Additional Help: 200-203 File Name: 200say_051601_cd24 Last Revised: 05/16/2001

A.I.D. Policy Paper

Trade Development

Bureau for Program and Policy Coordination U.S. Agency for International Development Washington, D.C. 20523 July 1986 DEVELOPMENT POLICY PAPER

Table of Contents

Section Page

Executive Summary ...... 1

1. Introduction

11. Trade and Investment in LDC Econon-dc Growth ...... 2

111. Obstacles to Improving LDC Trade Capabilities 3

A. Substitution Strategies ...... 3 B. LDC Parastatal Policies and their Impact on Private Investment ...... 4 C. Lack of International Marketing Information, Experience, and Networks ...... 4 D. Trade Barriers and Market Access ...... 4 E. Low and Unstable Prices of Primary Products ...... 5 F. Financing Constraints and Indebtedness ...... 5 G. Increased Use of Countertrade ...... 5

IV. U.S. Trade Policy and Its Relevance to LDCs ...... 5

V. A.I.D. Policy for Trade Development ...... 6

VI. Specific Components of A.I.D.'s Policy ...... 6

A. The Policy Environment for Trade and Investment . 7 1. The Trade Environment ...... 7 2. The Investment Environment ...... 8 B. Trade Diversification and Technology Transfer ...... 9 C. Trade and Investment Promotion ...... 10 1. Private Sector Activities ...... 11 2. Public Sector Activities ...... 11 3. Small Enterprises and Entrepreneurs ...... 12 4. Government-restricted Markets ...... 12 D. Trade Monopolies and Parastatals ...... E. U.S.-LDC Trade Promotion 13 F. Economic Infrastructure ...... G. U.S. Policy Trade Coordination 15

ANNEX A- The President's Trade Policy Action Plan, Fact Sheet, September 23, 1985 ...... 17 ANNEX B - Background Information on The General Agreement on Tariffs and Trade (GATT) ...... 19 ANNEX C - Background Information on the U.S. Generalized System of Preferences Program (GSP) ...... 20 Executive Summary growing and . These basic prin- ciples have been the cornerstone of U.S. World trade is one of the primary keys to trade policy for over 37 years, and comple- international economic growth and devel- ment the ' belief that only opment; LDC are of increasing through a strengthened international trading importance in achieving a level of sustained system can effective rules governing fair economic growth that will improve the living trade be established, trade liberalization be conditions of the poor, Because foreign negotiated, and disputes be settled. assistance is a relatively less significant source of foreign exchange for LDCs, countries that A.M.'s trade development policy is seek self-sustained economic growth will have designed to encourage LDCs to utilize to rely principally on an expansion and as a key instrument in diversification of trade to meet their energy the process of achieving broad based, needs, and finance of capital goods, sustained economic growth, and place a intermediate inputs, and, in a number of cases, greater reliance on complementary food. The purpose of this policy paper is to pro- domestic competitive markets that support vide direction to A.I.D. in the encouragement of more open trade policies. appropriate LDC trade policies and a framework for the design of trade-related programs and A major focus of the trade development projects. policy is on building and LDC private enterprise ties on a con- tinuing, long-term basis, consistent with For developing countries, sound trade policies the broad American objectives of trade are an integral component of an effective liberalization, The formation of such ties development strategy that will stimulate growth should lead to: and the productive use of natural and human resources. The opening of markets to foreign e development of stronger LDC economies trade is an important step in accelerating based on the efficiency of market-based economic growth. Exports play a vital role in resource allocation; long-term job creation and overall employment in an LDC's economy. * development and strengthening of mutual econon-dc interests between developed countries and LDCs.; Despite the advantages of an outwardlooking * encouragement of entrepreneurship, trade policy as a mechanism for achieving economic institution building, and reliance economic growth, there are many barriers that on sources of private finance; and must be overcome before such a policy can be pursued successfully by an LDC. These barriers * adoption of appropriate econon-tic include import substitution strategies; LDC policies. parastatal policies and their impact on private investment; the LDC's lack of international A.I.D. will focus its trade development marketing information, experience, and efforts within the framework of the four networks; industrialized countries' trade barriers pillars. Specifically, the policy directs that and market access policies; low and unstable A.I.D. policy dialogue, programs, and proj- prices of primary products; financing constraints ects (1) establish a policy environment that and LDC indebtedness; and increased use of is conducive to private enterprise and countertrade. expanded participation in international trade; (2) encourage the transfer of technology, skills, and information required The U.S. view of appropriate trade policies to expand and diversify LDC agricultural for both developed and developing coun- and industrial bases for production in tries derives from the same basic principles areas with comparative advantages; (3) to which the United States itself subscribes. support trade and investment promotion A.I.D.'s policy on trade and its role in efforts; (4) introduce or expand private development are fully consistent with and sector competition in the export or import of derive from the following three fundamental essential or economically important com- principles of U.S. trade policy: (1) free and modities; (5) broaden the scope of export open trade benefits all nations; (2) fair trade development projects to provide for greater is essential to support ; and (3) an U.S.-LDC two-way trade opportunities; and effective international trading system is (6) encourage prudent investments in essential to preserve open markets and infrastructure to improve an LDC's trade

I position. The guidance reflects A.I.D.'s in an LDC's economy. If the processes experience with trade policy and projects, and used for export production are labor- should be applied when a Mission has made the intensive, the country will realize significant decision to pursue trade or export development employment gains in the short- and as part of its economic development strategy- long-term. Although foreign assistance may be needed in Trade Development the early stages of development of the poorest LDCs to help provide capital and to Policy Paper develop export-oriented institutions, this aid becomes less important as an LDC's I. Introduction capacities to export are strengthened. Once World trade is one of the primary keys to their industrialization process begins, aid international economic growth and development; should be used to encourage those countries LDC exports are of increasing importance in receiving assistance to graduate in a timely achieving a level of sustained economic growth fashion from that assistance. For example, the that will improve the living conditions of the poor. economic well being and growth prospects of Because foreign assistance is a relatively less many emerging middle-income developing significant source of foreign exchange for LDCs, countries now depend on their ability to countries that seek self-sustained economic growth access international product and financial will have to rely principally on an expansion and markets rather than on foreign assistance. diversification of trade to meet their energy needs, Export earnings in many LDCs contribute a far and finance imports of capital goods, intermediate more significant proportion of foreign inputs, and, in a number of cases, food. A.I.D. will exchange resources than Official assist LDCs in improving their ability to trade Development Assistance; the LDC's export because, through expanded trade, industrialized earnings of $324 billion in 1983 amounted to and developing countries benefit from increased 10 times their inflow of resources from foreign economic efficiency, higher levels of income and aid. With the flow of foreign assistance employment, and greater access to technology. unlikely to expand in the foreseeable future, This approach is consistent with U.S. Government reliance on trade as a means to earn foreign trade policy, which has historically promoted exchange will be of even more critical policies oriented towards liberalizing world importance for most LDCs. markets and limiting government management of trade and investment. Recent studies have confirmed the strong relationships between export- or outward- onented strategies, a reliance on open market trading policies, and economic growth in LDCs.* The success stories of many of the The purpose of this policy paper is to provide Newly Industrialized Countries (NICs) direction to A.I.D. in the encouragement of illustrate this point. Although the appropriate LDC trade policies and a characteristics of individual NICs differ, four framework for the design of trade-related factors were very important for their success programs and projects. It is intended to be and ability to compete in world markets: (1) a useful to Missions in thinking about and reliance on export promotion and the conducting their dialogue with LDCs on trade international economy as major sources of policy and in crafting A.I.D. interventions expansion for their manufacturing and where appropriate. This policy paper builds industrial sectors; (2) a commitment to upon A.I.D.'s experience with trade and achieving market-based economic gr6wth export development and its private enterprise that enabled them to alter domestic policies initiative. It supersedes "AID Policy on Trade, accordingly; (3) a sustained investment in Investment and Development" (dated May 15, human resources development; and (4) close 1978). cooperation between government and the private sector. Another Il. Trade and Investment in LDC Economic Growth *See Jagdish Bhagwati, Anatomy and Consequences of Exchange Control Regimes and Anne 0. Krueger, The opening of markets to foreign trade is an Liberalization Attempts and Consequences, National Bureau of Economic Research, New York, 1978; and important step in accelerating economic Alvin Rabushka, Free Markets and Economic growth. Exports play a vital role in longterm Development in Postwar Developing Countries, U.S. job creation and overall employment Agency for International Development, December 1983.

2 important factor contributing to this growth was the accounts for an initial period of increased presence of a proper mix of exportoriented specialization in production (as well as a development policies and import substitution genuine savings to an economy). The relax- policies. In some cases, this meant that economic ation. of import restrictions will also provide growth was spurred by, or relied in part on, a sound indigenous businesses with access to the agricultural sector. financial, technological, and managerial inputs necessary to fuel economic growth. In the longer run, as a country's human resource The NICs, who accounted for much of the base develops, a country may expand the impressive LDC economic growth during the number of activities in which it has a 1974-1980 period, are now expanding their . Such diversification of activities into more complex, skillintensive, and production is important for stability and higher wage manufacturing. As these more sustained growth in order to hedge cyclical or advanced NICs (like South Korea, Taiwan, Hong secular declines in export prices, Kong, and ) progress to higher technology products (such as consumer appliances, electronics and computers), there is Increasingly, trade and investment flows are potential for other nations to take advantage of interrelated. The opening of markets to foreign opportunities to supply more laborintensive direct investment also provides a way for manufactured goods on world markets. In fact, a LDCs to diversify their economies at the same second group of cotmtries that includes Colombia, time they gain access to new technology and Malaysia, Thailand, and Tunisia has recently managerial skills. Open and fair investment accelerated economic growth via the export of policies are essential to an expansion of labor-intensive manufactured goods. investment and technology transfer. An open and stable investment environment will position developing countries to acquire the capital. necessary for private sector An LDC can maximize its benefits from freer trade development, Less government intervention in to attain sustained. economic growth and a the economies of developed and developing reasonable approximation of full employment only countries with correspondingly fewer if the opening of its economy to international restrictions on domestic and foreign markets is accompanied by domestic policies investment will greatly assist rapid which foster market-based resource allocation and development and growth in world trade. permit development of those activities in which it has a comparative advantage. A countrv that restricts trade and controls (or distorts) its internal 1,11. Obstacles to Improving LDC resource allocation through administrative Trade Capabilities measures is most likely forcing some of its In the near term, there is some doubt about resources to flow into less efficient uses. the capability of many LDCs to compete Government policies and adn-dnistrative efforts successfully in world markets or to serve as that ignore this fact cause some production to major sources of world demand. Despite the become more costly than the domestic market will advantages of an outward. looking trade policy bear. This restrictive approach could cause, in based upon open markets, there are many effect, a "" on the production in which the barriers that must be overcome before such a country may have a comparative advantage in policy can be implemented by an LDC. These order to "subsidize" the production in which it has barriers reflect problems that are both internal no comparative advantage. These efforts to protect and external to LDCs. Although the nature of LDC economies from competitive world trade also these barriers varies from country to country result in a diversion of resources that could be and generalizations may not be applicable in applied to other development problems. all LDCs, some of the more severe obstacles are common to manv LDCs. I

A. Import Substitution Strategies As an LDC removes import and export Many LDCs have promoted import substitution restrictions and controls, the market will allocate strategies for economic growth and resources away from, less efficient uses and employment generation. These strategieS are toward productive activity in which they are generally initiated by enacting temporary more suited. This shift of resources to their more protection, such as high tariffs, for infant efficient use industries against foreign competi-

3 tion. Although these tariffs have gradually while at the same time having to shield the been decreased, they remain well above less efficient public company from full developed country tariffs and are used competition. increasingly in tandem with nontariff barriers to protect these industries. In this conundrum, the private investor -often loses. Existing foreign or indigenous This new form of is difficult to investors often become frustrated by the dismantle once it has been established. In these favorable treatment and the unfair com- instances, import substitution leads to increased petitive advantage given public companies inefficiency in the domestic market (encouraged and may often see their firms forced out of by government policies that subsidize industries business, while the LDC spends precious in which a country may have no comparative resources keeping the SOEs afloat. Simi- advantage) and keeps foreign products out of larly, foreign or indigenous private inves- LDCs on a selective basis. It is better for an tors may sometimes be discouraged from LDC to develop its economy through entering the market altogether because of development of the market with increased the more favorable treatment extended to exports leading to an appropriate percentage the public enterprise. increase in imports than to try to do so behind barriers of import substitution. C. Lack of International Marketing Information, Experience, and Networks Inward-looking development strategies utilize a Many firms in LDCs find it difficult to obtain variety of measures to allocate imported goods the technical skills or knowledge needed to toward priority areas (as perceived by the identify products appropriate for export. EDC). These measures include an overhauled The lack of information is a particular exchange rate, restrictive exchange controls, problem when new export activities require tariffs, and quantitative import and export a clear technical and managerial restrictions. Such interventions in the market understanding of production possibilities, a favor certain imports, but cause high prices to firm grasp of present and future market be charged on imported items not under official conditions, and international marketing exchange rates. Moreover, productive activities skills. Among the factors contributing to this in which the country has a comparative lack of market information are the (1) high advantage may also be severely affected by the cost of obtaining information; (2) lack of restrictions on imports of intermediate goods, knowledge about new business practices; the higher export price of their products, the (3) insularity of many LDC businesses from higher transaction costs due to controls on trade, market channels; and (4) costs of and the tax effects of cross-subsidies required to developing contracts and sales networks. sustain the inefficient producers in other industries or sectors. D. Trade Barriers and Market A In the wake of a global recession in the B. LDC Parastatal Policies and their early 1980s, followed by an imbalanced Impact on Private Investment recovery concentrated almost entirely in North America, many industrialized coun- Since inefficient sectors or industries can- tries are intensifying and expanding protec- not survive unless policies are in place that tionism for their domestic industries and distort price signals, an economy that agriculture against imports from LDCs. A restricts trade almost always requires the major concern about the renewed protec- use of parastatals or government-sanc- tionism is that it poses new obstacles tioned private monopolies to provide the against products that might form the basis necessary goods and services. The of a feasible export expansion program by existence of the parastatals or monopolies these LDCs. Although some analyses indi- creates additional obstacles to cate that the new protectionism has had a liberalization in the future, through the modest impact on the volume of trade, the creation of "vested interests" as well as the following considerations have been raised: inability of such enterprises to compete against more efficient private concerns. Developing countries find themselves in the dilemma of wishing to attract private investment in a sector where a public company exists

4 e the adverse effects on trade may show up later, since investment in exportoriented activities will be inhibited and since some of the measures are only recent; 9 the pattern of trade may have been distorted G. Increased Use of Countertrade even though total trade has not fallen; and Manv LDCs resort to countertrade* arrangements because of the weakness of e in the absence of these protectionist measures, markets and their deteriorating trade would have expanded much faster than gross foreign exchange positions. Countertrade is national product, so that a shift to more always less efficient than normal commercial export-oriented growth is being inhibited. transactions-bilateral. arrangements are cumbersome, costly to LDC governments, deprive LDC companies of direct marketing Widespread protectionism would lower long-term and financing experience, and, in some growth by reducing international trade, economic cases, intensify downward price pressures on flexibility, and the productivity of capital and LDC comn~ercial exports. When LDCs deal labor, as well as serve as a disincentive to greater with foreign exchange shortfalls by using foreign trade and investment in LDCs, countertrade as an export financing mechanism, they should take care that the comparative advantage is clear and there is The United States market has been more open to minimum distortion to market allocation. LDC exports than have those of our major trading Although, as a matter of policy, the U.S. partners in recent years. In both 1982 and 1983, Government does not oppose the participation for example, a majority (55-60 percent) of LDC of private enterprises in countertrade exports of manufactured goods to the arrangements (as this may be one of the few industrialized countries went to the United States ways that they can meet some of their import alone. Our more robust economic recovery, and needs), it does not support the high value of the dollar, have drawn imports to government-mandated countertrade. our economy, The fact that such a large percentage of manufactures from LDCs is entering IV. U.S. Trade Policy and Its our market, despite strong protectionist pressures, Relevance to LDCs is testimony that U.S. barriers to imports are relatively low. The U.S. view of appropriate trade policies for both developed and developing countries derives from the same basic principles to which the United States itself subscribes. For developing countries, sound trade policies are E. Low and Unstable Prices of Primary an integral component of an effective Products development strategy that will stimulate growth and the productive use of natural and Many LDCs, especially the lowest income human resources. A.I.D.'s policy on trade and nations, specialize in the export production of its role in development are fully consistent one or a limited number of primary products. with and derive from the following three Due to technological advances in the fundamental principles of U.S. trade policy: production of substitute goods and a softening of world demand, a number of these products have experienced downward price - Free and open trade benefits all nations. trends. The United States believes that free trade and open markets permit the principles of F. Financing Constraints and Indebtedness comparative advantage to work, produces Much of the funds borrowed by the non-oil more jobs, more productive use of natural producing LDCs in the 1970s was invested in resources, more rapid innovation, increased projects that did not produce foreign consumer choices, a higher standard of living, exchange earnings sufficient to cover the and higher incomes. (Comparative advantage ensuing debt service. The debt service does not mean LDCs must continue to burden has, in turn, reduced the amount of depend on natural resources as the foreign exchange available for new investments, and caused private banks to *Countertrade may be defined as transactions in exercise more cautious lending policies than which the seller provides the buyer with deliveries (such as in the past. New foreign investments in LDCs technology or finished products) and contractually agrees to purchase goods from the buyer equal have slowed as well, cutting off a valuable to an agreed-upon percentage of the original sales source of funds for economic growth and contract value, Countertrade is a term that encom- limiting indigenous investment possibilities. passes barter, buy back, counterpurchase, offset, and compensation trade.

5 principle export; it means a greater oppor- V. A.I.D. Policy for Trade tunity for them to develop non-traditional Development exports.) A.I.D.'s trade development policy is - Fair trade is essential to support free trade. designed to encourage LDCs to utilize The United States believes that fair trade must international trade as a key instrument in be based on mutually acceptable rules that give the process of achieving broad based, no country an unfair advantage. Trade sustained economic growth, and place a opportunities derive from the principles of greater reliance on complementary comparative advantage, not artificial advantages domestic competitive markets that support that create barriers or close markets. (Fair trade more open trade policies. principles are as relevant to industrial as to developing countries since the benefits to A major focus of the trade development growing world trade should not be limited to policy is on building developed country one group at the expense of another.) and LDC private enterprise ties on a con- tinuing, long-term basis, consistent with the broad American objectives of trade liberalization. The formation of such ties - An effective international trading system is should lead to: essential to preserve open markets and growing and fair trade. The United States e development of stronger LDC economies believes that only through a strengthened based on the efficiency of market-based international trading system can effective rules resource allocation; governing fair trade be established, trade liberalization be negotiated, and disputes be 0 development and strengthening of settled. The interests of developing and mutual economic interests between industrial countries can best be realized through developed countries and LDCs; participation of all countries in the GATT. (In * encouragement of entrepreneurship, particular, developing countries' active economic institution building, and reliance participation in trade negotiations under GATT on sources of private finance; and auspices is the only effective means to assure that their trade interests are considered and * adoption of appropriate economic respected.) policies. This policy is consistent with two of the principal goals set forth in the Foreign These basic principles are inherent in the General Agreements on Tariffs and Trade and, Assistance Act of 1961, as amended: (1) the promotion of conditions enabling developing therefore, have been the cornerstone of U.S. trade policy for over 37 years. Although the countries to achieve self-sustained growth with basic principles of U.S. trade policy have not equitable distribution of benefits; and (2) the changed during these years, the importance of integration of the developing countries into an trade to the world economy and to economic open and equitable international econon-dc development has grown. system. V1. Specific Components of A.I.D.'s Policy More open trade and investment policies are particularly important for debt-burdened A.I.D. will focus its trade development efforts developing countries. The major element of within the framework of the four pillars. Treasury Secretary Baker's Program for Specifically, the policy directs that A.I.D. Sustained Growth is the adoption of policy policy dialogue, programs, and projects (1) reforms that maxin-dze the contribution that establish a policy environment that is conducive trade and investment can make to the to private enterprise and expanded participation growth and adjustment process of in international trade; (2) encourage the transfer developing countries. For example, those of technology, skills, and information required developing country economies that have to expand and diversify LDC agricultural and continued to advance during the debt crisis industrial bases for export production in areas of the 1980s are those that have adopted with comparative advantages; (3) support trade outward oriented growth strategies and investment promotion efforts; (4) introduce characterized by open trade and investment or expand private policies.

6 sector competition in the export or import of as possible the real opportunity costs of the essential or economically important ; items to the country. Successful export (5) broaden the scope of export development 5trategies, usually include the following: projects to provide for greater U.S.-LDC two-way trade opportunities; and (6) encourage prudent 9 the reduction or elimination of duties and investments in infrastructure to improve an LDC's quotas on imports essential to the production trade position. of exports;

0 the reduction or elimination of and ThAs guidance reflects A.I.D.'s experience with quotas on exports; trade policy and projects, and should be applied * the simplification of licensing and other when a Mission has made the decision to pursue bureaucratic procedures needed to export; trade or export development as part of its economic development strategy. Whether explicit 0 the reduction, to real levels, of transaction trade development activities should be initiated by costs associated with the handling of exports Missions depends upon several factors, including and related imports (e.g. licensing Mission priorities, staff capacity, and country requirements. embarkation and disernbarka- strategy, It is not expected that all Missions have tion processes, etc.) the staff capabilities to undertake these activities. However, even if program or project interventions * elimination of subsidies on exports; and may not be called for, policy dialogue activiti~s * excha~'.ge regimes that reflect market should be considered and carried out if at all rates. possible. Missions should look to private sector contractors and consultants; business, trade, and Missions should pursue a policy dialogue with host professional associations, and U.S. and LDC governments to remove existing trade restrictions private enterprises involved in trade for assistance and controls. Political and social resistance to in designing a trade strategy- AID/W will help reevaluating import substitution policies and Missions where it can. adopting an export orientation may be particularly strong in countries that have an elaborate structure of import substitution supports and considerable sunk investment in noncompetitive import substitution industries. It may require the reversal A. The Policy Environment for Trade and of many long held, politically-based policies and Investment the decline of inefficient industries. Any change in 1. The Trade Environment business activities to support exports may involve resistance by those who face possible losses. LDCs can most effectively enter the inter- Opposition may arise from Owners and managers national trading system by pursing trade- of inefficient firms that would have their markets oriented strategies that reduce import pro- opened to competition, from workers threatened by tection in favor of economic diversification, displacement, and from others who benefit by the competitive markets, and technology acqui- status quo, Missions should explore, with LDC sition. A.I.D.'s efforts to help strengthen the governments and private enterprises, alternative trade capabilities of LDC private enterprises uses for the human and financial resources that had can be truly effective only if they are carried been devoted to these industries. out in a policy climate that enc~urages market-based activity and maximizes the capabilities of the private sector. Therefore, A.I.D.'s first effort related to trade should be directed towards establishing and improving a policy environment that is Although this is a difficult process for some LDCs, conducive to private enterprise and this difficulty is not infrequently exaggerated by expanded participation in international LDC politicians. Countries that have limited their trade. Over the long term, it will be these import substitution efforts, and instituted policies policies, coalescing around trade-oriented to keep their import substitution industries strategies, that will be the dominant influence competitive with imports, are likely to be less affecting an LDCs economic growth. resistant to policies that would increase trade, If restrictions can be removed and the immediate Trade-oriented strategies seek to eliminate, adverse impacts of removing protection are hedged or at least minimize, economic distortions so or lessened, the potential that the prices of exports reflect as near

7 for sustained economic growth will be favorable to economic growth and the dramatically increased. Although this may be development of a competitive private sector easier said than done, it is important to pursue will continue (assuming that they exist in the our targets here. first place), which is necessary to encourage the long-term commitment required for trade In a number of LDCs, the enactment of those and investment. policies that support the expansion of exports and the removal of those policies that restrict trade, An important policy issue that should be must be accompanied by fundamental policy discussed with host governments is the use changes that may have more profound of standards. Generally accepted standards, consequences for the economy at large. These may both for product quality and for measures and include: weights, are crucial to the efficient functioning of markets and their growth. Standards permit * open market sales of foreign exchange; the rapid and wide spread of information that, - liberalization of financial systems so that the in turn, is needed for truly competitive market will determine domestic rates of interest; markets. The lack of common minimum standards often frustrates achievement of the consistent quality needed for trade in large 41 elimination of laws or conditions that quantities or over great distances. This is reduce or eliminate competition in production especially essential to the development of and trade; and agricultural trade in LDCs; it is also one of the major inhibitions to small scale e policies that ensure that establishment of manufacturers. In addition, many LDCs utilize wage and benefit packages more nearly unfair and arbitrary standards to discriminate reflect the value of labor input. against foreign products. There is no single rank ordering of the issues related to improving trade that can be applied in each Mission's policy dialogue with the There are many vehicles available in LDCs host country. In some LDCs, opportunities for standards development. Government may emerge to program A.I.D.'s assistance attitudes toward standards need to be in direct support of a comprehensive policy improved through the policy dialogue. Trade reform program that will have a significant associations can help to promote voluntary impact on improving trade and moving away industry-wide standards. A.I.D. should from import substitution policies. In other encourage LDC private and public LDCs with a relatively long tradition of import institutions to develop and strengthen substitution and central management of their quality and other standards. A.I.D. should economies, A.I.D. assistance may have to be also work with host governments to programmed to help the host country eliminate the use of product standards, overcome fundamental fears of exposing its testing, and certification procedures that economy to world (and domestic) market unfairly restrict imports. forces. In such countries, A.I.D. may need to Missions should also consider providing aid support a learn-bydoing approach focused on to LDC business associations in order to the development of a country's comparative involve more deeply the indigenous private advantage in nontraditional exports. Missions sector in the policy dialogue. These groups, should obviously be careful not to augment representing the local business community, distortions or introduce new disincentives into should be a primary mechanism for keeping an LDC economy; their actions should be the host government institutions aware of consistent with or designed to reinforce private sector concerns with respect to trade market-oriented activities and to encourage and other government policies or programs predictability in LDC policies. that affect business.

2. The Investment Environment Critical to the success of an open trading strategy is stability in government policies Foreign direct investment offers LDCs a way to affecting trade and investment in particular acquire new production facilities at a lower risk and economic growth in general so that than financing and building their own exporters, importers, and investors can operations. The investments bring new develop long-term linkages. Stability con- technology, provide employment, and transfer tributes to confidence that public policies new managerial skills.

8 In order'for LDCs to attract foreign investment, puts; and (3) 'be allowed to hire manage- businesses must be confident that such countries ment talent of their choice, regardless of pursue realistic economic policies and maintain a nationality. These obstacles to investment stable and open investment environment. suggest additional agenda items for Missions should encourage LDCs to adopt a Missions' policy dialogue with host marketoriented investment climate so these governments. countries will be able to attract the investment capital essential for private sector development. The issue of rights, raised The basic elements of an open investment above, deserves special aitention. inadequate environment include policies that- intellectual property rights protection continues to hinder foreign investrnent and innovation in many LDCs. If the country fails to guarantee patents and copyrights, and to * treat investors equally on most-favored nations license and protect trademarks, investors will principles and provide comparable treatment to be reluctant to come to that country in the first foreign and domestic investment (in such areas place and, in any event, will be hesitant to as taxes); make the most up-to-date methods of production or formulas available to local 0 conform to internationally recognized standards partners, Many countries that wish to comply for compensation in the event of expropriation; with internationally recognized copyright, trademark, and patent conventions, however, * permit the transfer of Profits and other funds often lack the resources and capabilities to associated with investments; enforce these conventions. A.I.D. should undertake efforts to assure LDC govern- do not encourage performance require- ments that proper enforcement of copy- ments that mandate conditions on invest- right, trademark, and patent conventions ments regarding local content, exports, or is essential to strategies intended to equity; increase the transfer of technologies and expand LDC access to information. 0 provide adequate and effective protec ion of intellectual property rights such as copyrights, patents, and trademarks; and * provide effective means for settling B. Trade Diversification and Technology disputes. Transfer The attractiveness of a particular L.DC market A country's comparative advantage in pro- to potential investors depends upon the duction (or international trade is not static; restrictions that the country imposes on such new competitors emerge and old ones relationships. If approval and import licensing disappear, technology changes, essential procedures are excessively lengthy, foreign resources becorne scarce, substitute products equity lin-dtations stringent, and requirements become available, and consumer preferences to export a portion of the production or to change. Successful participation in source local goods unreasonable (without international trade requires the dynamic regard to availability, price, and quality), then involvement of producers and governments in a foreign investor may be discouraged frorn a process of regular adjustment of practices pursuing LDC investments or joint ventures and policies, respectively, that responds to altogether. Even if the investor is not put off at current market conditions and anticipates the outset, the government approval process future trends. LDCs are particularly vulnerable may require the investor to spend a great deal to a loss of their comparative advantage in of money before any returns can be realized, production because of their limited human Investors sometimes have cancelled projects resource base, limited access to new if delays are too prolonged. technology, and limited access to market information, as well as rigidities imposed by poor policy. In addition, foreign companies should (1) Where appropriate, Missions should direct not be limited to producing for small program and project resources to encourage segments of the market, or to concentrate the transfer of technology, skills, and on exports, as protection for competing information required to overcome the local concerns; (2) have access to foreign limitations that threaten the comparative exchange to acquire needed imported in- advantage of LDC exports or inhibit the

9 emergence of new areas of comparative ad- The services sector (finance, training, soft- vantage in production. In this regard, A.I.D. ware, maintenance, and others) is a major programs should seek ways in which the capacity and growing component of trade and an of indigenous firms can be increased in order to important complement to the efficient use of engage in, expand, or diversify exports. capital in LDCs. Developing countries frequently restrict business opportunities in these areas, assuming that these can be One important method of achieving this objective reserved for local entrepreneurs; however, is through the encouragement and facilitation of these restrictions are often at substantial cooperative business relationships or joint costs in terms of access to technologies and ventures between developed and developing management practices. A.I.D. should en- country private enterprises (such as joint courage LDCs to open up their economies ownership ventures, licensing, contract to imports of services, and develop the manufacturing and assembly, management local private sector institutions and contracting, and supplier agreements). These types technological capability to complement of business relationships serve as a means for foreign-supplied services. promoting trade linkages between private enterprises, and are based on the mutual desire of A growing number of sophisticated the involved firms to improve their competitive manufactured imports require continued position in the world market. service input to keep them in operation; this input, in many cases, may not be available in the importing markets (such as user training These business relationships usually result in a or maintenance). A.I.D. should encourage new source of inputs and substantial transfers of countries to overcome the tendency to buy technology, managerial techniques, marketing only the capital components of a particular expertise, and market information to the LDC technology, and to devote greater attention to entrepreneur; represent a way to minimize costs the technical information and process and share risks; and open up access to markets and technologies that may be embodied in more channels of distribution. They also provide a complete packages. conduit for information on world market conditions which is almost impossible to obtain Finally, increasing developing country to from publications usually available within the developing country trade is another method LDC or from contacts with other indigneous firms. for stimulating economic development. Food The LDC firm's adoption of the management and emergencies often exist in one country while quality control standards required for success in its neighbors may have adequate or even the world market results in immediate financial abundant food supplies. A combination of gain. Missions should encourage joint ventures poor information, inefficient (or non-existent) (as well as other forms of cooperative business market channels, and the absence of relationships) as additional sources of technical transport are often as important as lack of assistance for LDC private enterprises. foreign exchange or creditworthiness in keeping normal trade and market activity from quickly dissolving these emergencies. As more LDCs adopt the proper trade Special attention should be given to the environment and overcome their financing constraints, indebtedness, and barriers to development of producers in new lines of exports. "national selfinterest," there will be greater Such action is particularly suitable for nations opportunities for inter-LDC trade. whose export earnings are tied to a few primary products that experience wide fluctuations in world prices. , In addition to diversifying an C. Trade and Investment Promotion LDC's export base and market risk, nontraditional exports are less likely to compete with most U.S. Trade and investment promotion are im- producers. However, A. L D. -supported country portant for promoting and diversifying ex- export development projects should not favor ports, attracting new capital and technology, some individual exporters at the expense of others, and generally improving the participation of a as this might lead to the exclusion of potentially country in the world market. Missions are viable exporters and the subsidization of current encouraged to review the variety of exporters. approaches available for export and investment promotion. In

10 developing export promotion. projects. Missions ment of product and narket inforniation should perfc.)rrn appropriate anaiyses to identify services; and assist ffirns conducting exportable products, determine potential markets, market arialyses to identify new areas of and make realistic determinations of the changing cc-smparative advantage. In providing such environment in which the Potential eNpurt assistance, J10issions shotild seek wavs to prcchl"cts nlt~st compete, as well as icicrifily prive, te sc, tor cost-eticctive ways to have local firrns ovaluate throtigli ch4iribers of corriraerce~ trade their prospects anti undertake nnar,kefing asso.~-ialions., labor organizations, and initiatives. other 2. Public Seckor Activitici 1. Private Sector Activities A number of LDC governments are A.I.D. Missions are encouraged to su.pport the involved in trade through incentive pro development of private sector institutions that g d to promote specific export can help indigenous entrepreneurs improve grams designe, their export capacity and capabilities, as well as activities or attract impoyted capital for new attract foreig.n, investors. Where there are commercial ventures, In some countries, existing private sector organizations providing partictilarIv NJCs, such programs have trade and investment promotion and services, been quite successful, Experience in many Nlission projects should rely on the private, sector LDCs, ho~vever, suggests that government to continue providing these services and channel -m.anagcA export or investnae-nt promotion assistance for this activity diredlv to private sector sch(" mies have not been successful and may entities.* have retarded growth and development by introducing rnarket distortions into the vcononiy~ J his ha-s often resulted because The development of private sconr iinsh (I) LDC invest.,nera promoters are often tutions may consist of establishing export government offitAals ~~,,jth little business ex promotion centers arid marketing office,,; perience (42) g (channels of distribution); business assoc)a government promotion agen- tions that promote the sharing of tech cies often operate Nvitlzin. the- context of nologies and technological innovation; governmental bureaucratic and legal struc- private financial institutions (export financ tures that often complicate otherwise simple ing and credit facilities, industrial and L ~ activities;* and (3) management decisions on agricultural banks, and other financial the targets and types of incentives were intermediaries , ); export trading companies, relsponsive to perceptions of governri*,ent rather and other institutions, For example, in the thar, based on markeet conditions, which inhibited area of export promotion, USAIDs should the gr( )wtli )f exports or the attraction of examine the possibility of contracting In general, A.1,I). Missions are advised to (through competitive bidding) for a promo exercise considerable caution before tion facility to be established within one of agree the local business associations or other ing to support LDC government-managed firms, rather than establishing one within a export or investment promotion government ministry, schemes. Assistance to LDC governments for expor, arid inves~ment promotion Mission programs should also seek oppor- schemes shuuld have as its objective the tunities to assist current arid potential LDC fostering of market-based trade between export industries to gain needed informa- their private enterprises arid foreign tion and technology to enhance their com- markets siroilar to the services provided by petitive position. A.I.D.'s assistance could the US. Foreign Commercial Service and support management and technical training the U.S, Foreign Agricultural Service), Sup for LDC producers, exporters, private bankers, port -,na ' v be given when the following con and lawyers; promote access to advisory and diti t con~ultant services for LDC finns and * The proposed incentive scheme does not violate industries; support the develop- any international or U.S. laws, conventions, or agreements related to export 'This approach is consistcnt with A.LD, vl,Awie, on !nstitutional Development and Private J'Jterpfisk, Develooment, which em hasize rtliancc on the 'SRI, internatiorial, i1i huesurent V p private sector rather than the public sect,-.1' tion Activihe~ir Final Rz-poft prepared for the Boreau tor w1wn, there is a chc~k.e and when host ~ountry !'6vatc- Enli,rprisk,. Awn~%Y, for Develop malke this pussible, ownt, V~'ashington, lanuary MA,

il 1= subsidies, anti-, or other unfair trade Missions may also wish to encourage LDC practices. governments to adopt laws that allow the establishment of free trade zones as a The proposed incentive scheme does not target means of encouraging private enterprise commodities that would conflict with statutory development. In addition to the manufac- provisions (e.g. FAA Section 620(d)) and existing turing and assembly activities derived from Agency policies proscribing activities that would the import of - or -free items into result in direct competition with U.S. enterprises. these zones, there may develop indigenous suppliers that provide backward or forward * The inceitives are appropriate to specific, linkages to firms in these zones. identified constraints on exports or investment and their duration must be terminated within a 3. Small Enterprises and reasonable period of time (as agreed upon by the Entrepreneurs Mission and the host government). Special attention should be given to exports by small and medium enterprises. The pro- * Decisions on general areas in which in- duction techniques employed by these en- centives will be targeted and the types of trepreneurial firms are generally less capital- incentives provided must be made in close and import-intensive than those of large firms, consultation with a broadly representative which makes them an important economic group from the LDC's private sector, and force in areas in which the LDC develops its must be consistent with efficient use of the comparative advantage. These enterprises country's resources. may be important sources of employment and can compete favorably on world markets due 4, It should not add unnecessarily to the host to the low wages that prevail in LDCs. If country's restrictive practices or to already market forces justify small scale enterprise excessive red tape, which would inhibit trade. exports, Missions should carefully look at ways to encourage them. This may take the Missions should investigate providing form of supporting directed programs in technical assistance to host governments to financial institutions, organizing cooperatives, help them effectively implement their trade or providing information and training, as well programs and streamline their procedures. as insuring that the policy environment does This could include, for example, consolidating not discriminate against small and medium the decision-making authority over export and enterprises and allows them to contribute to investment licenses and other necessary export expansion. Missions should look to permits in one centralized institution, or existing LDC private and public sector supporting training for LDC public sector institutions that deal with small enterprises personnel who are central to the export rather than undertake direct support to process (such as personnel in ministries of individual firms. trade and commerce) to strengthen their effectiveness in representing their country's commercial interests overseas. 4. Government-restricted Markets Government-restricted markets will become more Evaluation of costs and benefits is a crucial commonplace as LDCs increase their exports and activity if a Mission chooses to pursue a pose market challenges to competitors in public sector approach to export promotion. industrialized countries. Missions are aware of the These promotion programs can be subjected growing tendency by industrialized countries to to cost/benefit analysis, since quantifiable levy import quotas or other trade barriers in costs are incurred and quantifiable benefits response to LDC exports (such as higher tariffs, are achieved. Costs may include the tariff-rate quotas, orderly marketing arrangements, operating budget of the promotion agency, or some combination of these). Although marginal expenses of applied promotion protectionist sentiment in the United States has techniques, cost of the project, and the costs received considerable publicity, the United States' associated with incentives provided. Among openness to LDC imports and President Reagan's the benefits are the eventual econon-dc gains strong stand in support of free trade should be derived from new investments (in the form of borne in mind in discussions with host country employment, income, foreign exchange officials. earnings, and tax revenues).

12 conflicts and opportunities when reviewing CDSSs, Action Plans, and Mission project proposals in their respective regions. Where practicable, lZegional Bureaus s1hould fir.it lc~c)k- at uhe countries ~vithir; their jurisdiction as reg . ~, ~ ; L S ,wud o uce of and dieniand. It might also 'be uscful J 'Ne2ional.Bureaus shared infol-nia- tion or, their trade-related programs~ D~ Trade J.'Monopolles and Parasiatals Ll ~C governments have beco!rie beavfly in Volved in their country's intornational trade by granting c e. x - special rights to in,)p~rt ~r ti ~! t ()f jr-~J ,~J t P -uch as fuel, agri coni,-nodi,ies (,s C in puts, an~d fi.)od,~ to one ar a few firms, In

I- C~'ene~ ally, tj ie granti, g of special -'rade privilege,5 results in a Separation of the resource. allocauon decisions from wor!d n-taxkof, signals. so that these SOEs co.ncentrate ti-icir efi~_irts on proiduction in a secure and protected market., and on tbe inanufacture of products thal- are below lar ve world In an effort to avoid the imposition of quotas or ,vorld quality stand ds and abo price levels. other restrictions on LDC exports to the United States, U.S. supply and demand projections for the Over time, the SOF's p-oduction or ~_onsurnption particuiar product to be produced should be generally requires sub,,tanfial ~,ubsjdization au-id undertaken when planning export projects that may discourage private enterprise involvement in would include the United States as a potential the import or export of particular commodities. In market. Similarly, export data from A.I.D.- addition, fhe ceontry itself becomes locked in a supported export promotion projects and private particular pattern of trade and technological sector trade efforts in neighboring LDCs should be dependency that hastens its loss of comparative included in these analyses. Among the other advantage in key exports. State trading companies factors that Missions should consider are the also are more likely to seek countertrading potential injury to U.S. producers (based upon the arrangements. To the extent that countertrade export potential of the prcJect), and the condition transactions, are less effiC ient and introduce of the U.S. industrv that would be affected by the distortioris in

LDC export.~, trading C11 , patterns, the state trading cornpanies themselves can intensify their country's economic problems, especially if the co,itrolled At present, an A.I. D. -supported export cornmoditie5 constitute a large portion of a development project in one LDC may be prepared counfrv~s export.~,. in., isolation from an export development project in another LDC. The potentially negative impact These particular trade reshictions and stRevised: 05/16/201 that one country's export development will have 'nisuing price dj~_-,tortions on fundamental oil. export efforts or import needs of other 1.DCs economic activity have profound consequences for in the region is often not taken into account. the entire LDC economy in terms of fostering A.I.D. should not encourage potential LDC inequity and suppressing economic growth. exporters to compete with each other for A-L.D. strongly en.cnurages and supports efforts restricted. markets; Regiorial Bureaus are in a to introduce or expand private sector competition position to help guard against this problem. in the export or import of essential or econom- Regional Bureaus should advise Missions on ically important commodities. it is recognized, of potential export course, that -n-tarty LDCs rnay

13 raise political and social objections to this Import Bank, the U.S. Department of Com- approach; the dialogue in this area is of great merce (the U.S. and Foreign Commercial importance. Service, and other offices within the Inter- national Trade Administration), the U.S. A.I.D. resources may be programmed to assist Department of State (embassy economics LDCs to terminate trade monopolies and officers, in particular), and the Office of the oligopolies, dismantle marketing boards, and U.S. Trade Representative (which administers divest parastatals.* When A.I.D. resources are the Generalized System of Preferences). used to start a policy dialogue to initiate the dismantling of a marketing board or the divestiture

of an SOE when there is no initial commitment 9 Brokering. In recent years, a small number from the LDC, Missions must show that any of U.S.-based organizations have begun to improvement in the performance of the marketing offer commercially viable packages of board or SOE resulting from our assistance will consulting, brokering, and facilitation services contribute to increased dependence on market designed to help LDC firms (particularly forces and the eventual dismantling of the small- and medium-sized enterprises) by marketing board or divestiture of the SOE. Clear furthering their relationship with U.S. private benchmarks of substantial progress toward market- enterprises. These brokering services include based operations and divestiture must be identifying potential U.S. and LDC firms established and adhered to in the assistance interested in entering into joint ventures or program. In general, if the SOE is providing other collaborative business relationships; unfair trade competition to private enterprises, providing information to the potential restricting private enterprise development, or is collaborating firms about business conditions, enjoying special trade privileges or preferential risks, policy, and other concerns; and treatment, these activities should be phased out assisting client firms to identify technology or before funds are provided to the parastatal in other inputs needed to exploit a particular accordance with A.I.D. policy. business opportunity. Similarly, the Inter- national Executive Service Corps (IESC), through its Project ABLE, looks to match emerging or existing LDC firms with U.S. suppliers and customers.

E. U.S.-LDC Trade Promotion * joint ventures. The benefits derived from What is good for development should not be joint ventures and other cooperative business inconsistent with what is good for the expansion relationships between firms in developed of mutual economic activity between U.S. and countries and LDCs were identified in Section LDC private enterprises. A.I.D. should broaden VI.B. It should be noted, however, that these the scope of its export development projects to business relationships result in more than a provide for greater U.S.-LDC two-way trade one-way transfer of knowledge and opportunities. A.I.D., in concert with other U.S. experience from the developed country firm to government agencies, should also increase its the LDC partner. In reality, valuable skills in efforts to make U.S. companies aware of marketing products in LDCs and redesign A.I.D.'s varied activities. Many mechanisms are suggestions to adapt products for LDC available for accomplishing these linkages. These markets can be transferred from the LDC firm include: to the U.S. partner.

* Interagency cooperation. Missions and 9 U.S.-LDC trade associations. As many AID/W should seek greater cooperation with business associations are cooperative efforts other government agencies that are seeking between foreign and host country private greater U.S.-LDC trade and investment ties, enterprises, Missions should consider pro- such as the Overseas Private Investment viding assistance to these associations so Corporation, the they can help foster trade and increase ac- Program, the U.S. Export- cess to technology and information between indigenous and foreign private enterprises.

*A.I.D.'s involvement in the dismantling of marketing boards and parastatal divestiture should adhere to policy e Mixed credits. The use of mixed credits as stated in A.I.D.'s Policy Paper on Private Enterprise and other concessional financing programs Development (March 1985) and Policy Determination #14 on Implementing A.I.D. Privatization Objectives by foreign governments presents a growing Oune 1986). problem for effective development

14 assistance and trade development. Mixed credits absence of such conditions. In addition, do not directly promote two-way trade; however, A.I.D. resources should support trade- A.I.D. recognizes that other donors are actively related infrastructure only when the host using mixed credits to subsidize their own exports country's policy environment is supportive and that this can put U,S. exporters at a serious of competitive trade or when A.I.D.'s in- competitive disadvantage, Therefore, until such vestment in infrastructure is in exchange time as an effective agreement is reached with for appropriate export-oriented policies. other bilateral donors on restricting the use of mixed credits for export financing, A.I.D. will use For the most part, LDCs should undertake the U.S. tied aid credit program (under ESF trade-related infrastructure investments (such funding) for defensive purposes in selected as widening roads or improving ports) only countries to match the concessional credit terms when there is clear evidence that the offered or arranged for in support of a tender of a capacity of current facilities will restrict trade non-U.S. supplier in an international tender unless the improvements are carried out in a competition in which a U.S. supplier is the lowest timely manner. Furthermore, before initiating responsive bidder. This approach is consistent with such infrastructure, LDCs should ensure that the new mixed credit program announced by current policy and practices (particularly President Reagan in his September 23, 1985, state- regarding maintenance) result in the efficient ment on trade policy. use of existing facilities.

To a considerable degree, trade-related in- frastructure benefits a distinct group of en- It is important that A.I.D. be responsive to U.S. trepreneurs in an LDC. Consequently, A.I.D. private sector activities in LDCs, as early should seek ways in which the capital costs of participation in export sales is critical in building trade-related infrastructure are shared by the long-term trade and investment relationships. private firms that receive the majority of the Many of our foreign assistance activities currently benefits. In this regard, there is considerable generate additional future demand for U.S. room for the use of capital levies or products directly through the need for replacement debentures subscribed to by firms engaged in or spare parts, the purchase of complementary export production or other aspects of trade, or equipment, and familiarization with U.S. products. introduction of a system of user fees that These activities are also encouraged. provides for full cost recovery of the trade-related infrastructure. Additional guidance on the use of A.I.D. resources for infrastructure is presented in Section V.I. of F. Economic Infrastructure the revised Private Enterprise Development Policy Paper. LDCs have attempted to promote greater international trade through investments in economic infrastructure. Infrastructure has been G. U.S. Trade Policy Coordination built to (a) relieve transportation and communications bottlenecks; (b) ease congestion A.I.D. is also involved in the U,S. trade policy at seaports, airports, and other transfer points; and coordination process. The major U.S. (c) attract new investment by site improvement or government fora for consideration of most new site development. Infrastructure has also been trade issues and resolution of agency built to open new areas for resource development disagreements on U.S. and international trade and exportation. Investments in infrastructure issues are the White House Economic Policy to improve an LDC's trade position can be very Council, chaired by Treasury Secretary, and beneficial but should be undertaken only when the Trade Policy Committee (TPC), chaired by (1) there are firm assurances that the expected the United States Trade Representative. The complementary private investment in export TPC coordinates (1) interagency views on production will occur; (2) the LDC has firm U.S. positions for multilateral trade commitments from the principal investors who negotiations, (2) recommendations for the will use the facilities; and (3) adequate President on certain import remedies, and (3) provision is made to maintain these facilities. U.S. Government policy on international investment issues, international commodity negotiations, and other trade policy matters. A.I.D. participates in the TPC (and its staff committee and review group structures) under Support for infrastructure should not be the auspices of the office of the Director of the used as an incentive to investment in the

15 International Development Cooperation Agency. PPC represents IDCA at the TPC and in its working groups. Some LDCs are, in par ticular sectors, exporting products that fall under U.S. export controls or quotas. PPC will serve as a channel between U.S. Government trade experts and A.I.D. Mis sions with information on how to help LDC exporters deal with the myriad of U.S. and international trade agreements, when this information is not available through direct communications. (Brief descriptions of the General Agreement on Tariffs and Trade (GATT) and the U.S. Generalized System of Preferences (GSP) program, two of these agreements and trade preference programs, are provided in Appendices B and C.) PPC will also pro vide U.S. -, trade policy decision-making entities with information on the impact of U.S. trade policies on LDCs, and will con tinue its efforts to press for open U.S. and LDC economies through the trade policy coordination process.

16 ANNEX A When these conditions do not exist, it is unfair trade, and we will fight it, THE WHITE HOUSE The President has taken a number of actions to Office of the Press Secretary translate these principles into policy.

FOR RELEASE AT 11:30 A.M. EDT MONDAY, SEPTEMBER 23, 1985 Making Free Trade Fair Trade

The President's Trade Policy The President will vigorously pursue U.S. rights Action Plan and interests in international commerce under U.S. law and the GATT, and will see that other FACT SHEET countries live up to their obligations and trade agreements with the U.S. More specifically: The President's trade policy is based on five principles: 1. The President will attack foreign unfair trade 1. Free trade and fair trade are in the best practices. The President has directed the United interest of the citizens of the United States. States Trade Representative to initiate or Free trade produces more jobs, a more accelerate unfair trade practice proceedings, the productive use of our nation's resources, first time done so by a President of the United more rapid innovation, and a higher standard States. Other actions, when appropriate, will be of living. Free trade also advances our taken. Proceedings accelerated or initiated so far national security interests by strengthening are: the economic and political systems of our allies. Fair trade based upon mutually 9 Japanese leather and leather footwear import acceptable rules is necessary for support of restrictions; free trade. 1, European Community canned fruit 2. The United States plays the critical role in subsidies; ensuring and promoting an open trading system. If the United States falters in its * Korean insurance policy barriers; defense and promotion of the free worldwide trading system, the system will collapse, * Brazil's import restrictions on micro- adversely ~ffecting our national well-being. electronics products; and Japanese tobacco restrictions. 3. The United States' role does not ab- solve our trading partners of a major 2. To discourage our trading partners from obligation to support a more open trading seeking unfair advantage by using predatory system. This obligation includes: dismantling credits to subsidize their exports, the President trade barriers, eliminating subsidies and will propose that Congress approve a fund of $300 other forms of unfair trade practices, and million in grants which would support up to $1 entering into trade liberalization negotiations billion in tied-aid credits to maintain U.S. markets in the GATT. in the face of this practice, 4. The international trading system is based upon cooperation. Since World War 3. The President has directed the United States 11, we have made significant progress in Trade Representative to initiate and accelerate both moving toward an open worldwide trading bilateral and multilateral negotiations with system. Protectionism threatens to under- countries where the counterfeiting or piracy of mine the system. Our trading partners must U.S. goods has occurred. The Administration will join us in working to improve the system of increase efforts to protect intellectual property trade that has contributed to economic rights (patents, copyrights, trademarks), with a growth and security of ourselves and our view toward possible legislative or administTative allies. initiatives, 5. America has never been afraid to com- pete. When trade follows the rules, and there 4. The President has directed that a strike force is an equal opportunity to compete, American be established among the relevant agencies of the business is as competitive as any. This is fair Federal Government, with the task of identifying trade and we will not impair it. unfair foreign trade

17 practices and executing the actions necessary to Improving the World and Domestic counter and elin-dnate the unfair practices. Economic Environments The trade deficit has grown because 5. The President has directed the Secretary of econon-dc difficulties abroad have persisted State to seek time limits on the current discussions while the U.S. has been more successful in with Japan designed to open access to specific utilizing our economic opportunities. Better Japanese markets, at the end of which specific balance in world economic performance must comn-dtments will be evaluated and follow-up be achieved. procedures begun. New sectors will be added that offer the promise of expanded U.S. exports. 1. To do our share in achieving the needed balance in the world economy and lowering Promoting Free Trade and Exports the value of the dollar, the United States must reduce excessive government spending. The The United States is a great trading nation. The President will hold Congress to no more than health of our economy depends on both exports the spending levels established in the Senate and imports. The President's goal is to preserve as budget resolution. free and open a trading system as possible. A free and open system will be a fair system. 2. The President will press for his tax reform proposal, which is essential to strengthening the economy and making U.S. businesses more 1. The President seeks to engage our competitive in international markets. trading partners in multilateral negotiations in the GATT to achieve freer trade, increase access for U.S. exports, provide more 3. The President has directed the Economic and effective dispute resolution, and strengthen Domestic Policy Councils to review, and if the fabric of the international trading system. warranted, seek to amend antitrust laws that The President wants to use the multilateral impede our international competitiveness. The negotiating process to elin-dnate unfair trade President will also use the trade leverage created practices and improve access for U.S. by domestic deregulation to seek to open foreign exports, particularly agriculture and high markets. technology, and address newer forms of in- ternational trade problems, including intel- 4. The President authorized the Secretary of the lectual property protection, services trade, Treasury to join his counterparts from other major and investment issues. industrial countries yesterday to announce measures to promote stronger and more balanced growth in our economies and the strengthening of 2. The President will also explore possible foreign currencies. This will provide better bilateral and regional trade agreements that markets for U.S. producers and improve would promote more open trade and serve America's competitive position. U.S. economic interests. 3. The President has directed the Secretary 5. The United States is prepared to consider the of Commerce and the Economic Policy value of hosting a high-level meeting of the major Council, in conjunction with the President's industrial countries to review, implement and Export Council, to review current export build upon the Group of Ten monetary studies by promotion activities with a view toward considering in a cooperative fashion, the policies strengthening them and increasing private and performance of the major industrial countries, sector involvement. The Commerce and how these can be improved to promote Department will also work with state convergence toward non-inflationary growth. governments interested in expanding their export promoting activities. 4. To better assist workers in adjusting to the dynamics of the world trading system, the 6. The President has also directed the Secretary President has directed the Secretary of Labor of the Treasury to use the international financial and the Economic Policy Council to review institutions to encourage debt-burdened LDCs to existing worker assistance programs to reduce government impediments to the assure that they promote an effective policy functioning of markets, encourage private sector that contributes to maximum capacity for production, and substitute equity capital for debt change, mobility, and increased productivity. by encouraging both domestic and foreign investment.

18 Legislation which would reflect the President's tion through negotiations; principles and policies would include: - clarifying the accounting provisions and liabilities of foreign agents under the Foreign 1. Trade Negotiating Authority. Corrupt Practices Act of 1977 to - and Authority to support trade negotiating ddiii initiatives including: - allowing L).S. companies to export new drugs and biologicals no*, yet approved by the Food - a new round of negotiations; and Drug Adminis.tration to countries where thev - elimination of non-tariff barriers (current can be sold lawfully. authority expires January 3, 1988); - tariff reductions; and 4. Existing Trade Laws - compensation to other countries when the Strengthen the antidumping and countervailing U.S. increases tariffs (through Congressional duty laws with a predictable pricing test for action or Customs reclassification) to avoi4 non-market economies, place deadlines on Sectimi unilateral foreign retaliation against U.S.- 301 dispute settlement, and establish Section 201 exports, fast track procedure for perishable items, 2. Intellectual Property Rights. Further protection of intellectual property ANNEX B rights (patents, copyrights or trademarks), including: Background information on the -- protecting against trade in articles that General Agreement on I'ariff's infringe U.S. process patents; and Trade (GATT) - extending the Patent term for agricultural chemicals to match that for The General Agreement on Tariffs and Trade pharmaceutical inventions; (GATT) is a multilateral agreement subscribed to by 90 governments that together account for more eliminating the requirement in Section than four-fifths of world trade, Its basic aim is to 337 of injury to an efficiently and liberalize world trade and place it on a secure economically operated U.S. industry as a basis, thereby contributing to international precondition for a relief where the Intern-a- economic growth and development, GATT is the tional Trade Commission found a patent, only multilateral instrument that sets rules for trademark or copyright infringement; internationa.] trade; these rules govem the trade of - more liberal licensing of technology its member countries and the conduct of their trade under the antitrust laws; relations with one another. - better protecting "firmware" through amendments to U,S. copyright law; and - eliminating Freedom of Information Act abuses by giving affected companies notice and an opportunity to oppose release of their business ~onfidential information.

3. Export Promotion. Promote U.S. exports through. - submitting legislation authorizing and appropriating approximately $300 million in grant funds to enable the Administration to offer $1 billion in mixed credit loans to targeted buyers. This program is designed. to enable U.S. exports to compete effectively in third country markets until we can eliminate predatory mixed credit competi- 'The substantial reduction of tariffs and other barriers to trade is a principal aim, of the GATT. During the negotiations held in GATT's first 25 years, the tariff rates for thousands of items entering into world commerce were reduced or bound against increase. The concessions agreed upon in these negotiations have affected a high proportion of the total trade of contracting parties and have indirectly affected the trade of many nonmembers as well, as 'many tariff concessions have been extended to all trading partners under the xriost-favorednation (MFN) principle. Under this principle, countries ap ,,Tee to extend automatically to other trading partners the sam e treatment as that given to the "most favored" trading, partner,

19 GATT's original Articles of Agreement in- developing countries would forego such corporate several basic principles which all special and differential treatment as their signatories agree to follow. Two of these are development, financial, and trade needs discussed below. The first and most basic is to permitted (the concept of "graduation"). conduct trade on a nondiscriminatory basis. Under the "mostfavored-nation" clause, a GATT nation Five codes of behavior, incorporating the must treat all other signatories as favorably as any "special and differential" principle, were other nation when administering and applying its negotiated by the Tokyo Round's conclusion. tariff charges. GATT gives no nation special They cover subsidies and countervailing advantages, except in certain important cases. For duties, goverment procurement, technical example, LDCs may receive preferred tariff barriers to trade (standards), import licensing treatment as in the Generalized System of procedures and customs valuation. Preferences (GSP).

ANNEX C A second basic principle is the concept of national Background Information on The U.S. treatment. Not only must a nation treat all foreign Generalized System of Preferences countries equally, but it also must not discriminate Program (GSP) between foreign and domestic goods once foreign goods enter its local market. Its goal is to prevent internal domestic taxes or other regulations from The Generalized System of Preferences replacing any tariffs removed as trade barriers. (GSP) is a program of tariff preferences granted by industrialized countries to developing countries to assist them in their economic development by encouraging Much of the attention of the latest round of greater diversification and expansion of their multilateral trade negotiations (The Tokyo exports. In 1968, the United States joined with Round), which took place between 1973 and 1979, other industrialized countries in supporting the was designed to shape the multilateral trade concept of granting tariff preferences as a system and international trade relations into the means of facilitating development through the 1980s and beyond. The Tokyo Round resulted in auspices of expanded trade rather than the further lowering of many tariffs. A major new increased aid. With the expectation that focus of that round was liberalization of nontariff developing countries and territories could be measures that restricted or distorted trade, in encouraged to become more active constrast to earlier rounds of trade negotiations participants in the international trading where tariff reduction was the primary objective. system, 19 developed countries instituted However, the negotiations revealed that many GSP programs in the early 1970s. The United apparently unfair NTBs were actually domestic States implemented its program in 1976 policies with various goals, some legitimate and pursuant to the statutory authority contained some unfairly restricting trade. in the Trade Act of 1974.

Trade with developing countries and ter- ritories has increased dramatically since the It also defined special rules for developing inception of the GSP program. The U.S. GSP countries' participation in the world tra ing system. program currently provides duty-free Under the concept of "special and differential treatment for approximately 3,000 products treatment," developing countries asked to be from 140 developing countries and territories; treated more leniently as to the degree of however, these GSP imports represent only concessions they were expected to give in trade about 3 percent of total U.S. imports. negotiations. They also asked the developed countries to extend the legal basis under which developing countries receive preferential treatment The GSP program is vitally important under the GSP. Developed countries accepted the because of: (1) its recognition that trade is principle of "special and differential treatment" of an effective and cost-efficient way of pro- developing countries in areas of the negotiations moting broad-based sustained economic where it was feasible and appropriate, including development; (2) the program's ability to preferential tariff treatment, provided that the provide greater access for U.S. exports in the markets of developing countries; and the desire to (3) promote the integration of

20 developing countries into the international trading of U.S. foreign policy with respect to developing system; (4) assist developing countries in countries. Many GSP beneficiary countries generating sufficient foreign exchange to meet consider the program an important indication of their international debt obligations as well as the seriousness with which the United States further stimulate U.S. exports to these countries; views its policy of encouraging self-sufficient and (5) maintain the program's role as an economic development. important element

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