Spirit, Run Gum, etc.             69.7
    2,469 Apparel Articles and Accessories (not knit), etc.
    Men's or Boys' Undershirts (not knit or crochet), etc.       57.0
    25,465 Essensial Oils, Perfumery, Cometics, etc.
    Essential Oils Resinoid                                      50.4
    36,057 Electric Machinery, Sound and TV Equipment, etc.
    Primary Cells & Batteries, parts                             36.5
    52,522 Musical Instruments (parts and accessories)
    Musical Instruments with Sound Electric Products, etc.       32.8
    20,070 Coffee, Tea, Mate & Spices
    Pepper, Genus Piper, Genus Capsicum or Pimenta               32.1
    95,108 Edible Preparations of Meat, Fish, Crustaceans, etc.
    Fish, Caviar and Caviar Substitutes                          22.7
    35,031 Feathers, Down, Artificial Flowers, Hair Art, etc.
    Wigs of Hair and Articles of Human Hair (nesoia)             20.3
    38,076 Korea Iron and Steel
    Angles, Shapes & Sections of Iron and Steel                2980.1
    139,776 Articles of Stone, Plaster, Cement, Asbestos, etc.
    Millstones for Grinding Various Materials                   348.8
    6,816 Inorganic Chemicals; Precious & Rare Earth Metals
    Cyanides, Cyanide Oxides and Complex Cyanides               266.0
    5,073 Iron and Steel
    Wire of Alloy Steel (nesoia)                                 92.0
    7,965 Electric Machinery, Sound and TV Equipment, etc.
    Transport Appar. for Radio, TV, TV Camera,                   89.9
    788,375 Recorders Misc. Articles of Base Metal
    Wire, Rods for Soldering and Metal Spray, etc.               82.7
    12,143 Misc. Edible Preparations
    Ice Cream and other Edible Ice, with Cocoa or Not            80.5
    1,615 Textile Articles (needlecraft, worn textile), etc.
    Blankets and Traveling Rugs                                  71.4
    16,221 Salt, Sulfur, Earth & Stone, Lime & Cement, etc.
    Pumice, Emery, Natural Corundum and Garnet, etc.             70.7
    951 Beverages, Spirits and Vinegar
    Fermented Beverages (nesoia) (Cider, Perry, Mead,            61.6
    1,161 etc.) Explosives, Pyrotechnics, Matches, etc.
    Ferrocerium & other Pyrophoric Alloys, etc.                  59.5
    1,716 Products of Straw, Basketware and Wickerwork
    Plaits and Products of Plaiting Materials, etc.              47.3
    1,955 Articles of Iron or Steel
    Nails, Tacks, Drawing Pins, etc. of Iron or Steel            37.8
    118,946 Page 31                                GAO/NSIAD/GGD-99-
    174 IMF Borrowers' Trade Policies B-282825 Change          1998
    Product class
    Product name                                                 1997-
    98      Imports Misc. Articles of Base Metal
    Safes, Cash or Deed Boxes of Base Metals
    36.3        4,108 Iron and Steel
    Flat-rolled Iron and Steel (600mm wide, hot rolled)
    36.1      355,824 Plastics, etc.
    Polymers of Styrene, in primary forms
    35.6       44,316 Rubber, etc.
    Soft Vulc. Rubber Plates, Sheets, Profile Shapes, etc.
    33.6        5,081 Wadding, Felt, Yarn, Twine, Ropes, etc.
    Metal Yarn, Textile Yarn, or Strip w/Metal
    32.3        1,947 Mineral Fuel, Oil, Bitumin, Mineral Wax, etc.
    Pitch and Pitch Coke from Coal Tar or other Mineral
    30.9       16,730 Tars Electric Machinery, Sound and TV Equipment,
    etc.             Electric Water, Space and Soil Heaters and other
    25.2      502,387 Dryers Musical Instruments (parts and
    accessories)                  Pianos, Harpsichords and other
    Keyboard Stringed                24.8       68,416 Instruments
    Tools, Cutlery and Parts of Base Metals
    Articles of Cutlery (nesoia), Manicure Sets, etc.
    24.0       23,042 Photographic or Cinematographic Goods
    Motion-Picture Film (exposed and developed)
    23.2       23,966 Misc. Manufactured Articles
    Molded Resin, etc. and Carving Material (nesoia)
    19.8       12,126 Rubber, etc.
    Hygienic or Pharmaceutical Articles of Vulcanized
    17.8        1,743 Rubber Woven Fabrics, Tufted Fabric, Lace,
    Tapestries, Etc.         Labels, Badges, etc. of Textiles
    17.2        4,676 Pearls, Precious Stones, Precious Metals, Coins,
    etc. Imitation Jewelry
    15.2      136,031 Thailand Ceramic Products
    Ceramic Sinks, Washbasins, Water Closet Bowls, etc.
    359.4        8,039 Photographic or Cinematographic Goods
    Motion-Picture Film (exposed and developed)
    238.9         8,374 Rubber, etc.
    Hygienic or Pharmaceutical Articles of Vulcanized
    126.6        3,603 Rubber Rubber, etc.
    Articles of Apparel and Accessories of Vulcanized
    51.9      222,510 Rubber Gums, Resins, and Other Vegetable Saps
    and                   Natural Gums, Resins, Gum-Resins and Balsams
    51.1        4,062 Extracts Aluminum, etc.
    Household Articles (pot scour, aluminum, etc.)
    44.5       63,675 Electric Machinery, Sound and TV Equipment, etc.
    Electric Water, Space and Soil Heaters and other
    23.4      166,568 Dryers Apparel Articles (knit or crochet), etc.
    Men's or Boys Shirts (knit or crochet), etc.
    17.8      137,651 Musical Instruments (parts and accessories)
    Percussion Musical Instruments (drums, etc.)
    17.6         6,129 Total
    $4,082,327 Total (all products)b
    $9,370,226 anesoi stands for "not elsewhere specified or
    indicated." badditional products at a more detailed level also met
    the criteria. Sources: U.S. Department of Commerce statistics and
    GAO calculations. Page 32
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 Though
    we did not separately collect production statistics for these
    items, Some U.S. Industries            our examination of analyses
    prepared by outside industry experts suggests Appear to Be
    Vulnerable to      that the United States produces most of these
    fast-rising import items, Increased Imports; Others       although
    notable exceptions include certain primary products (for Are Less
    so                     example, rubber) and certain machinery and
    consumer electronic goods. We then assessed whether U.S.
    industries that compete with the surging imports are particularly
    vulnerable to import competition. For example, we examined the
    tariff treatment of different import categories, including under
    the U.S. Generalized System of Preference (GSP) program.31 Under
    the program, certain imported products are not eligible for duty-
    free treatment because they are import sensitive. Most textiles
    and apparel, leather goods, and glass have been deemed import
    sensitive by statute. For other product sectors in which imports
    are surging, we examined industry reports and discussed the
    factors contributing to the increases and potential vulnerability
    of the U.S. industry with staff at the Commerce Department and the
    ITC. According to these industry sources, some of the import
    surges we identified are in industries where foreign unfair trade
    practices do not appear to be an issue, while other import surges
    are in industries where allegations of foreign unfair trade
    practices already exist, and still other import surges have a more
    tenuous relationship to policy or adverse impact. In some cases,
    the industry sources we consulted cited factors other than "unfair
    imports" as the primary cause of surging imports: *  Market
    factors, such as a slight increase in U.S. coffee consumption and
    the need for more natural rubber for the larger tires being used
    in U.S. motor vehicles appear to be the primary factors in
    increased U.S. imports. *  In the fishery sector, rising imports
    of shrimp from Indonesia and Thailand appear to be tied to the
    strong U.S. economy; virtually all shrimp imported into the United
    States is destined for restaurant consumption, which has risen
    with U.S. incomes. *  Other increases are explained by resource
    endowments; for example, the United States is consuming more
    natural dyes and fragrances that are only available from nations
    with rain forest conditions, such as Brazil. Industry reports also
    suggest that a variety of factors are at play in many sectors that
    heighten competitive pressures on U.S. firms, including the
    ongoing globalization of production, the emergence of new
    competitors in 31 The GSP program provides duty-free treatment for
    specified nations and products as part of an overall effort to
    help developing nations diversify and increase their exports. Page
    33
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 Asia
    and elsewhere, and the price pressures that ensue from falling
    demand and excess capacity (some of which preceded the crisis).
    Some industries are calling for forceful action and strong
    enforcement of U.S. trade laws. Other industries, such as
    chemicals and forest products, say the most helpful U.S.
    government response would be pursuit of lowered trade barriers in
    these countries to provide new opportunities to U.S. exporters.
    Some investigations into complaints over harm from export policies
    by Investigations Into Industry Brazil, Indonesia, Korea, and
    Thailand are currently underway under U.S. Complaints Over Export
    trade statutes. In addition, export policies of Brazil and
    Indonesia have Policies Are Underway in          been subject to
    dispute settlement procedures in the WTO. Steel is the Some of the
    Sectors Having sector with the largest number of cases pending
    under U.S trade law. Overall U.S. imports of steel were up by 9
    million metric tons in 1998, and Major Increases in Imports
    imports captured 30 percent of the U.S. market, up from 24 percent
    in 1997. Various cases involve Brazilian, Indonesian, and Korean
    suppliers, as well as suppliers in Russia and Japan. Korea's POSCO
    is the world's second largest steel firm, and Brazil is among the
    top five U.S. import suppliers of steel. On January 7, 1999, the
    President outlined a seven-point action plan for responding to the
    rise in steel imports. Various plastic and rubber goods and
    textiles are also under investigation. Semiconductors and other
    microelectronic products have been subject to dumping and
    intellectual property right infringement in the past; the
    executive branch continues to monitor imports, and Korea is among
    the top five U.S. import suppliers of microelectronics (including
    semiconductors). In addition, Brazil's aircraft subsidies were
    recently found to be inconsistent with WTO rules. The United
    States is a major consumer, not a producer, of these regional jets
    but has had long-standing concerns over Brazil's export financing
    program, which applies to other sectors. In some recent
    countervailing duty cases, the U.S. Commerce Department determined
    the magnitude of the subsidies provided to be fairly small. Within
    the past 9 months, Commerce has found subsidies to Indonesian
    producers of rubber thread to be less than 3 percent of the
    thread's value, and countervailable subsidies of 6.62-9.45 percent
    for Brazilian hot-rolled steel. Subsidies for Korean stainless
    steel and strip were somewhat larger, up to 29 percent. In certain
    cases, the ITC has determined that imports were not causing injury
    to U.S. industry. In April 1999, for example, the ITC made a
    negative injury determination regarding synthetic rubber from
    Korea, Brazil, and Mexico, and in May 1999 the ITC made a negative
    injury determination in a case involving stainless steel round
    wire from Korea and other countries. Page 34
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 The
    ITC is conducting fact-finding investigations of imports of forest
    products at the Congress' request.32 ITC analysts suggest that
    U.S. suppliers face competition from hardwood plywood, and
    printing and writing paper from Indonesia; our data show paper
    imports are rising rapidly and prices are down. Commerce analysts
    report that the forest product industry employs more workers than
    the steel industry and some mills in the Northwest have recently
    closed in the face of weak demand and falling prices. Industry has
    reportedly expressed concern that rising imports from Indonesia
    may be due to unfair trade practices but has yet to file a formal
    case. Pulp imports from Brazil are also up but are reportedly from
    the Brazilian production facilities of U.S. firms. Textiles and
    apparel imports are increasing sharply, even though U.S. Concerns
    Exist in Other     limits on the quantity imported (quotas) are in
    place.33 A few instances of Sectors, too, but Rising
    investigations into "unfair trade" in textiles have occurred,
    including Imports May Be Primarily    textile products from
    Thailand and a recently filed petition alleging Due to Other
    Factors        dumping of polyester staple fiber from Korea.
    However, Commerce analysts report that in general the surges that
    occurred in the past 2 years appear to be caused by market forces
    and exacerbated by the financial crises that began in mid-1997,
    rather than government policies. Brazil, Indonesia, Korea, and
    Thailand are all WTO members and have bilateral quota agreements
    with the United States that establish comprehensive limits on
    virtually all categories of their textile and apparel exports to
    the United States. While these limits apparently had considerable
    room for growth,34 imports from Indonesia have fallen sharply in
    recent months as shipments approached the upper limits associated
    with such quotas. Sugar from Brazil and imports of rice from
    Thailand are among the agricultural and fishery products with
    rising imports and falling prices. Governmental policies exist in
    these two sectors but do not appear to be major factors in the
    rise. (In Brazil's case, other factors are at work, and in
    Thailand's case, the program involves government-to-government
    sales, which do not occur for the United States). However, the
    United States has identified Thailand's subsidies on some
    government-to-government sales of rice in its annual inventory of
    foreign trade barriers. Orange juice 32 The investigations are
    fact finding in nature, as opposed to investigations into unfair
    trade practices. 33 Total U.S. imports of textiles and apparel
    rose by 20.1 percent from 1996 to 1997 and by 13.3 percent in
    1998. Imports from three of the four IMF countries rose: by 14
    percent from Indonesia, the U.S' 10th ranking import supplier; by
    27.8 percent from South Korea, the 7th ranking supplier; and by
    29.7 percent from Thailand, the 9th-ranked supplier. 34 Korea, for
    example, had fairly low "fill rates" for U.S. quotas on textiles
    and apparel items. The double-digit growth registered in the last
    several years has brought those fill rates close to 90 percent in
    certain categories. Page 35
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825
    imports from Brazil also rose considerably in 1998, but much of
    the rise appeared to be due to weather, which contributed to a
    bumper crop in Brazil and a poor crop in Florida, where 90 percent
    of U.S. orange juice is produced.35 Chemical imports are causing
    price pressures on U.S. producers in the United States and other
    country markets. The 70-year record of U.S. surpluses in the
    chemicals trade was unbroken in 1998 but fell by nearly a third
    from 1997 levels, largely as a result of lower U.S. exports to
    Asia and other developing regions and higher U.S. imports from the
    EU. Industry analysts attribute most of the worsening to
    collapsing demand in Asia, which depressed U.S. and EU sales
    there. (U.S. exports of chemicals to Asia fell by more than 15
    percent from 1997 to 1998.) However, capacity expansions that
    reflect both ongoing globalization of production activity by U.S.
    and other firms and government policies in such nations as Korea
    and Thailand preceded the onset of the crisis. For example, the
    chemical industry is the leading manufacturing sector recipient of
    loans from the Korean Development Bank, and Korea's production
    capacity in the chemical industry rose by more than 27 percent
    between 1995 and mid- 1998. Even so, Korea supplied just 1.3
    percent of total U.S. imports of chemicals in 1998. In autos,
    competition to U.S. firms from Korean auto exports is rising. The
    25 percent plunge in domestic demand in Korea in 1998 halved
    domestic shipments. Production fell by 30 percent, and Korean auto
    makers were forced to turn increasingly to overseas markets for
    sales. According to statistics by the Korean Automobile
    Manufacturers Association, fully 75 percent of Korean cars were
    exported in 1998, versus 50 percent the year before, and the total
    number of units exported rose slightly. The U.S. market is Korea's
    second largest for car exports, but Commerce officials report that
    competition with U.S. makers is particularly intense in European
    markets.36 Meanwhile, despite Korea's compliance with a bilateral
    agreement with the United States on Korean market access for
    autos, there has been a virtual halt of import purchases in
    Korea's shrinking market. 35 However, the ITC recently determined
    that removing an existing antidumping duty order on Brazilian
    orange juice would mean a continuation or recurrence of material
    injury to the U.S. industry from such imports. 36 Passenger cars
    were among the leading U.S. imports from Korea in 1998, but the
    number of units imported fell by 5 percent. Page 36
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 Auto
    parts imports from Brazil are also increasing and could in
    principle be related to government policies, which require firms
    that make cars in Brazil to meet minimum export performance and
    local content levels in order to receive tax and other benefits.
    However, in accordance with a bilateral agreement with the United
    States, the Brazilian government policy is due to change by
    January 1, 2000, and Commerce officials we contacted were unaware
    of current complaints by U.S. industry. The few products that show
    substantial import increases appear to be original equipment parts
    made in Brazil and destined for their U.S. auto manufacturing
    facilities. Imports of pianos, string, and other musical
    instruments also show large increases.  The ITC recently released
    a report analyzing factors contributing to rising imports from
    Asian suppliers.37  However, the ITC reports that there were no
    claims that the rising imports were due to export policies of
    those countries. The situation in the tire and synthetic rubber
    industries shows how firm structure, customers' responsiveness to
    price, and the globalization of sourcing affect industry attitudes
    toward surging imports. Three of the four companies making tires
    in the United States are multinational firms that produce and sell
    tires globally; the three control 65 percent of the world tire
    market and reportedly have increased production and imports from
    such countries as Indonesia since mid-1997, when the rupiah
    (Indonesia's currency) plummeted. A fourth firm sells all of its
    production in the larger U.S. retail (consumer) market, where
    Korean, and to a lesser extent, Brazilian firms, compete largely
    on the basis of price. This firm is concerned about the 60 percent
    increase in imports of Korean tires. The firm has, however, filed
    briefs opposing findings of dumping against Brazilian and Korean
    suppliers of synthetic rubber38 because it needs such low-cost
    inputs to remain competitive with tires from Korea, Indonesia, and
    Brazil. We requested comments on a draft of this report from the
    Departments of Agency Comments and the Treasury, Commerce, and
    State; the IMF; the Office of the U.S. Trade Our Evaluation
    Representative; and the ITC. The Treasury provided written
    comments on a draft of this report, which are reprinted in
    appendix III. The comments characterized the report as balanced
    and informative. All six organizations 37 U.S. International Trade
    Commission, Pianos:  Economic and Competitive Conditions Affecting
    the U.S. Industry (investigation No. 332-401), USITC publication
    3196 (Washington, D.C.: May 1999). 38 At the time, emulsion
    styrene-butadiene rubber was the subject of a dumping
    investigation, which has since been terminated. Page 37
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 also
    provided technical and clarifying comments, which we incorporated
    as appropriate. For example, the IMF and USTR asked that we
    clarify the role that trade liberalization plays in IMF financing
    arrangements.  At the IMF's suggestion, we have pointed out that
    facilitating the balanced growth of international trade is part of
    the IMF's core mission as embodied in its Articles of Agreement,
    and that, according to the IMF, trade liberalization is an
    integral part of IMF programs and surveillance activities.  At
    USTR's request, we have noted that, in addition to trade and
    investment liberalization, other policy measures that Brazil,
    Indonesia, Korea, and Thailand are taking under their IMF
    financing arrangements to restore economic stability should also
    contribute to market opening; for example, Korea has committed to
    end government-directed lending. We are sending copies of this
    report to Senator Connie Mack, Chairman, and Senator Charles Robb,
    Ranking Minority Member, Joint Economic Committee; Senator William
    Roth, Chairman, and Senator Daniel Moynihan, Ranking Minority
    Member, Senate Committee on Finance; Senator Phil Gramm, Chairman,
    and Senator Paul Sarbanes, Ranking Minority Member, Senate
    Committee on Banking, Housing, and Urban Affairs; Representative
    Benjamin Gilman, Chairman, and Representative Sam Gejdensen,
    Ranking Minority Member, House Committee on International
    Relations. We are also sending copies of this report to the
    Honorable Robert Rubin, the Secretary of the Treasury; the
    Honorable Madeleine Albright, the Secretary of State; the
    Honorable William M. Daley, the Secretary of Commerce; the
    Honorable Charlene Barshefsky, the U.S. Trade Representative; the
    Honorable Jacob Lew, Director, Office of Management and Budget;
    the Honorable Allan Greenspan, Chairman of the Federal Reserve;
    and the Honorable Michel Camdessus, the Managing Director of the
    IMF. Copies will be made available to others upon request. This
    report was prepared under the direction of Harold J. Johnson,
    Associate Director, International Relations and Trade Issues, and
    Susan S. Westin, Associate Director, Financial Institutions and
    Markets Issues. Page 38                       GAO/NSIAD/GGD-99-174
    IMF Borrowers' Trade Policies B-282825 Please contact either Mr.
    Johnson at (202) 512-4128 or Ms. Westin at (202) 512-8678 if you
    or your staff have any questions about this report. Other GAO
    contacts and staff acknowledgements are in appendix V. Henry L.
    Hinton, Jr. Assistant Comptroller General National Security and
    International Affairs Division Nancy Kingsbury Acting Assistant
    Comptroller General General Government Division Page 39
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 LIST
    OF CONGRESSIONAL COMMITTEES The Honorable Jesse A. Helms Chairman
    The Honorable Joseph R. Biden, Jr. Ranking Minority Member
    Committee on Foreign Relations United States Senate The Honorable
    Ted Stevens Chairman The Honorable Robert C. Byrd Ranking Minority
    Member Committee on Appropriations United States Senate The
    Honorable Jim Leach Chairman The Honorable John J. LaFalce Ranking
    Minority Member Committee on Banking and Financial Services House
    of Representatives The Honorable C.W. Bill Young Chairman The
    Honorable David R. Obey Ranking Minority Member Committee on
    Appropriations House of Representatives Page 40
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies Page 41
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies Contents 1
    Letter 44 Appendix I                     Korean Import Policies
    44 Priority Import                Brazil
    51 Indonesia
    55 Policies of Korea,             Thailand
    56 Brazil, Indonesia, and Thailand 59 Appendix II
    Mechanisms Available to Anticipate and Remedy Adverse
    59 WTO Disputes and                 Effects of Foreign Export
    Policies U.S. WTO and CVD Cases Involving Korea
    61 U.S. Countervailing            Brazil
    63 Duty Cases Involving           Indonesia
    64 Thailand
    65 Export Policies of Brazil, Indonesia, Korea, and Thailand 67
    Appendix III Comments From the Department of the Treasury 68
    Appendix IV                    Assessing Borrowers' Trade
    Restrictiveness                                  68 Objectives,
    Scope, and Four Countries' Import Barriers and Export Policies
    69 Trade Liberalization in Four Countries' IMF Programs
    70 Methodology                    Assessing the Potential U.S.
    Impact of the Countries'                       70 Export Policies
    73 Appendix V GAO Contacts and Staff Acknowledgments Page 42
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies Contents Table
    1: Trade Liberalization in Brazil's Recent IMF
    22 Tables       Financing Arrangements, December 2, 1998, through
    April 30, 1999 Table 2: Trade Liberalization in Indonesia's Recent
    IMF                         23 Financing Arrangements, November 5,
    1997, through April 30, 1999 Table 3: Trade Liberalization in
    Korea's Recent IMF                             24 Financing
    Arrangements, December 4, 1997, through April 30, 1999 Table 4:
    U.S. Imports from Brazil, Indonesia, Korea, and
    31 Thailand That Increased by More Than 15 Percent While Their
    Prices Fell, 1997-98 (thousands of dollars) Figure 1: Percentage
    of IMF Borrowers and IMF                                    7
    Figures      Nonborrowers in Each IMF Restrictiveness Index
    Category Figure 2: IMF Countries' Shares of Total U.S. Trade, 1998
    9 (Exports Plus Imports, by Country) Figure 3: World Exports, by
    Selected Nations, 1998                              28
    Abbreviations ASEAN          Association of Southeast Asian
    Nations CVD            Countervailing duty EU             European
    Union GPA            Government Procurement Agreement GSP
    Generalized System of Preferences IMF            International
    Monetary Fund IPR            Intellectual property rights ITC
    U.S. International Trade Commission MERCOSUL       South America's
    common market NAFTA          North American Free Trade Agreement
    OECD           Organization for Economic Cooperation and
    Development POSCO          Pohang Iron and Steel Company SEO
    Subsidies Enforcement Office TRIPS          Trade-related Aspects
    of Intellectual Property Rights USTR           U.S. Trade
    Representative WTO            World Trade Organization Page 43
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies Appendix I
    Priority Import Policies of Korea, Brazil, Indonesia, and Thailand
    The U.S. government has focused considerable attention in the last
    3 years on eliminating or modifying certain import policies in
    Brazil, Indonesia, Korea, and Thailand that had restricted U.S.
    exports to those countries. The United States has had more
    concerns about Korea's import policies than about the other three
    countries in our review. For example, the United States has
    invoked World Trade Organization (WTO) dispute settlement
    procedures against Korean policies concerning beef, distilled
    spirits, airport procurement procedures, and import clearance
    procedures. In Brazil, the United States was involved as a third
    party in a WTO dispute over Brazilian policies that allegedly
    discriminated against automobile imports and that restrict the
    availability of import financing. In Indonesia, the main U.S.
    concern has been over protection of intellectual property rights
    (IPR). In Thailand, U.S. priorities have included high import
    duties on certain agricultural and food products, high automobile
    tariffs, inadequate protection of intellectual property rights,
    and inefficient customs operations. Korea has historically been
    considered one of the most difficult export Korean Import Policies
    markets in the world because of its many market access barriers.
    Even before its 1997 financial crisis and the establishment of
    financial arrangements with the International Monetary Fund (IMF),
    however, Korea had already begun to address some of its trade
    barriers because of its growing international trade links. These
    links, which implied a stronger reliance on international trade
    rules and principles, have gradually encouraged a more active role
    for Korea in international trading organizations that require
    greater market openness and trade liberalization among their
    members, particularly the WTO and the Organization for Economic
    Cooperation and Development (OECD), which Korea joined in 1996.
    The United States has identified a wide range and number of
    barriers that impede the import of U.S. goods and services into
    Korea. Within the last 3 years, U.S. government agencies have been
    particularly active in reporting on and trying to address Korean
    import barriers related to the following practices:
    Pharmaceuticals: Korea's treatment of foreign, research-based
    pharmaceuticals is one of the top priorities on the U.S. trade
    agenda with Korea.  The Office of the U.S. Trade Representative
    (USTR) named pharmaceuticals trade issues as a bilateral trade
    expansion priority in a 1999 report to Congress. Under its
    national health insurance system, Korea Page 44
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies Appendix I
    Priority Import Policies of Korea, Brazil, Indonesia, and Thailand
    does not give national treatment1 to imported drugs in terms of
    listing and pricing on the system's reimbursement schedule. The
    current system discourages medical providers from dispensing
    imported drugs by allowing them a higher profit margin from
    reimbursement for domestic drugs and by requiring additional
    administrative procedures for reimbursement from imported drugs.
    According to USTR, U.S. pharmaceutical producers also face
    nonscience-based requirements for clinical testing, inadequate and
    ineffective protection of test data against unfair commercial use,
    and lack of coordination between Korean health and IPR authorities
    that allows patent infringement.  In response to high- level
    bilateral consultations and correspondence, the Korean government
    has indicated that it is taking steps to address some of the U.S.
    government's and industry's concerns. According to a U.S. Commerce
    Department official, Korea has also agreed to reimburse medical
    providers for imported drugs in the near future. The executive
    branch is continuing to work with the Korean government to address
    concerns related to trade in pharmaceuticals. Beef Market Access:
    Korea restricts the quantity, distribution, and display of
    imported beef through a variety of measures, including
    requirements that imported beef be sold in separate retail
    establishments and be imported by certain designated entities.
    Since 1990, the U.S. government has negotiated several agreements
    with Korea that provide for annually increasing market access
    levels for beef imports; guarantee direct commercial relations
    between foreign suppliers and Korean retailers and distributors;
    and ensure that increasing volumes of beef would be sold through
    commercial channels instead of through a quasi-government agency.
    Korea has also pledged to remove all nontariff barriers on beef by
    2001. In 1997 and 1998, however, Korea did not meet its quota
    commitments on the importation of foreign beef. In February 1999,
    after failing to reach agreement with Korea on reforming its beef
    importation practices, the United States initiated WTO dispute
    settlement procedures alleging that Korean regulations
    discriminate against and constrain opportunities for the sale of
    imported beef in Korea. The United States also alleged that Korea
    imposes sale markups on imported beef, limits import authority to
    certain groups, and provides domestic support to the Korean cattle
    industry in amounts that cause Korea to exceed its aggregate
    measure of support as reflected in Korea's WTO tariff reduction
    schedule. A panel to consider the matter was established in May
    1999. Australia also 1 National treatment is a commitment to treat
    imported goods no less favorably than domestically produced goods.
    Page 45
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies Appendix I
    Priority Import Policies of Korea, Brazil, Indonesia, and Thailand
    initiated WTO dispute resolution procedures against Korean beef
    practices on April 13, 1999. Airport Procurement Procedures:
    Foreign companies had traditionally been limited in their
    opportunities to bid on government procurement contracts until
    Korea became a signatory to the WTO Government Procurement
    Agreement (GPA). During negotiations over Korea's accession to
    this agreement, the U.S. government reportedly received a
    commitment from Korea that entities responsible for airport
    construction would be subject to GPA disciplines. However, soon
    after negotiations were concluded, Korea created another entity--
    the Korea Airport Construction Authority--to manage procurement
    for the new Inchon international airport, one of the largest
    public works projects in Asia.  The Korean government has
    subsequently changed the construction authority to the Inchon
    International Airport Corporation. Korea now asserts that, because
    neither the airport construction authority nor the airport
    corporation are expressly listed as covered entities in its GPA
    schedule of concessions, procurement for the Inchon international
    airport is not covered by the GPA.  USTR reports that U.S. firms
    have repeatedly faced discriminatory tendering practices that
    hamper their ability to compete effectively for related
    procurement practices in the airport project. In February 1999,
    the United States requested consultations with Korea under WTO
    dispute settlement procedures. In May, the United States requested
    the establishment of a WTO dispute settlement panel on Korea's
    procurement practices after WTO consultations held on March 17
    failed to resolve the issue. Anti-import Activities: Over the
    years, the U.S. government has reported that frugality campaigns
    by Korean civic groups and media organizations have encouraged
    Koreans to avoid imported products and services and that the
    campaigns may have involved some Korean government support. In
    addition, the U.S. government has identified some Korean
    government practices that have specifically targeted imports. For
    example, in the past, the Korean government selected Korean
    lessors of imported automobiles for tax audits. Since the spring
    of 1997, the Korean government has publicly announced that it does
    not support anti-import activities and has promulgated guidelines
    to its officials on ensuring nondiscrimination against imports. In
    addition, the Korean president has urged Koreans to base their
    purchasing decisions on price and quality, rather than on the
    country of origin of the goods, and a 1998 U.S.-Korean auto
    memorandum of understanding states that the Korean government will
    effectively and expeditiously address all instances of anti-import
    activity associated with motor vehicles. The U.S. government,
    however, continues to watch for Page 46
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies Appendix I
    Priority Import Policies of Korea, Brazil, Indonesia, and Thailand
    reports of anti-import activity, and raises instances of such
    activity with the Korean government. Motor Vehicles: As a result
    of market access barriers in the automotive sector, foreign
    automobiles comprised less than 1 percent of the Korean motor
    vehicle market in 1998, compared to about 6 percent in Japan, over
    25 percent in the European Union (EU), and about 30 percent in the
    United States. In an October 1997 report to the Congress, the
    United States identified Korean barriers to motor vehicles as a
    priority foreign country practice, the elimination of which is
    likely to have the most significant potential to increase U.S.
    exports. Although the United States and Korea had already signed a
    memorandum of understanding on improving market access for foreign
    motor vehicles in September 1995, the United States had
    subsequently failed to reach agreement with Korea over remaining
    market access concerns. The concerns involved tariff and tax
    disincentives on imports, onerous and costly auto standards and
    certification procedures, automobile financing restrictions, and a
    pervasive anti-import climate for imported vehicles. After a U.S.
    Section 301 investigation2  and bilateral negotiations over these
    concerns, the United States and Korea concluded a memorandum of
    understanding in October 1998 to improve market access for foreign
    motor vehicles in Korea. Under the agreement, Korea agreed to
    broaden coverage of the 1995 memorandum of understanding to
    include minivans and sport utility vehicles; streamline Korean
    standards and certification procedures and adopt self-
    certification procedures by 2002, lower and/or eliminate taxes on
    automobiles, bind Korean tariffs on vehicles in the WTO at 8
    percent (formerly, Korea's tariff was 80 percent), introduce
    secured automobile financing, and implement a program to improve
    public perceptions of foreign automobiles. The executive branch is
    monitoring Korea's compliance with the agreement. Distilled
    Spirits Taxes: Korea applies lower taxes to its domestically
    produced distilled spirit, called "soju," than to imported
    alcoholic beverages. As a result of various Korean taxes and
    tariffs on foreign distilled spirits, the tax burden on imported
    liquor is higher than that for soju. In fact, according to the
    U.S. government, the tax burden on U.S. whiskey in Korea is more
    than four times greater than that on soju. In 1997, the United
    States and the EU brought the matter to the WTO, arguing that
    Korea levied discriminatory taxes against imported distilled
    spirits. 2 Section 301 of the Trade Act of 1974 (19 U.S.C. 2411),
    as amended, provides the U.S. Trade Representative with the
    authority to enforce U.S. rights under bilateral and multilateral
    trade agreements and respond to unjustifiable or discriminatory
    foreign government practices that burden or restrict U.S.
    commerce. Section 301 investigations can be initiated by USTR or
    pursued by USTR in response to a petition filed by a person, firm,
    or association. Page 47
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies Appendix I
    Priority Import Policies of Korea, Brazil, Indonesia, and Thailand
    Both the WTO dispute settlement panel in July 1998 and the WTO
    appellate body in January 1999 ruled in favor of the United States
    and the EU in the case. In March 1999, Korea informed the WTO that
    it was considering options for implementing the WTO's
    recommendations. In April 1999, the United States and Korea
    requested that the period of time for Korea to implement these
    recommendations be determined by arbitration.  Korea requested 15
    months, which the United States and the EU opposed. The arbitrator
    subsequently determined that Korea had 11.5 months to comply with
    its WTO commitments in this case. Movie Screen Quotas: By
    requiring Korean movie theaters to show domestic Korean films at
    least 106 or 146 days each year, Korea in effect imposes a quota
    on foreign films, thereby deterring trade in films and cinema
    construction and the expansion of theatrical distribution in
    Korea. The U.S. government has repeatedly raised this issue with
    the Korean government, including during a March 1999 trade mission
    to Korea. Currently, this issue is under discussion in
    negotiations over a bilateral investment treaty. Intellectual
    Property Rights: IPR-related concerns in Korea have involved
    limited retroactive copyright protection, incomplete trademark
    laws; inconsistent interpretation and implementation of patent
    laws; software piracy; production and export of counterfeit goods;
    and deficient laws on countering unfair competition and protecting
    trade secrets. Although Korea remained on the U.S. government's
    Special 3013 "watch list"4 in 1997, 1998, and 1999, the U.S.
    government acknowledges that Korea has made significant efforts to
    strengthen its IPR laws and enforcement. For example, pursuant to
    its obligations under the WTO Agreement on Trade- Related Aspects
    of Intellectual Property Rights (TRIPS), Korea passed four acts on
    patents, utility models, designs, and trademarks in 1995 and
    implemented new copyright, computer software, and customs laws in
    1996. In March 1998, Korea's revised trademark law became
    effective and a new patent court was established. Nevertheless, in
    negotiations over a bilateral investment treaty, the U.S.
    government has asked Korea to resolve some remaining
    inconsistencies involving its TRIPS obligations. 3 Under the
    "Special 301" provision of the Omnibus Trade and Competitiveness
    Act of 1988 (19 U.S.C. 2242), USTR performs an annual review to
    identify countries that do not provide adequate or effective
    protection for intellectual property rights. If a country is
    designated as a "priority foreign country," USTR must decide
    within 30 days whether to initiate a Special 301 investigation
    into the country's IPR practices. 4 USTR has created a "priority
    watch list" and a "watch list" under Special 301 provisions to
    indicate countries where particular problems exist with respect to
    IPR protection or enforcement or market access for persons relying
    on intellectual property. Page 48
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies Appendix I
    Priority Import Policies of Korea, Brazil, Indonesia, and Thailand
    For example, according to USTR, Korea still does not provide full
    retroactive protection to existing copyrighted works. Similarly,
    Korea's trademark law still does not protect some famous U.S.
    cartoon characters because they have not been registered with
    Korean authorities.  Also, the U.S. government has raised Korea's
    failure to provide TRIPS-consistent data protection and full
    coordination between Korea's IPR and health authorities to
    preclude patent infringements. Telecommunications: U.S. equipment
    and services companies have traditionally encountered a range of
    market barriers in the Korean telecommunications sector. The
    United States first cited Korea in 1989 as a priority foreign
    country for trade barriers in the telecommunications field
    involving discriminatory procurement practices, "buy local"
    policies, lack of transparency (openness), and inadequate trade
    secret protection. Despite a 1992 bilateral agreement and a 1993
    exchange of letters addressing Korea's telecommunications trade
    barriers, in July 1996 the United States designated Korea as a
    "priority foreign country" under Section 1374 of the Omnibus Trade
    and Competitiveness Act of 1988. Subsequent bilateral negotiations
    resulted in a July 1997 agreement in which Korea agreed to
    implement a range of policies to address remaining U.S. concerns
    and enhance U.S. market access. These policies included national
    treatment for foreign companies; government nonintervention in
    private sector procurement; increased transparency in criteria and
    procedures relating to services licensing, equipment
    certification, and type approval; increased foreign ownership in
    domestic service providers; enhanced protection of intellectual
    property and proprietary information; clear guidelines for
    technology transfer; transparent procedures for satellite services
    authorization; procompetitive regulatory measures; and an enhanced
    independent regulatory role for the Korean Communication
    Commission. Korea also agreed to eliminate tariffs on information
    technology products and to increase limits on foreign ownership of
    domestic telecommunications services companies. As a result of the
    agreement, the United States revoked Korea's priority foreign
    country designation as of August 1997. The United States is
    continuing to monitor Korea's implementation of the agreement as
    well as U.S. industry concerns over possible Korean government
    involvement in promoting the consolidation of private cellular
    telecommunications operators and wire- line companies under
    current conglomerate restructuring plans. Financial Services:
    Korea has traditionally restricted foreign participation and
    involvement in its insurance, banking, and securities sectors.
    However, Korea has been liberalizing many of these restrictions in
    recent years, particularly in the context of its WTO, OECD, and
    IMF Page 49                              GAO/NSIAD/GGD-99-174 IMF
    Borrowers' Trade Policies Appendix I Priority Import Policies of
    Korea, Brazil, Indonesia, and Thailand commitments. According to
    the U.S. Treasury Department, under its IMF financing
    arrangements, Korea has agreed to a fundamental overhaul of its
    weak and noncompetitive financial system. The prudential
    regulatory framework is being strengthened and restructured, and
    banks and other financial institutions are now expected to operate
    in a more transparent and financially sound manner. Additionally,
    Korea committed to the IMF to make its OECD commitments on
    financial services liberalization part of its WTO commitments,
    which would make them subject to the WTO's binding dispute
    settlement mechanism. For the insurance industry, Korea included
    expanded market access and national treatment of foreign insurers
    in its WTO schedule of liberalization measures as part of the 1997
    WTO financial services agreement. Similarly, in consultation with
    the IMF and the World Bank, Korea is implementing considerable
    structural reform in its banking sector to ensure that it operates
    on a fully commercial basis. The Korean government has also
    committed to the IMF to refrain from interfering in bank lending
    or managing decisions, to open its capital markets significantly
    to foreign participation, to permit foreign financial institutions
    to participate in mergers and acquisitions of Korean financial
    institutions, to allow foreign banks to establish subsidiaries or
    branches in Korea, and to liberalize foreign exchange controls.
    Under its IMF financial arrangements, Korea is also implementing
    considerable liberalization of its securities market by removing
    or lifting ceilings on foreign investment in Korean stocks, bonds,
    or commercial paper. Import Clearance Procedures: The U.S.
    government reports that Korea's import clearance procedures often
    delay entry of U.S. imports into Korea. For example, certain
    sanitary and phytosanitary5 barriers frequently delay some U.S.
    agricultural and food exports from entering Korea for 2 to 4
    weeks, and sometimes up to 2 months, except for perishable fruits
    and vegetables, which take a maximum of 5 days. Problems with
    import clearance procedures involve Korea's ingredient listing
    requirements, sanitary and phytosanitary rules, standards and
    conformity assessment procedures, and arbitrary actions by Korean
    inspectors. Korea has addressed some of these issues in response
    to U.S.-initiated WTO dispute settlement procedures. Specifically,
    Korea agreed to expedite clearance procedures for fresh fruits and
    vegetables, to use the concept of scientific risk assessment in
    developing a quarantine pest list and setting fumigation
    requirements, to revise some of its food additive standards to
    bring them closer to international standards, and to eliminate
    sorting requirements 5 Phytosanitary measures refers to various
    regulations governments may adopt to protect human, animal, or
    plant life or health. Although phytosanitary measures may result
    in trade restrictions, governments generally agree that in certain
    cases they are necessary and appropriate. However, governments may
    disagree about the need for or appropriateness of particular
    phytosanitary measures. Page 50
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    Priority Import Policies of Korea, Brazil, Indonesia, and Thailand
    and requirements on ingredients listing by percentage for all
    ingredients. Under its IMF financial arrangements, Korea also
    presented a plan in August 1998 to streamline various import
    certification procedures and bring them in line with international
    practices. Cosmetics: The U.S. government has identified several
    impediments to the entry and distribution of foreign cosmetic
    products in Korea. These include requirements for the Korean Food
    and Drug Administration to approve imports of the same cosmetic
    products if they have different countries of origin, the Korean
    government's delegation of authority to the domestic industry
    association to screen advertising and information brochures, the
    mandatory provision of proprietary information on imported
    cosmetics to Korean competitors, redundant testing, restrictions
    on sales promotions involving gifts with purchases, and burdensome
    import authorization and tracking requirements. The executive
    branch cited Korea's cosmetics-related trade barriers as a
    bilateral priority in a 1997 report to the Congress because the
    Korean government had not fully addressed U.S. concerns despite
    consultations between the two governments. In January 1998, the
    Korean Food and Drug Administration abolished the annual testing
    requirement for imported cosmetics and authorized importers to
    perform the required self-testing. Nevertheless, significant
    delays still remain for final government approval for the local
    sale of products developed outside of Korea, and cosmetics are
    still subject to the same rigorous and time-consuming approval
    process as pharmaceuticals and nutritional supplements. The U.S.
    government is working in conjunction with the EU to address
    cosmetics trade issues with the Korean government. According to
    the Brazilian government, trade liberalization is a key Brazil
    element in its efforts to consolidate the country's economic
    stabilization process. Brazil's economic liberalization-initiated
    in 1990 and accelerated with the Real Plan in 1994-has resulted in
    a more open trade regime with generally lower tariffs and reduced
    nontariff barriers. Alongside its liberalization efforts, Brazil
    has pursued further economic integration through MERCOSUL (South
    America's common market) and negotiations to establish the Free
    Trade Area of the Americas. The 5-year-old Real Plan, introduced
    after nearly a decade of economic stagnation and periods of
    hyperinflation, was the key element underpinning Brazil's efforts
    to stabilize its economy. Access to Brazilian markets in a
    significant number of sectors is characterized as generally good-
    with competition and participation by foreign firms through
    imports, local production, and joint ventures. Page 51
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    Priority Import Policies of Korea, Brazil, Indonesia, and Thailand
    However, some key liberalization measures introduced by the
    government of Brazil since 1995 have not been fully implemented-
    including some measures to eliminate government monopolies and to
    remove the distinction between foreign and national investors. In
    addition, the Brazilian government implemented temporary
    restrictive measures during 1996-98 to slow increasing trade
    deficits. Since 1990, Brazil has relied primarily on tariffs to
    regulate imports, rather than on nontariff barriers. Although
    Brazil's average import tariff increased from about 12 percent in
    1996 to about 15 percent in1998, it remained significantly below
    the 1990 level of 32 percent. Within the last 3 years, U.S.
    government agencies have been particularly active in reporting on
    and addressing trade barriers related to Brazilian protection of
    IPR, import financing restrictions, phytosanitary restrictions on
    wheat, discriminatory automobile policies, and customs valuation
    practices and import licensing system. Intellectual Property
    Rights: In April 1993, USTR identified Brazil as a priority
    foreign country under "Special 301" because Brazil failed to
    provide adequate and effective intellectual property rights
    protections. Later that year (May 1993), USTR initiated a Section
    301 investigation of Brazil's IPR regime and requested
    consultations. As a result of Brazil's commitment to improve the
    protection of intellectual property and provide greater market
    access for intellectual property products, USTR terminated its
    investigation in early 1994 and removed Brazil's designation as a
    priority foreign country. However, because of Brazil's lack of
    progress in implementing changes to its IPR regime, Brazil was
    placed on the priority watch list in April 1995. Subsequent
    improvements in IPR protection resulted in Brazil being first
    moved down to the watch list in 1996 and eventually being removed
    from the list entirely in 1997, when a series of IPR laws was
    promulgated. While the new laws represent progress in Brazil's IPR
    regime, deficiencies in the TRIPS-consistency and enforcement of
    some of these laws resulted in Brazil being placed back on the
    watch list in 1999. Specifically, USTR has identified problems
    with Brazil's Industrial Property Law, which includes a domestic
    working requirement for patents that is not consistent with TRIPS.
    In addition, USTR reported that Brazil's uneven enforcement of
    copyright laws is a serious and growing concern. Deficiencies in
    the Brazilian government's efforts to improve copyright
    enforcement have contributed to increasing piracy rates. Problems
    were particularly acute with respect to sound recordings and
    videocassettes-with virtually all audiocassettes sold in 1998
    being pirated copies. Overall, the sound Page 52
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies Appendix I
    Priority Import Policies of Korea, Brazil, Indonesia, and Thailand
    recording industry saw its piracy losses double in 1998. The U.S.
    government contends that the Brazilian government's efforts to
    patrol its border and ports have been inconsistent (a significant
    amount of the pirated material enters Brazil through Paraguay) and
    that the Brazilian government has not provided police the tools or
    training to enforce the laws. Furthermore, proposed legal changes
    that could reduce criminal penalties for intellectual property
    crimes and remove police authority to initiate some searches and
    seizures have become a particular concern for the U.S. government.
    According to USTR, Brazil's generally inefficient courts and
    judicial system have complicated the enforcement of intellectual
    property rights. The U.S. executive branch believes that Brazil
    should increase fines so as to create a true deterrent to
    copyright infringement, increase the effectiveness of the criminal
    enforcement system, and decrease delays in the judicial process.
    Import Financing Restrictions: In April 1997, Brazil-imposed
    requirements effectively prohibited import financing for less than
    180 days on purchases from non-MERCOSUL countries and raised costs
    for any import financing of less than 1 year. Specifically, Brazil
    required importers to purchase foreign exchange for financing
    purposes at least 180 days in advance of the due date for short-
    term supplier credit (that is, less than 360 days in duration).
    Brazil also prevented export credit agencies such as the U.S.
    Export-Import Bank from offering short-term credits for certain
    categories of purchases (for example, raw materials, spare parts,
    and others). According to a Commerce Department official, these
    restrictions were implemented as a reaction to Brazil's burgeoning
    trade deficit and to combat currency speculation. It is estimated
    that these measures added 3 to 5 percent to the cost of affected
    imports. The U.S. government raised its concerns bilaterally with
    the Brazilian government regarding the WTO- consistency of this
    policy and joined as a third-party observer in the March 1998 WTO
    dispute settlement consultation between Brazil and the EU. The EU
    requested consultations with Brazil in January 1998. Although WTO
    consultations are still pending, Brazil eliminated its import
    finance restrictions in March 1999 for most practical purposes,
    according to the Commerce Department. Phytosanitary Restrictions
    on Wheat: The access of U.S. wheat to the Brazilian market was
    removed in September 1996, when the government of Brazil
    effectively banned U.S. wheat imports due to concerns about the
    wheat fungus Tilletia controversa Kuhn. Prior to 1996, U.S growers
    exported about 750,000 tons of wheat to Brazil-a leading importer
    of wheat. However, the United States and Brazil reached agreements
    on U.S. hard red winter wheat after Brazil eliminated its
    phytosanitary restrictions Page 53
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies Appendix I
    Priority Import Policies of Korea, Brazil, Indonesia, and Thailand
    on this type of wheat in April 1998. Brazil's decision was based
    on strong scientific evidence presented in a pest risk assessment.
    Although Brazil's government published an executive order to allow
    entry of U.S. hard red winter wheat into Brazil in November 1998,
    the United States has not made any wheat sales to Brazil since the
    executive order was signed. The United States continues to work
    bilaterally with Brazil to resolve outstanding issues that
    restrict market access for other types of wheat as well as other
    U.S. exports such as poultry. Automobile Program: In December
    1995, Brazil enacted an auto program that offers automobile
    manufacturers reduced import duties on automobiles and automobile
    parts, and other benefits if they export certain quantities of
    parts and vehicles and meet local content targets in their
    Brazilian plants. This program adversely affects U.S. exports of
    autos and auto parts to Brazil by distorting investment, sourcing,
    and production decisions. The United States also believes that the
    program violates the WTO's provisions on trade-related investment
    measures. As a result, the United States requested WTO dispute
    settlement consultations with Brazil on these measures in August
    1996. In October 1996, USTR initiated a Section 301 investigation
    of Brazil's practices. In January 1997, USTR requested additional
    consultations with Brazil in the WTO, focusing specifically on new
    aspects of its auto regime that were introduced following the
    earlier consultations. These included tariff rate quotas6 for
    Korea, Japan, and the EU, and incentives to establish production
    facilities in specific regions of Brazil. The United States and
    Brazil signed an agreement settling the dispute in March 1998, and
    USTR terminated its investigation. In this regard, Brazil
    committed to eliminate the trade- and investment-distorting
    measures in its auto regime by December 31, 1999, and agreed not
    to extend the WTO trade-related investment measures to MERCOSUL
    partners when they unify their auto regimes in the year 2000.
    Currently, USTR is monitoring Brazil's implementation of the March
    1998 agreement, and Brazil is negotiating with its MERCOSUL
    partners to establish a new auto regime. The U.S. government is
    monitoring Brazil's MERCOSUL negotiations. Customs Valuation and
    Import Licensing: In January 1997, Brazil's Secretariat of Foreign
    Trade implemented a computerized trade documentation system to
    handle import licensing.  According to USTR, as 6 Tariff rate
    quotas allow a set quantity of a commodity to be imported at a
    guaranteed low tariff rate called the "in-quota" duty. Imports in
    excess of this quantity are subject to an agreed higher tariff
    rate called the "out-quota duty." Page 54
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies Appendix I
    Priority Import Policies of Korea, Brazil, Indonesia, and Thailand
    of January 1, 1999, the system charged a fee of Real$30 per import
    statement and Real$10 per product added to the statement.  An
    increasing number of products are exempt from automatic licensing.
    In addition, beginning in October 1998, Brazil issued a series of
    administrative measures that required additional sanitary and
    phytosanitary, quality, and safety approvals from various
    Brazilian government entities for products subject to nonautomatic
    licenses.  The October measures and the use of minimum price lists
    in conjunction with licensing have been characterized by Brazil as
    a deepening of its existing import licensing regime and as part of
    a larger strategy to prevent under-invoicing.  However, according
    to USTR, the use of minimum price lists raises questions about
    whether Brazil's regime is consistent with its obligations under
    the WTO, and these practices have proven to be a barrier to U.S.
    exports. According to U.S. government and WTO sources, in recent
    years Indonesia Indonesia    has liberalized its foreign trade and
    investment systems and has taken a number of important steps to
    reduce protection. The Indonesian government has done so by
    issuing periodic deregulation packages that have incrementally
    reduced overall tariff levels, simplified the tariff structure,
    replaced nontariff barriers with more transparent tariffs, and
    encouraged foreign and domestic private investment. According to
    USTR, Indonesia's average unweighted tariff7 has fallen to 9.5
    percent from 20 percent in 1994, and about 160 tariff lines
    remained subject to restrictive import licenses, down from 1,112
    lines in 1990. A November 1998 WTO report on Indonesia's trading
    system commended Indonesia for its trade and investment
    liberalization. However, the report noted that the pace of trade
    and investment liberalization had slowed during 1994-96. It added
    that, prior to its financial crisis, Indonesia had made limited
    progress in removing nontariff import barriers and export
    restrictions and that liberalization in agriculture and forestry
    had lagged reforms in other sectors. Despite this progress,
    Indonesia still maintains a number of restrictions to imports and
    foreign investment, according to the U.S. government and the WTO.
    In recent years, Indonesian barriers to imports included high
    tariffs on certain items; quantitative restrictions on some
    agricultural and other goods; and barriers to service imports,
    including restrictions on wholesale and retail distribution.
    Barriers to foreign investment have included restrictions and
    prohibitions in certain sectors, such as film and video
    distribution and forest concessions. Since 1996, the most
    prominent import 7 Unweighted tariffs are the simple average
    applied tariff rate across the entire tariff schedule unadjusted
    for trade volumes. Page 55
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    Priority Import Policies of Korea, Brazil, Indonesia, and Thailand
    barrier issue between the United States and Indonesia has
    concerned Indonesia's IPR protection. Since April 1996, Indonesia
    has been on the U.S. government's priority watch list for
    inadequate intellectual property protection. The U.S. executive
    branch has cited the following reasons for this designation: (1)
    trademark infringement, including software, book, video,
    videocassette disk, drug, and apparel piracy; (2) audiovisual
    market access barriers; (3) inconsistent enforcement and
    ineffective legal system; and (4) amendments to the copyright,
    patent, and trademark laws that the U.S. government believes are
    not fully consistent with Indonesia's obligations under the WTO
    TRIPS agreement. In June 1998 the U.S. executive branch presented
    to the Indonesian government a plan for improving IPR protection
    that could result in Indonesia's removal from the priority watch
    list. However, according to USTR, Indonesia has not been able to
    devote significant resources to improving or enforcing its IPR
    regime due to its severe economic crisis. Thailand's average
    tariff rate in 1998 was about 18 percent. In addition, as Thailand
    one of the 10 members of the Association of Southeast Asian
    Nations (ASEAN), Thailand has pledged to reach and maintain
    tariffs on trade with its ASEAN partners of between 0 and 5
    percent by 2003. Generally, the Thai government has continued to
    lower tariff rates pursuant to goals established in 1994. However,
    USTR and other U.S. government agencies have identified several of
    Thailand's trade policies and practices that affect U.S. exports
    to Thailand, such as weak IPR enforcement. These barriers include
    the following: Inadequate Protection of Intellectual Property
    Rights: This is the leading trade issue between the United States
    and Thailand. In this regard, USTR initiated Section 301
    investigations in 1990 and 1991 regarding Thailand's lack of
    adequate protections over intellectual property. Both
    investigations found Thailand's copyright and patent protections
    to be unreasonable and burdensome to U.S. commerce. Thailand made
    significant improvements to its IPR legal regime and enforcement
    efforts in the 1990s. Despite this progress, Thailand has remained
    on the U.S.' Special 301 "watch list" since November 1994 because
    of long-standing IPR enforcement weaknesses. According to USTR's
    1999 National Trade Estimate report, the U.S. copyright industry
    estimates it lost nearly $200 million from intellectual property
    rights infringements in Thailand. In response to these concerns,
    the Thai government implemented a series of legal reform
    initiatives, established a special Intellectual Property and
    International Trade Court, and concluded an intellectual property
    enforcement action plan with the United States. However, U.S.
    government officials maintain that significant enforcement
    problems remain, piracy rates continue to climb, and Page 56
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    Priority Import Policies of Korea, Brazil, Indonesia, and Thailand
    monetary penalties or jail sentences are rarely imposed to deter
    such crimes. In February 1999, a new enforcement strategy was
    implemented, but at the time of our report no information
    regarding the success of this effort was available. High Tariffs
    on Automobiles: In addition to currently applied domestic auto
    sector protections (local content restrictions), which must be
    removed by January 1, 2000, pursuant to Thailand's commitments
    under the WTO agreement on trade-related investment measures,
    Thailand imposes significantly high tariffs on automobiles. While
    Thailand's overall average tariff rate is relatively low when
    compared with its ASEAN neighbors, its tariffs on automobiles
    remain high at 80 percent. However, Thailand's automobile tariffs
    have never risen to an actionable level, in part because
    Thailand's tariffs are bound in the WTO, and Thailand actually
    applies lower tariffs ranging from 42.5 to 68.5 percent.
    Furthermore, some U.S. car manufacturers assemble automobiles in
    Thailand, thus avoiding the higher tariffs. These manufacturers,
    however, pay tariffs up to 35 percent on automotive parts imports.
    Thailand recently announced its latest plans to bring its national
    car policy into conformity with its agreement on trade-related
    investment measures obligations as required by January 1, 2000.
    The plans are being studied by U.S. government officials.
    Inefficient Customs Operations: USTR and the State Department
    report that Thailand's customs clearance processes are arbitrary,
    irregular, and inefficient. In 1997, the United States and nine
    other chambers of commerce, including Japan's, vigorously and
    publicly complained about Thailand's customs procedures. The U.S.
    government is concerned about excessive paperwork and formalities,
    lack of coordination between customs and other import-related
    agencies, and lack of modern computerized processes. However,
    Thailand has made progress in reforming some areas of its customs
    operations, such as express shipment handling, payment procedures,
    and document simplification. The U.S. embassy in Bangkok, the U.S.
    Customs Service, the IMF, and others have provided the Thai
    government with technical assistance to improve the customs
    clearance process. High Duties on Certain Agriculture and Food
    Products: Specific duties for most agricultural and food products,
    with the exception of wine and spirits, no longer exist, but
    import duties on high-value fresh and processed foods remain high
    at about 60 percent. As a signatory to the WTO, Thailand committed
    to reduce tariffs and began to do so in 1995. However, by the end
    of the tariff reduction phase-in period in 2004, duties Page 57
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    Priority Import Policies of Korea, Brazil, Indonesia, and Thailand
    will still be in the 30 to 40 percent range for most consumer-
    oriented food products, with the notable exception of apples and
    raw tree nuts. In addition to high tariffs, time-consuming and
    cumbersome licensing and registration procedures can delay the
    entry of new products into the Thai domestic market. Investment
    Restrictions: Thailand's agreement with the IMF contains a
    commitment to accelerate privatization of state holdings in the
    areas of energy, public utilities, telecommunications, and
    transportation. Progress in this regard has been slow, but the
    Thai parliament has recently passed significant bankruptcy,
    foreclosure, and privatization laws that are aimed at expediting
    the privatization process. This, in turn, is expected to increase
    opportunities for U.S. investors to gain market access to those
    service sectors. Under the 1966 Treaty of Amity and Economic
    Relations, with the exception of a few sectors, the United States
    is exempted from restrictions on foreign equity investment in
    Thailand.  However, there are still Thai government restrictions
    in the communications, transport, and banking sectors; the
    exploitation of land and natural resources; and the trade of
    domestic agricultural products. Page 58
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    Disputes and U.S. Countervailing Duty Cases Involving Export
    Policies of Brazil, Indonesia, Korea, and Thailand U.S.
    countervailing duty (CVD) laws and the WTO Agreement on Subsidies
    and Countervailing Measures provide redress mechanisms against the
    adverse effects of subsidization. U.S. companies may file CVD
    petitions directly with the Commerce Department. Commerce and the
    International Trade Commission (ITC) separately determine if the
    subsidies are countervailable and have harmed U.S. industry. To
    obtain redress through the WTO's subsidies agreement, a U.S. firm
    informally brings its concerns to the U.S. government, which
    investigates the matter and then, if warranted, raises the issue
    in the appropriate WTO forum. We reviewed the export policies of
    four current IMF borrowers: Brazil, Indonesia, Korea, and
    Thailand. Since 1996, the United States has formally invoked the
    WTO's dispute settlement procedures over a number of Brazilian,
    Indonesian, and Korean subsidies and has found subsidies in
    Brazil, Korea, and Thailand to be countervailable under U.S. trade
    law. For example, the United States invoked dispute settlement
    procedures against Korean subsidies to its beef industry and a
    Brazilian subsidy to its auto industry, and determined that both
    countries were providing countervailable subsidies to their steel
    industries. Among other actions, the United States invoked WTO
    dispute settlement procedures against Indonesia's automotive
    subsidies and determined a variety of Thai subsidies to be
    countervailable. Under the Tariff Act of 1930, as amended, U.S.
    firms that are materially Mechanisms Available injured by foreign
    subsidized goods in the U.S. market can obtain relief to
    Anticipate and               from certain actionable subsidies by
    seeking to have countervailing duties levied on the subsidized
    imported goods.1 CVD laws are administered Remedy Adverse
    jointly by the Department of Commerce and the ITC. Effects of
    Foreign Export Policies                 An interested party may
    file a CVD petition with Commerce alleging that a U.S. industry is
    materially injured, or is threatened with material injury, by
    reason of imports that are being subsidized by foreign
    governments. If the petition demonstrates a reasonable indication
    that a subsidy exists and is causing material injury, Commerce and
    the ITC conduct separate but parallel investigations. The Commerce
    Department determines whether the imported product is being
    subsidized, either directly or indirectly. An actionable subsidy
    exists when the foreign firm making or exporting the product (1)
    receives a "financial contribution" by a government or public
    body, (2) receives a "benefit" from that contribution, and (3)
    receives a financial contribution that is "specific" (that is, it
    is based upon export performance or limited to a certain industry
    or group of industries). 1 19 U.S.C. 1671, et seq. Page 59
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies Appendix II WTO
    Disputes and U.S. Countervailing Duty Cases Involving Export
    Policies of Brazil, Indonesia, Korea, and Thailand The ITC
    determines whether a U.S. industry is materially injured, or
    threatened with material injury, or that the establishment of an
    industry in the United States is materially retarded, by reason of
    imported subsidized products. Material injury is defined as a harm
    that is not inconsequential, immaterial, or unimportant.2 In
    determining the threat of material injury, the ITC considers
    whether the subsidy practice indicates the likelihood of
    substantially increased imports and whether such an increase would
    result in material injury to U.S. industry. If the Commerce
    Department finds an actionable subsidy and the ITC finds material
    injury, Commerce will then issue a CVD order instructing the U.S.
    Customs Service to collect additional duties on the imported
    product in an amount equal to the subsidy margin determined by
    Commerce in its investigation. While U.S. CVD law addresses
    foreign subsidized imports in the United The WTO Subsidies
    States, under the WTO's Subsidies and Countervailing Measures
    Agreement            Agreement, U.S. industries have a redress
    mechanism against foreign subsidies that affect U.S. business in
    markets outside the United States, including the subsidizing
    government's market. Under the subsidies agreement, a subsidy is
    defined as a financial contribution that imposes a cost on the
    government providing it, and confers a benefit to certain
    enterprises. The subsidy must be causing serious prejudice to a
    U.S. industry.3 In 1995, the U.S. Commerce Department created the
    Subsidies Enforcement Office (SEO) to assist U.S. businesses by
    monitoring foreign subsidies and identifying subsidies that can be
    remedied under the WTO's subsidies agreement when they adversely
    affect U.S. business interests. One of the focuses of the SEO's
    subsidies monitoring program is to ensure compliance with the
    subsidy-related conditions of the IMF stabilization packages and
    to uncover subsidy practices that are actionable under the WTO's
    subsidies agreement. Unlike U.S. CVD law, a concerned U.S.
    business does not file a formal petition with the SEO to allege a
    foreign subsidy in violation of the WTO subsidies agreement.
    Instead, the SEO receives information concerning foreign subsidy
    practices through informal contacts with U.S. businesses, trade
    associations, U.S. embassies, and the SEO's own monitoring
    efforts. 2 Section 771(7) of the act (19 U.S.C. 1677(7)). 3
    Article 6.1 of the Agreement on Subsidies and Countervailing
    Measures. Page 60
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    Disputes and U.S. Countervailing Duty Cases Involving Export
    Policies of Brazil, Indonesia, Korea, and Thailand Once the SEO
    has evaluated all available information on the particular alleged
    subsidy, SEO will confer with USTR on how to proceed. In many
    cases, an effective way to proceed is through informal channels,
    bilateral meetings, and in WTO subsidies agreement committee
    meeting discussions. However, formal enforcement mechanisms are
    also provided for under the WTO subsidies agreement, including
    dispute settlement action in the WTO. The WTO Committee on
    Subsidies and Countervailing Measures also provides regular
    surveillance. In May 1999, the United States participated in
    review by the committee of the full notifications submitted to the
    WTO by countries that were due on July 1, 1998. Korea's
    notification was among those that were discussed at that review.
    Over the past 2 years, the United States has posed a series of
    questions to all four IMF borrower countries in our review
    regarding their WTO subsidy notifications. In addition, it invited
    the three Asian borrowers to discuss their IMF financing
    arrangements at a special meeting held in April 1998. The U.S.
    government tracks export and domestic policies of various
    countries for possible subsidization and routinely examines
    subsidies notified to the WTO for conformity with the subsidies
    agreement. The SEO also has created a "Subsidies Enforcement
    Library" that contains such WTO notifications, Federal Register
    notices associated with past U.S. CVD cases, and other
    information. Commerce and USTR jointly prepare an annual report to
    Congress on the WTO subsidies agreement. In addition, USTR, State,
    and Commerce include export policies in their regular reports on
    trade barriers. Finally, an interagency task force under the
    leadership of the U.S. Department of the Treasury is reviewing
    trade policies of key IMF borrower countries, including export
    policies. All of these rely heavily on industry to identify and
    make known potential problems. In February 1999, the United States
    requested consultations under the U.S. WTO and CVD
    WTO dispute settlement mechanism concerning Korean government
    Cases Involving Korea support to its beef industry. The United
    States alleged that Korean regulations discriminated against and
    constrained opportunities for the sale of imported beef in Korea.
    The United States also alleged that Korea provided domestic
    support to its cattle industry in amounts that exceeded its WTO
    tariff reduction schedule. The United States contended that such
    support amounts to domestic subsidies that contravene the WTO
    Agreement on Agriculture. A panel was formed to consider the
    matter on May 26, 1999. Australia also initiated WTO dispute
    settlement procedures against Korean beef practices in the WTO on
    April 13, 1999. Page 61                            GAO/NSIAD/GGD-
    99-174 IMF Borrowers' Trade Policies Appendix II WTO Disputes and
    U.S. Countervailing Duty Cases Involving Export Policies of
    Brazil, Indonesia, Korea, and Thailand Also, within the last 5
    years the Commerce Department has conducted three CVD
    investigations, all involving potential Korean government
    subsidies to its steel industry. Commerce launched the first of
    these investigations in April 1998 to determine whether Korea was
    providing countervailable subsidies to certain Korean producers
    and exporters of stainless steel plate in coils. In its final
    determination in March 1999, Commerce ruled that the subsidy
    existed but that it was not countervailable due to its small size.
    Nevertheless, prior to Korea's recent IMF financing arrangements,
    the Commerce Department found certain other Korean subsidy
    programs to be countervailable. These subsidies involved *
    government-influenced lending, *  government infrastructure
    investments at a port facility used predominantly by a state-owned
    steel company, *  short-term export financing, *  tax reserves for
    export losses, *  tax reserves for overseas market development, *
    investment tax credits, and *  electricity discounts from a
    government-owned power company. In July 1998, the Commerce
    Department began another investigation to determine whether Korea
    was providing countervailable subsidies to certain Korean
    producers and exporters of stainless steel sheet and strip in
    coils.  In its final determination in June 1999, Commerce ruled
    that such countervailable subsidies were being provided.  These
    subsidies involved *  government influenced lending; *  the
    purchase of one steel company's divisions by another state-owned
    steel company; *  government-supported infrastructure development
    at a port facility used predominantly by a state-owned steel
    company; *  export industry facility loans; *  short-term export
    financing; *  tax reserves for export losses; *  tax reserves for
    overseas market development; *  investment tax credits; *  utility
    rate discounts from the government-owned electricity provider; *
    loans from the National Agricultural Cooperation Federation; and *
    two-tiered pricing structure for domestic customers of one steel
    company. Page 62                             GAO/NSIAD/GGD-99-174
    IMF Borrowers' Trade Policies Appendix II WTO Disputes and U.S.
    Countervailing Duty Cases Involving Export Policies of Brazil,
    Indonesia, Korea, and Thailand Finally, in March 1999, the
    Commerce Department initiated an investigation to determine
    whether Korea, among other countries, was providing
    countervailable subsidies to certain manufacturers, producers, or
    exporters of certain cut-to-length, carbon-quality steel plate. As
    part of the investigation that was still ongoing as of April 30,
    1999, the Commerce Department is reviewing alleged countervailable
    subsidies involving *  a two-tiered pricing structure to domestic
    customers of one steel company; *  government-directed credit
    programs; *  Korea's Private Capital Investment Act; *
    government-supported infrastructure development at a port
    facility; *  certain tax programs and asset revaluation under
    Korea's Tax Reduction and Exemption Control Act; *  special cases
    of Tax for Balanced Development Among Areas; *  certain industry
    promotion and research and development subsidies; *  Overseas
    Resource Development loan and grant programs; *  free trade zones;
*  excessive duty drawbacks; *  port facility fees; *
    preferential utility rates; *  a scrap reserve fund; *  export
    insurance rates by the Korean Export Insurance Corporation; *
    short-term export financing; *  Korean Export-Import Bank loans; *
    Export Industry Facility Loans and Special Facility Loans; and *
    loans from the Energy Savings Fund. Since 1996, the United States
    has participated in two WTO dispute Brazil      settlement
    proceedings involving Brazilian subsidies. The United States
    invoked WTO dispute settlement procedures and held consultations
    with Brazil regarding various aspects of its automotive regime in
    August 1996, including provisions in its WTO-notified subsidy
    program for automobiles. In March 1998, the United States and
    Brazil signed an agreement settling the dispute. (See app. I for
    more details.) Japan and the European Union have also invoked WTO
    dispute settlement procedures in response to various aspects of
    Brazil's automotive regime. These consultations were pending as of
    April 30, 1999. In a second dispute, in June 1996, Canada
    requested consultations with Brazil regarding its claim that
    export subsidies granted by PROEX, a Brazilian government export
    financing program, to foreign purchasers of Brazil's Embraer
    aircraft were inconsistent with the WTO's Agreement on Page 63
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies Appendix II WTO
    Disputes and U.S. Countervailing Duty Cases Involving Export
    Policies of Brazil, Indonesia, Korea, and Thailand Subsidies and
    Countervailing Measures. Canada later requested establishment of a
    WTO dispute settlement panel to review the matter. The United
    States and the European Union reserved their rights as third
    parties in the dispute. One of the many U.S. submissions to the
    panel challenged Brazil's position that it could provide export
    subsidies to counter nonexport credit subsidies offered by another
    WTO member. In April 1999, the dispute settlement panel found that
    Brazil did not meet the conditions that allow developing nations
    more time than developed nations to remove prohibited export
    subsidies, such as PROEX. The panel declared that PROEX's interest
    equalization program was a prohibited export subsidy and that it
    must be withdrawn without delay. In addition to the WTO disputes,
    the U.S. government has preliminarily determined one Brazilian
    subsidy to its steel industry to be countervailable. In October
    1998, the Commerce Department began investigating whether Brazil
    was providing countervailable subsidies to manufacturers of
    certain hot-rolled flat rolled carbon-quality ("hot-rolled") steel
    products. In its preliminary decision in February 1999, Commerce
    ruled that some equity infusions and debt-to-equity conversions
    provided to several of these manufacturers were countervailable
    because they were inconsistent with the usual investment practices
    of private investors. The net subsidy rate for these manufacturers
    ranged from 6.62 percent to 9.45 percent. The Commerce Department
    also preliminarily ruled that tax deferrals that were provided to
    some of the same steel manufacturers were not countervailable
    because they were not limited to any specific industry. According
    to USTR, since 1996, Indonesia's most controversial trade policy
    Indonesia    has been its efforts to develop an indigenous
    automotive industry. Two programs were involved. One program,
    which was begun in 1993 and was to be continued until the year
    2000, granted import duty relief to certain automotive parts and
    accessories for use in assembling or manufacturing motor vehicles
    based on the percentage of local content in the finished vehicles.
    The other subsidy related to the 1996 establishment of a national
    car program. Under this program, Indonesian companies designated
    as "pioneer firms" were permitted to import tariff-free finished
    automobiles designated as "national cars," and to sell the
    national cars luxury tax free for 3 years. A single Indonesian
    company was granted pioneer status, and in 1996 it began importing
    finished national cars from Korea, where they were produced by a
    company that was jointly owned by the Indonesian company and a
    Korean firm. In October 1996, 6 months after Indonesia announced
    the establishment of its national car program, the United States
    and the European Union Page 64
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies Appendix II WTO
    Disputes and U.S. Countervailing Duty Cases Involving Export
    Policies of Brazil, Indonesia, Korea, and Thailand initiated WTO
    dispute settlement procedures against the program and against the
    other automotive sector subsidy, the local content tariff
    exemption.4 After its financial crisis began and while the WTO
    dispute settlement procedure still was ongoing, Indonesia
    committed to the IMF to eliminate the national car program by
    removing its special tax, customs, and credit privileges. In
    January 1998, while the WTO dispute was ongoing, Indonesia revoked
    these privileges as a commitment to the IMF. Indonesia also
    pledged to the IMF to phase out tariff privileges tied to local
    content levels, although a WTO panel had not reached a final
    decision. In June 1998, the WTO panel issued a final ruling
    against Indonesia, and Indonesia was given until July 1999 to
    eliminate the second subsidy. In January 1999, the Indonesian
    government announced that it would formulate a new national car
    policy that would conform to its WTO obligations. In addition to
    the national car program, during 1997-99 the U.S. government has
    investigated one other Indonesian export subsidy under U.S. CVD
    law. In response to a complaint from a U.S. company regarding
    extruded rubber thread, on March 26, 1999, the Commerce Department
    found that the Bank of Indonesia's rediscount export financing
    program was a subsidy because, during 1997 under the program,
    "special" exporters received financing at a lower rate than was
    available to other firms. However, the Commerce Department
    determined that the subsidy provided to the two Indonesian
    producers of extruded rubber thread products in question was not
    countervailable because the subsidy amounted to less than 3
    percent of the value of the products. Since 1996, the United
    States has not formally raised concerns about Thai Thailand
    subsidies in the WTO; however, in the past the U.S. government has
    found a number of Thai subsidies to be countervailable. Some of
    these programs were found to be countervailable with regard to
    certain apparel, steel pipe and tubing, ball bearings, and pocket
    lighters, but no CVD order was issued with respect to pocket
    lighters because the ITC did not find material injury to the
    competing U.S. industry. These programs were found to be
    countervailable: *  Export packing credits, which are short-term,
    preshipment export loans, provided and recorded on a shipment-by-
    shipment basis, and approved new export packing credit loans
    totaling $500 million to stimulate export activity in reaction to
    Thailand's lagging exports were countervailable. The Commerce
    Department determined that this program was countervailable 4 At
    the same time, Japan initiated WTO dispute procedures against the
    national car program only. Page 65
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies Appendix II WTO
    Disputes and U.S. Countervailing Duty Cases Involving Export
    Policies of Brazil, Indonesia, Korea, and Thailand in the context
    of investigations of certain apparel, steel pipe and tubing, and
    other products. *  Tax certificates for exporters, which are
    issued by the Thai government to exporters, and which are
    transferable, were found to be countervailable; these certificates
    also rebate indirect taxes and import duties levied on inputs used
    to produce exports. *  Tax and duty exemptions that allow
    exporting companies to import machinery and equipment free of
    import duties and business and local taxes were countervailable. *
    Income tax exemptions that allow companies to obtain 3 to 8 year
    exemptions from payment of corporate income tax on profits derived
    from net profits for losses incurred during the tax exemption
    period were found to be countervailable. *  Goodwill and royalties
    tax exemption status, which is granted to promoted businesses for
    income arising from goodwill, royalties, and other payments for a
    period of up to 5 years were countervailable. *  Tax deductions
    for dividends that allow promoted businesses receiving tax
    exemptions to receive an additional deduction from taxable income
    for dividends received from promoted activities were found to be
    countervailable. *  Assistance for trading companies, which the
    Board of Investments authorized in 1978 to provide certain
    incentives to eligible trading companies, were countervailable. *
    Duty exemption for raw materials that allows companies to import
    raw and "essential " materials used in the production, mixing, and
    assembly of exports, free of import duties were found to be
    countervailable. *  Permission to maintain foreign currency bank
    accounts, which allows a Thai company to hold a foreign currency
    account, is countervailable in the event the account is
    denominated in U.S. dollars. Page 66
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies Appendix III
    Comments From the Department of the Treasury Page 67
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies Appendix IV
    Objectives, Scope, and Methodology This report (1) identifies the
    extent to which current International Monetary Fund (IMF) borrower
    countries restrict international trade and the countries whose
    trade has the greatest potential to affect the United States; (2)
    describes in detail the reported trade barriers and export
    policies of four IMF borrowers that are among those with the
    greatest capacity to affect the United States-Brazil, Indonesia,
    the Republic of Korea, and Thailand-and recent actions reported to
    have been taken to reduce those barriers or modify policies; (3)
    identifies actions, in the context of their current IMF programs,
    the four countries have taken or are committed to take to
    liberalize their trading systems; and (4) determines the extent to
    which the impact of the four countries' export policies on the
    United States can be predicted and measured and which U.S.
    industry sectors might be affected by changes in trade from these
    countries. Except where otherwise noted, we included information
    as of April 30, 1999. We defined IMF borrower countries as those
    98 member countries that had IMF credit and loans outstanding in
    calendar years 1997 or 1998.1 These 98 countries have used IMF
    credit at some point during the past 10 years and still have
    outstanding obligations. To determine the degree to which current
    IMF borrower countries restrict Assessing Borrowers'
    international trade, we analyzed several indicators of
    restrictiveness, Trade Restrictiveness    including average tariff
    rates;2 nontariff barriers;3 and indexes constructed by the IMF,
    the Heritage Foundation, and the Fraser Institute. The IMF index
    is composed of three measures: an index of average tariff rates
    and other duties on imports, an index of nontariff barriers, and
    an overall index that rates trade restrictiveness on a 10-point
    scale that weights nontariff barriers heavier than tariff
    barriers. The overall index classifies countries as either "open"
    (1 to 4), "moderate" (5 to 7), or "restrictive" (8 to 10). 1 This
    includes credit from the use of the IMF's General Resource
    Account, as well as from loans made under three concessional
    (below-market-interest-rate) programs, the Structural Adjustment
    Facility, the Enhanced Structural Adjustment Facility, and the
    Trust Fund. 2 Average tariff rates are the average of the applied
    rate across the entire tariff schedule. We obtained information on
    average tariff rates from various sources, including the World
    Trade Organization (WTO), the United Nations Conference on Trade
    and Development, the Asia-Pacific Economic Cooperation forum, the
    Interamerican Development Bank, the International Trade Commission
    (ITC), and the Office of the U.S. Trade Representative (USTR). 3
    Nontariff import barriers include quantitative restrictions, state
    trade monopolies, restrictive foreign exchange practices that
    affect a country's trade system, and quality controls and customs
    procedures that act as trade restrictions. Page 68
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies Appendix IV
    Objectives, Scope, and Methodology Although these indicators do
    not comprehensively measure the wide variety of policies that
    countries may use to restrict trade, they do reflect important
    barriers and provide information on the relative restrictiveness
    of countries among each other and over time. We also collected
    information on borrowers' tariff levels from other sources. We
    then compared how the IMF index rated countries to the way the
    Heritage and Fraser Institute measures did so. We found that the
    three organizations' measures rated countries similarly and that
    the tariff rates used by the three indexes were similar to the
    tariff rate data we collected independently. Finally, we
    supplemented this information with information from USTR and the
    WTO on membership in the WTO, the existence of other multilateral
    and bilateral trade agreements with the United States, formal
    market access disputes filed, and types of barriers identified in
    USTR's annual National Trade Estimate Report on Foreign Trade
    Barriers. We selected four of the eight current IMF borrowers for
    more detailed Four Countries' Import study-Brazil, Indonesia,
    Korea, and Thailand. We selected these four Barriers and Export
    countries because, in addition to being important U.S. trading
    partners, they are among the 10 top current borrowers and
    currently have IMF Policies                        financing
    arrangements. Mexico is the largest U.S. trading partner among
    current IMF debtors, and Mexico is the fourth largest current IMF
    debtor. We did not select Mexico for our study, however, because
    Mexico is not currently in an IMF financing arrangement and thus
    is not currently eligible to borrow more funds from the IMF, and
    because U.S.-Mexican trade is governed by the North American Free
    Trade Agreement. To identify the priority4 import barriers and
    export policies of Brazil, Indonesia, Korea, and Thailand, we
    relied principally on USTR's most recent three (1997-99) National
    Trade Estimate Report on Foreign Trade Barriers. These reports
    identify those foreign import policies and practices that have the
    greatest potential to affect U.S. exports. We also relied upon
    USTR's Trade Policy Agenda and Annual Report of the President of
    the United States on the Trade Agreements Program. These reports
    identify the executive branch's annual trade priorities. We also
    used recent State Department Country Reports on Economic Policy
    and Trade Practices. In addition, we interviewed U.S. government
    officials from USTR, the Department of Commerce, and the
    Department of State. We reviewed the results of countervailing
    duty reviews and investigations by the ITC and the Department of
    Commerce's International Trade Administration, which 4 We use
    "priority" to characterize these policies because the U.S.
    government has been particularly active in reporting on and
    addressing certain trade practices in specific sectors. Page 69
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies Appendix IV
    Objectives, Scope, and Methodology were reported in the Federal
    Register. And we met with officials from the Department of the
    Treasury and the IMF to discuss import and export policies in the
    context of each country's current IMF program. Information on
    foreign laws and policies does not reflect our independent legal
    analysis but is based on interviews and secondary sources. To
    identify and determine the status of trade liberalization measures
    that Trade Liberalization in Brazil, Indonesia, Korea, and
    Thailand have undertaken or have committed Four Countries' IMF
    to undertake within the context of their recent IMF financing
    arrangements, we defined their "recent" IMF programs as those that
    Programs                        started since June 1997 when the
    Asian financial crisis began in Thailand. Several of the countries
    technically have had more than one IMF financing arrangement since
    then because their original programs were expanded. We considered
    a measure to be trade liberalization in nature if it involved
    eliminating or lowering either tariffs or nontariff barriers to
    imports; concerned policies that promote exports, such as
    subsidies; or involved export restrictions. We reviewed public and
    nonpublic country and IMF documents, including the countries'
    letters of intent and memorandums of economic and financial
    policies. We also reviewed IMF staff reports on the countries'
    progress in attaining the objectives of their financing programs
    and met with IMF and U.S. government officials. We based our
    general discussion of the potential impact of export policies
    Assessing the Potential on economic literature and reports that
    explain how the U.S. government U.S. Impact of the
    analyzes the impact of imports and export policies on trade. We
    identified the rank of Brazil, Indonesia, Korea, and Thailand as
    exporters among IMF Countries' Export               borrowers by
    examining data prepared by the IMF. The latest available Policies
    data cover 1997. We identified the four nations' ranks as world
    exporters by examining the WTO's April 1999 report on world trade
    in 1998. Exports net of intra-European Union trade were used. We
    identified the rank of Brazil, Indonesia, Korea, and Thailand as
    suppliers of specific product groups by examining the U.S.
    Department of Commerce's 1999 Industrial and Trade Outlook report
    and the ITC's 1998 annual Trade Shifts report. To identify which
    of the four countries' export policies might harm U.S. industries,
    we reviewed the results of countervailing duty reviews and
    investigations by the ITC and the Department of Commerce's
    International Trade Administration, which were reported in the
    Federal Register. We looked exclusively at subsidies; that is,
    financial contributions by a government that confer a financial
    benefit to selected companies, or that are prohibited by WTO
    agreements. We also relied on the Commerce Department's Electronic
    Subsidies Enforcement Library to review countervailing duty cases
    filed, and spoke with officials from the Page 70
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies Appendix IV
    Objectives, Scope, and Methodology Department's Subsidies
    Enforcement Office to discuss those cases. In addition, we
    reviewed each of the four countries' most recent export subsidy
    notifications to the WTO's Committee on Subsidies and
    Countervailing Measures. However, information contained in these
    notifications was dated. To determine which subsidies were subject
    to the WTO dispute settlement activity or investigations under
    U.S. countervailing duty law, we reviewed the most current
    Overview of the State-of-Play of WTO Disputes in addition to the
    Commerce Department sources previously cited. Where practicable,
    we identified overlaps and linkages between the various types of
    policies and issues, but the available information was not always
    clear or detailed enough to identify such linkages. We identified
    products that showed rising imports and falling prices by
    examining trade data for the years 1997 and 1998. Specifically, we
    identified product sectors showing large increases in U.S. imports
    from the partner by analyzing all U.S. imports from these nations
    at both the 4- and the 10-digit levels of aggregation of the U.S.
    Harmonized Tariff Classification System. Products that met certain
    value, market share, and import increase thresholds were analyzed
    further.5 First, we netted out import surges that appeared to be
    coming at the expense of other foreign suppliers, instead of U.S.
    producers.6 Second, we determined whether price declines had
    occurred for the remaining items by calculating unit values of
    imports at the 10-digit level.7 The result of this screening
    process was that 62 4-digit items, amounting to $4.1 billion in
    imports, showed the specified increases in imports and price
    declines, as did 300 10-digit harmonized schedule products,
    accounting for $5.3 billion in imports. In reviewing whether a
    domestic U.S. industry exists, we examined regular monitoring
    reports and secured staff-level insights by selected industry
    experts at the ITC, the U.S. Department of Commerce, the U.S.
    Department of Agriculture, and other sources. A limitation of this
    approach is that it is somewhat imprecise and based on at-hand
    information, which may be limited. However, it was not practicable
    to use other currently available 5 The criteria used at the 4-
    digit level were (1) value, $500,000 minimum value of imports of
    the product category from the partner in 1998; (2) market share,
    the partner accounted for at least 5 percent of total U.S. imports
    of the product; and (3) import increase, imports of the product
    from the partner had increased by 15 percent or more in value
    terms from 1997 to 1998. The criteria used at the 10-digit level
    were: (1) minimum value, $1 million; (2) market share, 5 percent
    of the U.S. import market; and (3) import increase, 20 percent in
    value or quantity terms. 6Specifically, only product sectors that
    showed increases in overall U.S. imports were further analyzed.
    7At the 4-digit level, unit values at all of the 10-digit product
    categories were calculated and then averaged to determine whether
    prices fell for the 4-digit category. Page 71
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies Appendix IV
    Objectives, Scope, and Methodology information on U.S. production
    because it is dated and did not neatly match the classifications
    used for trade and tariff analysis. We identified products that
    were eligible for Generalized System of Preferences treatment by
    examining codes in the U.S. tariff schedule identifying such
    treatment. We discussed the leading import surges and price
    declines identified with staff at the U.S. Department of Commerce
    and the ITC. We relied upon these informal contacts as well as
    information on export policies developed in a previous section and
    information on formal petitions for import relief made under U.S.
    trade law to identify products where concern exists by U.S.
    producers about harm from imports and/or unfair trade practices by
    Brazil, Indonesia, Korea, and Thailand. Such information is
    instructive but must be recognized as indicative only. Fully
    identifying and analyzing the factors contributing to rising
    imports; the nature, extent and impact of competition from imports
    on U.S. producers; and the extent of export subsidies would
    require information that is beyond the scope of this report. We
    performed our work between November 1998 and May 1999 in
    accordance with generally accepted government auditing practices.
    Page 72                               GAO/NSIAD/GGD-99-174 IMF
    Borrowers' Trade Policies Appendix V GAO Contacts and Staff
    Acknowledgments Elizabeth Sirois, (202) 512-8989 GAO Contacts
    David Genser, (202) 512-9617 In addition to those named above, Kim
    Frankena, Tim Wedding, Michael Acknowledgments    Zola, David
    Artadi, Carlos Evora, and Rona H. Mendelsohn made key
    contributions to this report. Page 73
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies Page 74
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies Page 75
    GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies Page 76
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