What did the General Agreement on Tariffs and Trade Do?

THIRTY-ONE COUNTRIES, mostly members of the Fund, between 1948 and 1950 entered into a multilateral trade agreement, called the General Agreement on Tariffs and Trade (GATT).1 A multilateral trade agreement of such comprehensive scope, covering not only tariffs but also the general principles of commercial policies, is without precedent. The participating governments deliberately avoided the traditional pattern of an “international organization,” thereby establishing mere contractual relations and not corporate relations among the contracting parties.2

The general objective of GATT is to reduce discriminatory practices and excessive trade barriers in international economic intercourse. The participants in GATT attempt to achieve that purpose through a number of consultative arrangements. These arrangements, along with a code of desirable trade practices (contained in GATT), are intended to replace both unilateral actions and bilateral (exclusive) arrangements in international trade. Under GATT, the concessions in tariffs and commercial policy granted by each country apply to trade with all other participants in GATT. A modern regime of multilateral trade practices presupposes stability in the field of exchange rates, and orderly exchange arrangements. With this in mind, the Contracting Parties agreed to seek the cooperation of the Fund principally in the form of consultation on all problems pertaining to their external financial position which are within the scope of the Fund’s activities. The Contracting Parties and the Fund adopted, in September 1948 and subsequently, provisional rules for cooperation. The present study deals very tentatively with a few legal aspects of collaboration between the Fund and the Contracting Parties.3

I. General Observations

The following general statements outline the somewhat complex network of relations between the Contracting Parties and the Fund.

The participants in GATT have agreed to coordinate their commercial policies regulated in GATT with the policies pursued by the Fund. They also have agreed to consult with the Fund before acting on commercial policy problems involving the external financial positions of contracting parties; and, when acting upon certain specified problems relative to the monetary reserve position of a contracting party, to follow the views of the Fund,4 which are determined by procedures different from those adopted in GATT.5 The Fund has agreed to cooperate with the Contracting Parties in accordance with the terms of GATT.

GATT requires the Contracting Parties to consult fully with the Fund whenever they are called upon to consider matters pertaining to the external financial positions of individual contracting parties.6 The subjects of consultation comprise, on the one hand, exchange matters proper (for example, a change in the par value of the currency of a contracting party which is not a member of the Fund) and, on the other hand, the monetary implications of commercial policies (for example, import restrictions which are to be instituted for balance of payments purposes). For all practical purposes, quantitative restrictions for balance of payments purposes constitute the principal subject of consultation between the Contracting Parties and the Fund, although numerous other activities of the Contracting Parties may involve problems concerning the external financial positions of contracting parties and, consequently, consultation with the Fund.

Many of the subjects with which the Contracting Parties deal may or may not have monetary implications (e.g., agreement to form a customs union). The Contracting Parties themselves will determine whether or not the subject with which they are dealing involves monetary problems, and consequently whether consultation with the Fund is required. The authority of the Contracting Parties to administer GATT is unaffected by the fact that the Contracting Parties base certain of their actions on the facts supplied and the opinions rendered by the Fund.

Cooperation of the Fund with the Contracting Parties on problems concerning monetary reserves, balances of payments, and foreign exchange arrangements is one important means of collaboration for promoting exchange stability in accordance with Article IV, Sec. 4(a), of the Fund Agreement.7 Such cooperation also assists Fund members, who are availing themselves of the transitional arrangements under Article XIV, Sec. 2 of the Fund Agreement to discharge their obligations, and to develop commercial policies which serve exchange stability.8 The Fund’s cooperation in furnishing the Contracting Parties with statistical and other facts on monetary affairs is in conformity with Article VIII, Sec. 5(c) of the Fund Agreement, which requires the Fund to act as a center of information on monetary and financial affairs. The Fund’s functions in consultative procedures will be adjusted to the specific subjects involved.

The Fund’s function in maintaining exchange stability will be furthered considerably if, through GATT arrangements, nonmembers of the Fund follow the patterns in respect to exchange discipline which are developed for Fund members. The Fund’s consultative functions in respect to nonmembers are based on the authority of the Fund to maintain exchange stability, and on its function to provide the machinery for consultation and collaboration on international monetary problems.

When the Contracting Parties consult the Fund on a matter relative to the external financial position of an individual contracting party, that party may wish to discuss certain financial problems with the Fund directly. GATT does not provide expressly for direct consultation between individual contracting parties which are Fund members and the Fund on the monetary aspects of matters falling under GATT. Such provision, however, is not necessary since it is self-evident that a contracting party which is a Fund member may consult with the Fund on any matter pertaining to its external financial position.

As mentioned above, a separate procedure agreed upon by the Fund and the Contracting Parties opens the possibility for nonmembers of the Fund to discuss with the Fund, upon the request of the Contracting Parties, certain matters pertaining to their external financial positions. Such direct consultation with the Fund does not prejudge, of course, the legal situation of the individual contracting party vis-à-vis the Contracting Parties.

The contracting parties accepted GATT only on a provisional basis. During the provisional period, any contracting party may give 60 days’ notice of withdrawal. Furthermore, during that period the provisions of important sections of GATT (Art. III-XVIII) apply only as far as they do not conflict with the legislation of the respective contracting party. GATT requires that the contracting parties observe, to the fullest extent of their executive authority, the general principles of those provisions of the Geneva draft (1947) of the Charter of the International Trade Organization9 which are not covered by GATT, e.g., the provisions on employment, investment, intergovernmental commodity agreements, etc. This requirement broadens, to some extent, the coverage of the matters on which the Contracting Parties must consult with the Fund. The reference above to the legislative and executive authority of the contracting parties indicates that the framers of GATT assumed that the constitutions of the contracting parties contain a division of powers along the lines of Western democracies.

The following may be classified as within the category of general cooperation between the Fund and the Contracting Parties; consultation on specific matters is discussed in later sections.

• (a) The Contracting Parties shall initiate discussions to consider whether measures other than import restrictions might be taken to relieve the pressure on monetary reserves when general disequilibrium prevails (Art. XII, par. 5). The Fund will presumably be requested to cooperate in the preparatory studies and to participate in the relevant discussions.

• (b) The Contracting Parties shall prepare annually a report on transitional discriminatory import restrictions (Art. XIV, par. 1 (g)). The Fund will presumably be requested to give technical assistance in respect to the monetary aspects of these reports.

• (c) As of January 1, 1951, the Contracting Parties are required to review all import restrictions for balance of payments purposes (Art. XII, par. 4(b)). In the course of the preparation of the report, the Contracting Parties will consult the Fund on the financial problems involved.

II. Import Restrictions for Balance of Payments Purposes

General provision on protecting reserves

To safeguard the external financial position of a contracting party, GATT authorizes prohibitions and restrictions (through quotas, licensing, state trading operations, or other measures) on the importation of goods from other contracting parties. The use of quantitative restrictions to prevent an undesirable drain of monetary reserves and to assist in the accumulation of adequate reserves is not confined to the postwar transitional period. Moreover, restrictions are authorized not only for balance of payments purposes but for various other purposes (e.g., economic development, intergovernmental commodity agreements, shortages). Whereas import restrictions for balance of payments purposes will always require comprehensive consultation with the Fund, the Contracting Parties may deal with other quantitative restrictions in a manner which does not require such consultation, although import restrictions imposed for any purpose influence more or less the external financial position of a country. There is nothing in GATT to prevent a contracting party from maintaining import restrictions on two or more grounds.10

Under Article XII, par. 1, of GATT, a contracting party is authorized to institute or maintain import restrictions to protect its monetary reserves, which are required to safeguard its external financial position and balance of payments. This paragraph reads as follows:

Notwithstanding the provisions of paragraph 1 of Article XI, any contracting party, in order to safeguard its external financial position and balance of payments, may restrict the quantity or value of merchandise permitted to be imported, subject to the provisions of the following paragraphs of this Article.

This paragraph implies that, in order to safeguard its external financial position, a contracting party should have reserves of an amount and a structure appropriate to a desirable situation in which no restrictions exist on imports and current payments.11

The principle of Article XII, par. 1, is subject to various qualifications, of which the most important are the criteria (Art. XII, par. 2) for determining whether and to what extent a contracting party is authorized to protect its reserve position by import measures.

Criteria for protecting reserves

Article XII, par. 2 (a), makes it explicit that the external financial position of a contracting party should not be protected by import restrictions unless (a) its reserves are under an imminent threat of a serious decline, or (b) its reserves are declining seriously, or (c) it seeks to achieve a reasonable rate of increase in “very low” reserves.12 The necessary extent of the import restrictions imposed (or to be imposed) under these criteria must, of course, be considered in the light of coexisting restrictions on current payments and other special factors affecting the reserve position.

Very low reserves. A contracting party with “very low” reserves is authorized to use import restrictions to an extent (and as long as) necessary to build up its reserves until its external financial position is safeguarded. It follows from the logic of Article XII, par. 1 and 2, that if the reserve position of a contracting party cannot be designated “very low” the contracting party should be able to settle its current international transactions without resort to any restrictions on imports and current payments, i.e., its reserves are then either at or above the lowest adequate level. The limits of adequacy may change as national and international economic conditions fluctuate.

The tempo at which “very low” reserves may be increased (using the device of import restrictions) must be reasonable, i.e., the rate of increase must be appropriate to the actual need under the circumstances of the case.13 For example, a country with virtually no monetary reserves would achieve, with only a modest absolute increase in reserves, a very high rate of increase which would nevertheless not be unreasonable. On the other hand, a country with almost adequate reserves would be entitled to apply import restrictions of a modest extent in order to achieve a modest increase in reserves under the “reasonable rate of increase” clause. If the rate of increase is greater than can be considered “reasonable,” the application of very comprehensive import restrictions in order to increase “very low” reserves within a very short time may be inconsistent with Article XII, par. 2(a) (ii), of GATT.

The use of the term “very low” in Article XII, par. 2(a) (ii), to describe the level of reserves, pertains to a situation in which restrictions on current payments and imports are absent. An “adequate” level of reserves, with reference to a situation in which restrictions on imports and current payments exist, will presumably be much less than under conditions of no restrictions on current transactions.

Serious decline in reserves. Under Article XII, par. 2(a), import restrictions may be applied to stop a serious decline in reserves, but as soon as the serious decline is stopped the restrictions must be removed. If a contracting party had considerably more reserves than are reasonably appropriate, it is not precluded from protecting by import restrictions these “very high” reserves from serious decline. After the decline has been stopped, however, import restrictions cannot be continued in order to achieve an increase of reserves to the “very high” level at which they had been before the decline occurred.

Threat of serious decline in reserves. Import restrictions may be applied under Article XII, par. 2 (a) (i), to forestall an imminent threat of a serious decline in reserves. Such restrictions must be removed when the imminence or seriousness of the threat subsides.14

Restrictions based on several criteria. Import restrictions may be based on two or on all three of the criteria enumerated above. Thus, the necessary extent of the import measures may depend at the same time on (a) the degree of the decline in reserves, (b) the degree of the imminence and seriousness of the threat of their decline, and (c) the degree of inadequacy of reserves.

Removal and progressive relaxation of restrictions

The import restrictions which have just been considered can be maintained “only to the extent that the conditions specified in that sub-paragraph [par. 2(a), Art. XII] still justify their application.” If the conditions justifying the application improve gradually, the contracting party must progressively relax the restrictions. As stated above, the restrictions must be removed when conditions no longer justify their maintenance (and the contracting party may reasonably expect that the removal of restrictions will not result in a situation in which the protection of the reserves again becomes necessary).

Assume that a contracting party’s reserves are “very low” (with reference to a hypothetical situation in which restrictions are absent) and the contracting party maintains import restrictions to increase its reserves. As the reserve position improves, the “necessary extent” of the import restrictions decreases. When this “necessary extent” of import restrictions is less than the existing extent of such restrictions, their progressive relaxation is required by Article XII, par. 2 (b), even though adequate reserves have not yet been accumulated. The rule of progressive relaxation applies also to the progressive improvement of conditions in respect to the decline in reserves and the threat of decline. A logical counterpart of the rule of progressive relaxation is the authority of a contracting party to intensify its import restrictions if the conditions affecting reserves deteriorate.

Pressure on the contracting party’s reserves may be a result of its domestic policies, especially in employment and economic development. If such domestic policies are consistent with the terms of GATT, the contracting party cannot be required to relax or remove the restrictions on the ground that their use might be unnecessary if different employment or development policies were adopted.15

Consultation between individual contracting party and Contracting Parties

To the use of import restrictions for balance of payments purposes is attached the obligation of the contracting party to consult with the Contracting Parties as to the nature of its balance of payments difficulties, the available alternative corrective measures, and the possible effect of such measures (the import measures and alternative measures) on the economies of other contracting parties. Article XII, par. 4, distinguishes between the following cases:

• (a) Contracting parties which are not applying import restrictions to safeguard their external financial position but are considering doing so must initiate consultations with the Contracting Parties (1) if practicable before instituting import restrictions; (2) otherwise immediately after their institution (Art. XII, par. 4(a)).

• (b) The Contracting Parties are required by Article XII, par. 4(b), to invite contracting parties substantially intensifying their import restrictions to consult within thirty days.

• (c) The Contracting Parties may institute at any time consultation on import restrictions which were imposed for balance of payments purposes (Art. XII, par. 4(b)).

• (d) An individual contracting party may suggest consultation to obtain the prior approval of the Contracting Parties for contemplated import restrictions (Art. XII, par. 4(c)).

• (e) Consultation may be suggested as a step in the course of a complaint procedure against another contracting party (Art. XII, par. 4(d)).

Any consultation has at least the following three objectives:

• (a) To assist in the clarification of the interests of the contracting party in respect to the import restrictions applied (or to be applied), i.e., to help the contracting party assess the effect of its import restrictions upon its own external financial position from the aspect of world financial developments;16

• (b) To prevent, in the interest of other individual contracting parties or the community of contracting parties, the arbitrary or capricious application of import measures;

• (c) To prevent certain import measures from causing unnecessary damage to other contracting parties.

The matters on which consultation is required, under Article XII, par. 4, are:

• (a) An analysis of “the nature” of the balance of payments difficulties, e.g., why reserves are declining, to what extent the difficulties can be attributed to domestic affairs and to developments in other countries;

• (b) Consideration of available “alternative” corrective measures which would fully or partly obviate the necessity of imposing (or intensifying) import restrictions (e.g., reorientation of investment policies, anti-inflationary measures);

• (c) The possible effect of the import restrictions and of the suggested alternative corrective measures on the economies of other contracting parties.

The principal purpose of the consultation is to ensure that the contracting party concerned adjusts its future behavior in respect to import restrictions to the requirements of the provisions of GATT. Hence, such consultations will deal primarily with those facts and factors which are significant for the future conduct of affairs. Facts relative to past conduct can be relevant only insofar as they reflect on the future or enable one to judge the future.

Must every consultation result in a conclusive formal resolution (“final decision”) of the Contracting Parties? As far as prior approval of restrictions (Art. XII, par. 4(c)) and complaint procedure (Art. XII, par. 4(d)) are concerned, a conclusive decision may be expected in most cases. However, insofar as consultations are based on Article XII, par. 4(a) and (b), it is a matter of policy whether the Contracting Parties wish to terminate the consultative procedure by a conclusive resolution or whether they prefer to limit the procedure to an exchange of opinions.17

The matters on which consultations take place are, to a large extent, related to monetary reserve problems; and, in respect to these problems, the Contracting Parties are required to consult fully with the Fund.

Most of the developments in the course of the consultations between the Contracting Parties and an individual contracting party will decisively influence the corresponding consultation between the Contracting Parties and the Fund. (Various aspects of that procedure are considered in other sections of this study.) An indication of the subjects considered in the course of the consultations with the Fund may be given by listing the important types of formal resolution which the Contracting Parties may render:

(a) An advisory opinion to an individual contracting party as to whether the import restrictions contemplated are consistent with GATT (Art. XII, par. 4(a));

(b) Prior approval insofar as the general extent, degree of intensity, and duration of import restrictions are concerned (Art. XII, par. 4(c));

(c) An ex-post advisory opinion as to whether quantitative restrictions that are maintained or intensified are consistent with the terms of GATT (Art. XII, par. 4(a) and (b));

(d) An expression of views concerning conditions for the settlement of complaints raised against contracting parties maintaining restrictions; after determining that restrictions are maintained inconsistently with Articles XII, XIII, and XIV of GATT, recommendation for modification or withdrawal of restrictions; the release of contracting parties from specified obligations under GATT vis-à-vis contracting parties applying quantitative restrictions in a manner inconsistent with the terms of GATT (Art. XII, par. 4(d));18

(e) Recommendations or rulings in respect to complaints of a contracting party that any benefit accruing to it under GATT is being nullified or impaired or that the attainment of any objective of GATT is being impeded as a result of action of another contracting party; determination in the course of a “Nullification or Impairment” procedure that the circumstances of the case justify the release of a contracting party from obligations or from the granting of concessions pursuant to GATT (Art. XXIII);

(f) The waiving of certain obligations involving problems concerning monetary reserves, balances of payments, and foreign exchange arrangements (Art. XXV).

Consultation between Contracting Parties and Fund

When consultations take place between the Contracting Parties and an individual contracting party on import restrictions imposed (or to be imposed) for balance of payments purposes, a comprehensive analysis of the external financial position of the contracting party concerned in the context of the international financial situation will be the customary point of departure.

The decisive factor in determining whether a contracting party is authorized to apply import restrictions to safeguard its external financial position is the condition of its monetary reserves. If the monetary authorities of the contracting party have adequate foreign funds at their disposal to settle its international obligations (taking into account possible fluctuations), and if these funds are not declining and no imminent threat of a serious decline exists, the contracting party’s reserves do not need protection through import restrictions. Whether monetary reserves are to be considered adequate (not “very low”) depends, in the broadest sense, on the member’s balance of payments prospects.

The Contracting Parties will presumably accept the Fund’s opinion as to which foreign assets may be considered monetary reserves for the purpose of Article XII of GATT, since GATT itself does not define monetary reserves. The Contracting Parties will also rely on the Fund’s judgment as to the significance of various factors affecting the reserves or the need for reserves.19

Quantitative restrictions to make effective exchange measures

Whether or not the criteria of Article XII, par. 2 (a), are applicable (i.e., whatever its reserve position), a contracting party is authorized by Article XV, par. 9(b), of GATT to use quantitative restrictions to make effective exchange restrictions and exchange controls, provided that such exchange measures are “in accordance” with the provisions of the Fund Agreement or a special exchange agreement, and that the use of these quantitative restrictions is not directed to any other purpose than to make effective the exchange measures mentioned above, and/or to attain the effects envisaged by those quantitative restrictions which are applied in accordance with Articles XI, XII, XIII, and XIV of GATT.20

In this connection, the following points should be noted:

(a) A contracting party which is not a member of the Fund or does not operate under a special exchange agreement cannot take advantage of the provision of Article XV, par. 9 (b), here discussed.

(b) Exchange measures must be actually applied by the contracting party wishing to make the exchange measures more effective through quantitative measures. A contracting party which is authorized to apply exchange measures cannot choose to substitute for exchange measures quantitative restrictions with an effect equivalent to that of the permitted exchange measures. The actual application of exchange measures is requisite to their legitimate reinforcement (making “effective”) by quantitative restrictions.

(c) Quantitative restrictions under this provision cannot be used if they would have an effect other than (1) making authorized exchange measures effective and (2) those effects permitted under Articles XI, XII, XIII, and XIV of GATT (for example, if they were to serve protective purposes or to counteract dumping).

(d) Since Fund members have almost complete freedom to regulate capital transfers by exchange measures, they will have broad possibilities of action in respect to making effective such exchange measures through quantitative restrictions.

A contracting party by mere reference to Article XV, par. 9 (b), can make wide use of quantitative restrictions to complement its authorized exchange system.

III. Discriminatory Practices in the Field of Quantitative Restrictions

Numerous provisions of GATT are designated to restrain contracting parties from applying discriminatory trade practices against each other. Article XIII, par. 1, containing a general prohibition of discrimination in export and import transactions, reads:

No prohibition or restriction shall be applied by any contracting party on the importation of any product of the territory of any other contracting party or on the exportation of any product destined for the territory of any other contracting party, unless the importation of the like product of all third countries or the exportation of the like product to all third countries is similarly prohibited or restricted.

The application of discriminatory trade restrictions vis-à-vis one contracting party by another is conditional upon the application of similar discriminations vis-á-vis all other contracting parties. If the most-favored-nation principle is to be applied to discriminatory quantitative restrictions, the least favorable treatment has to be applied to all contracting parties. It seems that, from the aspects of legislative and administrative techniques, the most-favored-nation clause, as contained in Article I of GATT, is best suited to the field of tariffs and charges, whereas the clause requiring least favored treatment vis-à-vis all, as contained in Article XIII, is best suited to discriminatory quantitative restrictions.

Discriminatory practices are frequently motivated by the wish of a contracting party either to spend or acquire, or not to spend or acquire, a certain currency. The consultative functions of the Fund extend to discriminatory trade practices whenever the Contracting Parties are dealing with problems concerning monetary reserves, balances of payments, and foreign exchange arrangements.

An enumeration, as given below, of those provisions of GATT applying to discriminatory practices which may have a significant effect on the external financial position of contracting parties seems to be the best means of conveying briefly the possible scope of the Fund’s consultative functions in this field.

Exceptional transitional period arrangements

In the postwar transition period, GATT permits broad deviations from the rule of nondiscrimination, as long as the necessity for protecting foreign exchange reserves is widespread.

Under Article XIV, par. 1, discriminatory deviations in the use of import restrictions are authorized to safeguard a contracting party’s external financial position. The contracting party must simultaneously avail itself of “transitional arrangements” in accordance with Article XIV of the Fund Agreement (or in accordance with a special exchange agreement). Contracting parties which are not members of the Fund cannot take advantage of Exceptional Transitional Period Arrangements unless they have concluded special exchange agreements authorizing transitional arrangements in the exchange field. GATT requires that policies used in connection with any of the Exceptional Transitional Period Arrangements shall (a) promote maximum development of international trade, and (b) expedite attainment of a balance of payments position which does not require resort to restrictive measures. GATT permits the following three categories of Exceptional Transitional Period Arrangements:

Discriminatory import restrictions having an effect equivalent to transitional exchange arrangements authorized under Fund Agreement (Art. XIV, par. 1 (b), of GATT). A contracting party applying import restrictions to safeguard its external financial position may, in using such restrictions, deviate from the rule of nondiscrimination in a manner that has an effect equivalent to those exchange restrictions which the contracting party may at that time apply under Article XIV of the Fund Agreement (or under an analogous provision of a special exchange agreement).

Discriminatory import restrictions applied on March 1, 1948 (Art. XIV, par. 1(c), of GATT). A contracting party applying import restrictions to safeguard its external financial position, and which on March 1, 1948 was applying such import restrictions in a manner that deviated from the rules of nondiscrimination, may continue so to deviate, and may adapt such discriminatory deviations to changing circumstances.

Discriminatory import restrictions in order to obtain additional imports (Annex J of GATT).21 A contracting party applying import restrictions to safeguard its external financial position may relax such restrictions in a manner which departs from the rule of nondiscrimination to the extent necessary to obtain additional imports. The levels of prices of products so imported (additional imports) should not be substantially higher than those for comparable goods available from other countries. The import transactions must not be part of an arrangement which would result in a reduction in the amount of gold and convertible currencies derived from exports to members not participating in such an arrangement.

Other permitted discriminations

In addition to exceptional transitional period arrangements, the contracting parties are permitted to practice discrimination as follows:

(a) Contracting parties applying import restrictions to safeguard their external financial positions (Art. XII) may, with the prior consent of the Contracting Parties, apply them in a discriminatory manner in respect of a small part of their external trade. This measure is independent of whether or not the transitional exchange arrangements (in accordance with the Fund Agreement or a special exchange agreement) have been terminated.22

(b) A contracting party applying balance of payments restrictions may direct its exports in such a manner as to increase its earnings of convertible currencies (Art. XIV, par. 4).

(c) A contracting party applying import restrictions to safeguard its external financial position under Article XII is authorized, until December 31, 1951, to discriminate in the application of those import restrictions if the discrimination does not involve a substantial departure from the rule of nondiscrimination and if as a result of the discrimination the contracting party is placed in a position to assist another country whose economy has been disrupted by war (Art. XIV, par. 3(b)).

(d) Import restrictions to safeguard their external financial positions (Art. XII) may be applied in a discriminatory manner by a group of contracting parties which have a “common” quota in the Fund against outsiders (which are not included in that “common” quota). In this way, as far as the discriminatory import restrictions are concerned, a free trade area will exist with reference to specified commodities among the contracting parties of an empire group which are covered by one membership in the Fund (Art. XIV, par. 3(a)).23

(e) GATT authorizes contracting parties to apply discriminatory quantitative restrictions having an effect equivalent to exchange restrictions applicable by Fund members under the scarce currency provisions (Art. XIV, par. 5(a)).

(f) Article XV, par. 9 (b), of GATT authorizes the use of restrictions on imports and exports to “make effective” such (discriminatory and nondiscriminatory) exchange measures as are consistent with the Fund Agreement or with the terms of the respective special exchange agreement. (These measures are considered also in Section II.)

(g) If discriminatory quantitative restrictions are “made effective” through state trading operations, the provisions of GATT covering discriminatory quantitative restrictions also apply (Art. XI and XIII). In other words, the fact that the state (and not private residents) is engaging in foreign trade transactions does not affect the contracting party’s obligations under the rule of nondiscrimination. However, if foreign trade is conducted by a state monopoly, it may be difficult to ascertain whether the rule of nondiscrimination has been taken into account.

(h) Discrimination in trade which may require Contracting Parties’ action (and consultation with the Fund as far as monetary aspects are concerned) is authorized in a number of other cases. International commodity and commodity control agreements, like preparatory measures for customs unions and free trade areas, will by their very nature involve discrimination (Art. XX and XXIV). Discriminatory restrictions are temporarily authorized to relieve critical shortages of essential goods (Art. XI), or in the postwar period to deal with such problems as the distribution of products in short supply, the control of prices, and the liquidation of war surpluses (Art. XX).24 Film quotas may be discriminatory (Art. IV).

IV. Findings and Determinations of the Fund

General provision on findings and determinations

The provision of Article XV, par. 2, of GATT that the Contracting Parties “shall consult fully” with the Fund “in all cases” when they deal with problems concerning the external financial position of contracting parties can mean only that the Contracting Parties do not wish to take any significant action involving the external financial position of contracting parties without prior consultation with the Fund. The general provision requiring full consultation with the Fund does not, however, debar the Contracting Parties from using their own judgment (after having considered the opinion of the Fund) on “problems concerning monetary reserves, balances of payments or foreign exchange arrangements.”

In addition to this provision, Article XV, par. 2, enumerates matters on which the Contracting Parties expressly wish to be guided, when formulating their over-all judgment, by the facts supplied and the opinions rendered by the Fund. The Fund may supply the Contracting Parties with (a) findings on statistical and other facts, (b) determinations as to whether exchange actions of individual contracting parties are authorized, and (c) determinations concerning specified questions in respect to monetary reserves. The circumstances are specified under which the Fund may designate certain facts, which it supplies, as “findings,” and certain opinions as “determinations”; these findings and determinations shall be “accepted” by the Contracting Parties when reaching their decision. The obligation to “accept” the findings of the Fund implies that the Contracting Parties must not, if they wish to base their action on “statistical and other facts,” base their action on facts other than those supplied by the Fund. If the Contracting Parties wish to disregard either the Fund’s “findings” or “determinations,” they can do so only by basing their action on factors other than those over which the Fund has the function of rendering “findings” or “determinations.”

Subjects on which the Fund renders findings and determinations

Findings on statistical and other facts. When the Fund is consulted by the Contracting Parties on a problem concerning monetary reserves, balances of payments, or foreign exchange arrangements (regardless of whether the consultation concerns quantitative restrictions or other topics), the Fund may on its own initiative, or upon request of the Contracting Parties, present to the Contracting Parties relevant findings on statistical and other facts relating to foreign exchange, monetary reserves, and balances of payments.25 These findings must be “accepted” by the Contracting Parties.

The Fund will presumably base its findings on verifiable evidence. When the Fund cannot divulge confidential facts, it will inform the Contracting Parties to that effect.

Determination as to whether exchange actions of Contracting Parties are authorized. The Fund, when consulted by the Contracting Parties, may upon its own initiative or upon the request of the Contracting Parties render “determinations” as to whether actions of the Contracting Parties “in exchange matters” are “in accordance” with the Fund Agreement as far as Fund members are concerned, or with a relevant special exchange agreement as far as nonmembers of the Fund are concerned. The expression “action in exchange matters” covers a variety of situations. To be sure, all actions of a contracting party (except mere organizational measures) covered by the Fund Agreement or by a special exchange agreement will, in all likelihood, be considered as covered by the term “exchange matters.” Presumably all exchange actions of a contracting party, which are consistent with the provisions of the Fund Agreement, including the purposes of the Fund, may be considered to be “in accordance” with the Fund Agreement.

The functions of the Contracting Parties in respect to a special exchange agreement will consist principally of judging whether exchange actions are “in accordance” with that agreement. This is the reason for the Fund’s comprehensive consultative functions in the application of those agreements.

Determinations concerning specified questions on monetary reserves. When a contracting party imposes (or envisages) import restrictions to protect its reserves, the Contracting Parties may be called upon to consider whether criteria included in Article XII, par. 2(a), are applicable and thus make the contracting party’s action consistent with GATT.26 The text of Article XII, par. 2(a), is given in footnote 12, above.

When the Contracting Parties are considering cases involving the status of monetary reserves, as set forth in Article XII, par. 2(a), “determinations” will be supplied by the Fund and, under Article XV, par. 2, the Contracting Parties shall accept these determinations where the intention is to reach a “final decision.”27

The Contracting Parties are required to reach their decisions in the light of all relevant factors provided for in GATT, and not merely on the basis of those concerning which the Fund renders determinations (e.g., the Contracting Parties have to consider also employment problems). The over-all “final” decision as to whether and to what extent a contracting party’s import restrictions are necessary, and the over-all considerations concerning the commercial effects of such restrictions, are exclusively in the province of the Contracting Parties, although in reaching such “final decision” the determination of the Fund will be, no doubt, a very weighty element.

Terms requiring further clarification

Three expressions in the last sentence of Article XV, par. 2, are briefly analyzed here, in order to make clearer the circumstances under which the Fund is expected to make determinations: (1) “criteria” set forth in Article XII, par. 2(a), (2) “cases” involving these criteria, (3) “other matters” on which the Fund renders determinations from the financial point of view.

“Criteria.’ The “facts” in Article XII, par. 2(a), (see fn. 12) are set forth as criteria in order to enable both the Contracting Parties and the individual contracting party concerned to test whether (and to what extent) import restrictions are necessary (and consequently authorized). The “extent” of these import restrictions will probably be “measured” in terms of the value of foreign exchange which will be saved. One or more of the criteria compose the yardsticks for determining whether (and to what extent) import restrictions are authorized under Article XII of GATT.

“Cases” involving criteria. Determinations will be rendered by the Fund when the Contracting Parties consult the Fund in “cases” involving the above criteria. Generally speaking, one or more of the criteria will be involved in all consultations on the institution, maintenance, intensification, relaxation, or removal of import restrictions. The Fund will render determinations only in “cases” which actually concern one or more individual contracting parties. Abstract problems related to monetary reserves (for example, whether there is widespread disequilibrium as mentioned in Article XII, par. 5, of GATT), on which the Fund is consulted in the interest of the community of contracting parties, will not constitute a “case” from the point of view here discussed.

“Other matters.” “Other matters” are those on which the Fund can render determinations only from “financial” aspects and not from any relevant aspect. Financial aspects include the domestic and external monetary, fiscal, credit, and investment position of the contracting party; and inflationary and deflationary movements in connection with the import restrictions considered. The term “other matters” applies, inter alia, to the existence of an imminent serious threat to monetary reserves, the domestic and external causes of the threat, the nature of the balance of payments difficulties requiring import measures, corrective measures alternative to import restrictions, possible effects of the import restrictions, and effects of the alternative measures on the economies of other contracting parties.

V. Exchange Matters Regulated by GATT

A variety of subjects in the exchange field are regulated by GATT. Some were included because the governments concluding GATT considered them as falling within the framework of “commercial policy” (for example, most-favored-nation treatment of charges in connection with exchange licenses on imports). In the interest of orderly trade relations, it was also thought proper to control the exchange policies of nonmembers of the Fund, for example, by special exchange agreements.

Standards for quantitative restrictions coordinated with those for exchange restrictions

GATT contains a number of provisions tending to coordinate regulations and policies as to restrictions on payments and transfers with quantitative restrictions. One of these provisions is contained in Article XV, par. 5, which reads:

If the Contracting Parties consider, at any time, that exchange restrictions on payments and transfers in connection with imports are being applied by a contracting party in a manner inconsistent with the exceptions provided for in this Agreement for quantitative restrictions, they shall report thereon to the Fund.

No doubt, the intention of this provision is to suggest that adverse effects, resulting from differing standards applied to discrimination in respect to exchange and quantitative restrictions, should be avoided. Article XV, par. 5, of GATT covers exchange restrictions applied by contracting parties which (a) are Fund members, (b) operate under a special exchange agreement, or (c) are not Fund members and have not entered into a special exchange agreement.

The effect of a report in accordance with Article XV, par. 5, may vary according to the above three categories as follows:

(a) If a Fund member applies exchange restrictions in a manner which would conflict with GATT if those exchange restrictions were import restrictions, but the exchange restrictions are “in accordance” with the Fund Agreement, the Fund member is authorized to apply them, under Article XV, par. 9 (a), of GATT. If, however, the exchange measures are inconsistent with the Articles of Agreement of the Fund, the Fund will presumably take appropriate measures.

(b) If a contracting party is operating under a special exchange agreement, the Fund will advise the Contracting Parties along lines similar to those indicated above for Fund members.

(c) If the contracting party is not subject to a special exchange agreement or to the Fund Agreement, the Fund will presumably advise the Contracting Parties as to the repercussions of the exchange action on the external financial situation of the contracting parties concerned. The Fund will also consider the “frustrating” effect of the contracting party’s action, following Article XV, par. 4, of GATT.28

Survey of exchange matters regulated by GATT

The various GATT provisions which deal, directly or indirectly, with exchange problems may now be surveyed.

GATT obligations concerning use of authorized exchange measures. Article XV, par. 9(a), contains a sweeping provision on the coordination of the obligations of a contracting party concerning its exchange actions under the provisions of GATT with its obligations under the Fund Agreement (or a corresponding provision of a special exchange agreement). This provision reads:

Nothing in this Agreement shall preclude:

(a) the use by a contracting party of exchange controls or exchange restrictions in accordance with the Articles of Agreement of the International Monetary Fund or with that contracting party’s special exchange agreement with the Contracting Parties.

From this provision it is evident that, if an exchange action is covered by the term “exchange controls or exchange restrictions,” then the fact that its application is “in accordance” with the Fund Agreement (or a special exchange agreement) creates an exemption from any limitations which GATT may contain in respect to the application of such action. Thus, if a contracting party’s exchange actions are authorized by the Fund, the frustration provision of Article XV, par. 4, of GATT cannot preclude the use of such exchange measures. This exemption does not apply to exchange restrictions and controls which are not “in accordance” with the Fund Agreement (or special exchange agreement). Consequently, Article XV, par. 9(a), does not cover (a) exchange restrictions and controls of those contracting parties which are not members of the Fund and have not entered into a special exchange agreement, or (b) exchange restrictions and controls (of Fund members) which are inconsistent with the Fund Agreement, and exchange restrictions and controls (of contracting parties operating under a special exchange agreement) which are inconsistent with the provisions of a special exchange agreement.

Protection of Fund against frustrating trade action. Article XV, par. 4, requires that contracting parties do not frustrate the intent of the provisions of the Fund Agreement “by trade action.” The scope of this provision embraces also “trade actions” which, in the absence of the provision of Article XV, par. 4, would be consistent with GATT. The provision applies to all contracting parties whether or not members of the Fund.

Protection of GATT against frustrating action in exchange field. Article XV, par. 4, requires that contracting parties do not frustrate the intent of the provisions of GATT by exchange action. In the light of Article XV, par. 9 (a), this provision applies principally to exchange action which is not “in accordance” with the Fund Agreement or is not consistent with the provisions of a special exchange agreement.

Most-favored-nation treatment of charges on exchange transactions. Article I of GATT requires contracting parties to accord to other contracting parties immediately and unconditionally most-favored-nation treatment concerning any charge imposed on the international transfer of payments for imports and exports. This provision may, at first sight, appear to limit the freedom of action of contracting parties operating under the Fund Agreement or a special exchange agreement. (For example, it would appear that Article I of GATT prohibits the application of discriminatory charges by a member on transfers of payments to hard currency countries even if such charges are consistent with the Fund Agreement.) The apparent conflict is dispelled, however, if the provision of Article I is read in the light of Article XV, par. 9(a), which shows that the most-favored-nation clause does not apply to those exchange charges that can qualify as authorized exchange restrictions. The Contracting Parties will consult with the Fund as to whether a discriminatory exchange charge may be considered “in accordance” with the Fund Agreement.

Special exchange agreements. GATT requires contracting parties to adhere to the Fund or, failing that, to enter into a special exchange agreement with the Contracting Parties, which shall provide that the objectives of GATT will not be frustrated by the exchange policies of the contracting party.29 The special exchange agreement is intended to be a substitute for Fund regulations, subjecting nonmembers of the Fund to certain rules in respect to exchange stability and exchange restrictions. The Contracting Parties and the Fund cooperated closely in the preparation of the text of the special exchange agreement, and the administration of these agreements also requires close collaboration. The Fund, upon request of the Contracting Parties, will determine in the course of consultations whether a contracting party’s action with respect to exchange matters is in accordance with the terms of a special exchange agreement (Art. XV). Actually, three special exchange agreements have been signed: the one concluded between the Contracting Parties and Ceylon, in effect between April 2 and August 29, 1950, when Ceylon accepted membership in the Fund; the one signed by Haiti to become effective February 23; and the one signed by Indonesia, to become effective February 25. The texts of these special exchange agreements are to be published in the Treaty Series of the United Nations.

The text of a special exchange agreement covers the following four groups of related obligations: (a) general collaboration on exchange stability with other contracting parties, (b) establishment of a par value of the contracting party’s currency governing certain gold transactions and exchange rates, (c) par value changes to be made only after consultation with Contracting Parties (or with their prior approval) and only to correct a fundamental disequilibrium, and (d) the subjecting of restrictions on international payments to prior approval of the Contracting Parties.

Conversion rates in customs valuation. As a general rule, when conversion is needed for customs valuation purposes, the Contracting Parties are required to convert foreign currency into their own currency on the basis of agreed par value rates. If no par value has been established for either or both of the respective currencies (those of the exporter and importer), the conversion rates shall reflect the current valuation in commercial transactions of the currencies involved. Where both the exporting and importing countries have agreed par values, and the exporting country employs multiple currency practices consistently with the Fund Agreement, the importing country may choose to convert the exporting country’s currency either according to par value rates or according to rules to be issued by the Contracting Parties in agreement with the Fund (Art. VII of GATT).

Restriction on amount of charges raised in connection with imports and exports. Contracting parties imposing any kind of charges in connection with imports and exports (including the administration of exchange controls) shall limit the amount of the charges to the approximate cost of services rendered. The imposition of these charges should not result in indirect protection or revenue. Contracting parties should put this principle into effect “at the earliest practicable date” (Art. VIII).30

According to an interpretative note to Article VIII, GATT condemns “the use of exchange taxes or fees as a device for implementing multiple currency practices.” The note also states that Article VIII of GATT requires that such charges (and multiple currency practices) be eliminated at the earliest practicable date even if they are approved by the Fund. Furthermore, the note implies that if such exchange charges are used with the approval of the Fund for other than balance of payments purposes (fiscal purposes or protection of domestic markets), they must be eliminated forthwith, i.e., their elimination cannot be delayed until “the earliest practicable date.”31

The present version of Article XV, par. 9 (a), of GATT, which implicitly modifies Article VIII and its interpretative note, is of more recent origin (Third Session at Annecy) than Article VIII and the interpretative note.32 In addition, the very text of Article XV, par. 9, explicitly states that no other provision of GATT shall preclude the use of authorized exchange restrictions.

To sum up: If exchange charges (whether or not in the form of multiple currency practices) are applied by a contracting party “in accordance” with the Fund Agreement, or with the provisions of a special exchange agreement, respectively, the limitations of Article VIII do not preclude their use.

Publication and administration of trade and exchange regulations. Contracting parties shall promptly publish their respective regulations, judicial decisions, and administrative rulings relating to the transfer of payments for imports and exports. Such measures shall not be put into effect before they have been officially published. They shall be administered in a uniform, impartial, and reasonable manner (Art. X).

Import and export of gold. In connection with the import or export of monetary gold, contracting parties shall not apply trade measures which discriminate among contracting parties in an arbitrary or unjustifiable manner or which represent a disguised restriction on trade (Art. XX).

Currency problems attached to Schedules of Concessions. The Schedules of Concessions annexed to GATT contain the lists of duties, charges, and margins of preferences. Article II of GATT includes various general regulations concerning these concessions, inter alia, the following provisions dealing with certain foreign exchange problems:

(a) Methods of converting currencies. Under Article II, par. 3, a contracting party cannot alter its method of converting currencies so as to impair the value of any of the concessions granted to other contracting parties. This pertains principally to alterations of conversion “methods” affecting the value of concessions which have an effect similar to an increase of tariffs on the competitive situation of importers. For example, an alteration of the method of conversion would affect the value of concessions if the competitive position of an importer vis-á-vis a domestic producer in respect to a certain product was rather favorable for the importer at the time of granting the concession, and later, as a consequence of a change in a currency practice (e.g., the institution or alteration of exchange certificate arrangements), the competitive situation were altered in a manner which would put the importer in a less favorable position.

If the exchange measures which affected the changes in conversion methods are inconsistent with the provisions of the Fund Agreement, or a corresponding provision of a special exchange agreement, they are also inconsistent with Article II, par. 3, of GATT. If, however, the alteration of the conversion method is based on exchange measures (exchange restrictions or exchange controls) which are authorized by the Fund Agreement or a special exchange agreement, they are exempted, under Article XV, par. 9 (a), of GATT, from the limitations of the provision of Article II, par. 3.

(b) Effect of reduction of par value on specific duties and charges. According to Article II, par. 6(a), of GATT, specific duties and charges (including margins of preference) of Fund members “are expressed in the appropriate currency at the par value accepted or provisionally recognized by the Fund at the date of this agreement.”33 If a contracting party which is a Fund member reduces its par value, consistently with the Fund Agreement, by more than 20 per cent, it is authorized, with the consent of the Contracting Parties, to adjust (presumably to increase) its specific duties, charges, and margins of preference, taking account of the changed par value. The Contracting Parties may concur with such adjustment only if it does not impair the value of the original concessions.

The provision of Article II, par. 6(a), applies to those contracting parties (Fund members) which adhered to GATT from its establishment. Article II, par. 6 (b), contains an analogous provision concerning contracting parties which became members of the Fund later than the date of GATT, and also concerning those contracting parties which operate under a special exchange agreement. However, the possibility of adjustment of concessions under this title is not open if (1) a contracting party reduced its par value inconsistently with the Fund Agreement or inconsistently with its special exchange agreement; (2) Fund members or contracting parties which operate under a special exchange agreement do not have agreed par values; and (3) a contracting party is neither a Fund member nor operating under a special exchange agreement.

(c) Reference in Article II, par. 6(a), to par values “provisionally recognized by the Fund.” This term requires some elucidation. The Fund Agreement does not contain provisions concerning “provisionally recognized” par values.34 The legislative history of Article II, par. 6(a), clearly shows that the expression “par value provisionally recognized by the Fund” was intended to designate par values communicated to the Fund in accordance with Article XX, Section 4(a), of the Fund Agreement, which have not yet been agreed upon with the Fund.

Dumping and subsidy by means of multiple currency practices. Article VI of GATT “condemns” dumping. It authorizes a contracting party whose interests are adversely affected by dumping practices to levy an anti-dumping duty to offset or to prevent dumping. The Article also authorizes a contracting party to levy on the importer a “countervailing duty” to offset bounties or subsidies of exporters.

According to an interpretative note to the Article, competitive advantages attained by an exporting country which are the result of partial depreciation by multiple currency practices in that country may be met by the importing country with anti-dumping duties.35 Furthermore, if a country subsidizes its exports through the medium of multiple currency practices (e.g., by establishing for the earnings of foreign exchange for specified commodity exports buying rates higher than par value rates) in order to attain competitive advantages in the market of an importing country, the importing country may offset the competitive advantages by a countervailing duty.36

Assume that the exporting country used multiple currency practices consistently with the Fund Agreement, and that these practices increased its competitive advantages in an import market. The importing country would, however, protect the established competitive position of its domestic producers through anti-dumping or countervailing duties. Could the exporting country justifiably complain that the importing country is frustrating by trade action the intent of the provisions of the Fund Agreement (Art. XV, par. 4, of GATT) ? There is an apparent conflict between the frustration clause and the note on countervailing duties. It could be argued that the authority of the exporting country to apply a multiple currency practice does not imply an obligation of other contracting parties (importers) to adjust or maintain their tariff regime in a manner such that the exporting country could make effective use of the competitive advantage resulting from the multiple currency practice.

VI. Commercial, Development, and Employment Policies

The most important items in the field of commercial, development, and employment policies which may involve problems relative to the external financial positions of contracting parties, and consequently consultation with the Fund, are the following:

Measures to promote economic development and reconstruction (Art. XVIII)

Measures to promote economic development and reconstruction may involve a number of complex problems affecting the external financial position of a contracting party. It is noteworthy that a considerable number of quantitative restrictions have been applied under this title by contracting parties. According to general practice, the Contracting Parties are carefully considering every protective measure instituted under this title.

Export subsidies (Art. XVI)

Article XVI of GATT does not restrict export subsidies; it only opens the way to consultations with a view to limiting them. The Fund presumably will be consulted if the Contracting Parties deal with exchange problems in this connection.

Agreements leading to customs unions and free trade areas (Art. XXIV)37

Agreements made in preparation for customs unions or for free trade areas may cover various discriminatory measures in the fields of exchange practices and quantitative restrictions, and may consequently require consultation with the Fund.

Intergovernmental commodity agreements (Art. XX)

Intergovernmental commodity agreements frequently deal with or reflect on exchange problems which directly affect the external financial positions of contracting parties. To that extent presumably the Fund will be consulted by the Contracting Parties.

Balance of payments aspects of full employment policy (Art. 3 and 5 of Geneva draft)

GATT itself contains very few references to employment policies (e.g., Art. XII, par. 3). The Contracting Parties’ jurisdiction over employment policies originates in the provision that contracting parties must observe, to the fullest extent of their executive authority, the general principles of the Geneva draft of the ITO Charter (Art. XXIX of GATT), which contains several provisions on employment policies. For example, the Geneva draft (Art. 3 and 5) requires that governments maintain full and productive domestic employment. The measures applied for the maintenance of full employment must not, however, involve the creation of balance of payments difficulties for other countries. A contracting party when carrying out, without resorting to trade restrictions, the general principles of the Geneva draft on the maintenance of domestic employment may be handicapped by difficulties in maintaining its external financial position. One major factor causing these difficulties may be a persistent export surplus of another member. At the same time that the handicapped member takes appropriate action to correct its difficulties, the country with the strong export balance must make its full contribution toward assisting in the correction of the situation.38

VII. Organization and Procedure

One of the fundamental characteristics of GATT is that it does not provide the bureaucratic machinery customary in international agencies. Administrative routine functions are managed on a provisional basis by the Secretariat of the Interim Commission of the International Trade Organization in Geneva.

GATT envisages an agreement with the Fund on procedure for consultation.39 Although no comprehensive agreement exists yet, a number of informal understandings on various problems of consultative procedure have been reached. Effective cooperation between the agencies of each Government which represent that Government in the Fund and in the Contracting Parties is a prerequisite to fruitful collaboration between the Fund and the Contracting Parties.

The Contracting Parties have met in five sessions, the last one, in Torquay, England, terminating in December 1950. The lack of adequate machinery for intersessional conduct of the affairs of the Contracting Parties has led to difficulties. It has been suggested that a permanent committee and a permanent secretariat be established. This suggestion will be considered at the Sixth Session of the Contracting Parties in September 1951 at Geneva. The attitude of the Government of the United States40 and of the United Kingdom41 in this respect will be of decisive importance. The questions of organization and procedure to be considered at the Sixth Session are also relevant to the Fund’s relations with the Contracting Parties.

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