Linkage Between WTO, IMF, WB

 Journal of World Trade 34(4): 1–35 2000. © 2000 Kluwer Law International. Printed in The Netherlands.

Linkages between International Financial and Trade Institutions IMF, World Bank and WTO  Dukgeun AHN* I.

0

INTRODUCTION

The intertwined relationship between international financial institutions such as the International Monetary Fund (IMF) or the International Bank for Reconstruction and Development (World Bank) and international trade institutions such as the General Agreement on Tariffs and Trade (GATT) and now the World Trade Organization (WTO) has become by far closer and more complex than ever. 1 Potential conflicts between their jurisdiction and operation have drawn much attention in recent years, mainly due to the formal establishment of international trade organization, or the WTO, and the resurgent roles of the IMF and the World Bank during the financial crisis in the late 1990s. When the roles of the IMF and the World Bank increased as a result of the recent financial and exchange crisis that swept over the substantial part of the world economy, the “new” Bretton Woods regime within which it now embraces the WTO has raised a concern on coherence and harmonization with respect to the areas of overlapping functions and mandates. The need for a co-operative approach to the interface of trade and financial issues that would be governed by the separate regimes and organizations has long been recognized as essential and inevitable for maintaining a balanced world economic system. As the world economy becomes more globalized, the ubiquity of intertwined trade and financial issues in a certain international transaction or economic conduct tends to increase. For example, the exchange rate change that may be initiated as a part of the IMF reform programmes unequivocally affects the calculation of dumping margins and subsidy impacts which is viewed as the primary concern of the GATT/WTO.2 0

* Assistant Professor, School of Public Policy and Management, Korea Development Institute, Seoul, Korea; B.A., Seoul National University; Ph.D., University of Michigan; J.D., University of Michigan Law School. The author is currently advising the Ministry of Justice as special legal counsel on WTO and international trade laws. I am grateful to Professors John H. Jackson and Robert Howse for their insights and guidance on the subject discussed in this paper. This article has also benefited from useful comments by Professor Thomas Cottier. 1 The difference in the sizes of these institutions is still substantial. As of April 2000, the WTO Secretariat has 534 staffs and the total budget for year 2000 amounts to 125,386,460 SFR (about $ 75 million). See WTO,  Annual Report (2000). Report  (2000). The IMF has currently more than 2,000 working staffs and its administrative budget for the Report  (1999). The World fiscal year 2000 is about $ 576 million. See IMF, IMF, Annual Report (1999). World Bank has about 9,300 staffs and Repo rt (1999). its administrative budget for 1999 was about $ 1,328 million. See World Bank,  Annual Report  (1999). 2  John H. Jackso n, Managing the Trading System: The World Trade Organization and the Post-Uruguay Round  GATT Agenda, in Managing the World Economy: Fifty Years after Bretton Woods (Peter B. Kenen ed., 1994), 131, 143.

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Likewise, while many economic development strategies for developing countries that are funded mainly by the World Bank often try to utilize trade policies for the purpose of promoting exports or substituting imports or both, such subsidy policies affecting international trade may be prohibited by the Agreement on Subsidies and Countervailing Measures (hereinafter “SCM Agreement”) under the auspice of the WTO.3 As illustrated in several instances in the context of the recent IMF salvage programmes, certain elements of those programmes that tend to generate direct or  indirect trade implication have been strongly opposed by other countries that allege the violation of the obligation under the WTO agreements.4 At the same time, with intensified and broadened scope of the WTO, more of its jurisdiction seems to overreach into the territory in which monetary and financial institutions have conventionally exerted more or less exclusive jurisdiction. In fact, trade and financial elements in many international transactions have been so intertwined that their  characterization as being either trade or financial becomes extremely difficult or even meaningless in many cases. In this article, I present the broad overview of these institutions’ coexistence since the Bretton Woods Conference mainly from the perspective of the trade institution and examine the relevant GATT/WTO cases in which the linkage issues between finance and trade were addressed. In addition, the t he role of the primary WTO organ that deals with financial matters, or the Committee on Balance-of-Payments Restrictions (hereinafter “BOP Committee”), is also examined in the context of WTO dispute settlement. More specifically, in section II, the historical review of coexistence of the IMF and the World Bank under the GATT system is presented. A brief history of the Bretton Woods system and legal provisions governing co-operation with other  organizations in each institutional charter are reviewed. In section III, a recent and more formalized WTO agreement with the IMF and the World Bank for the purpose of assuring coherence is discussed. Section IV examines dispute panel decisions under  the GATT and the WTO that addressed roles of the IMF and the BOP Committee in the WTO system. Section V provides proposals to be considered in future efforts to enhance the coherence among these organizations. The conclusion is given in sect section ion VI.

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Article 3.1 of the SCM Agreement prohibits both subsidies contingent, in law or in fact, upon export performance, and subsidies contingent upon the use of domestic over imported goods. 4 For example, the European Communities raised a complaint against the Korean government concerning its work-out programme for the shipbuilding sh ipbuilding industry, industry, alleging that the IMF financial assistance was channelled to that industry in order to subsidize it in violation of t he SCM Agreement. In response to that argument, the Korean government explained that the IMF fund was merely deposited in the Federal Reserve Bank of New York to support exchange reserve and never actually transmitted to Korea.

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Likewise, while many economic development strategies for developing countries that are funded mainly by the World Bank often try to utilize trade policies for the purpose of promoting exports or substituting imports or both, such subsidy policies affecting international trade may be prohibited by the Agreement on Subsidies and Countervailing Measures (hereinafter “SCM Agreement”) under the auspice of the WTO.3 As illustrated in several instances in the context of the recent IMF salvage programmes, certain elements of those programmes that tend to generate direct or  indirect trade implication have been strongly opposed by other countries that allege the violation of the obligation under the WTO agreements.4 At the same time, with intensified and broadened scope of the WTO, more of its jurisdiction seems to overreach into the territory in which monetary and financial institutions have conventionally exerted more or less exclusive jurisdiction. In fact, trade and financial elements in many international transactions have been so intertwined that their  characterization as being either trade or financial becomes extremely difficult or even meaningless in many cases. In this article, I present the broad overview of these institutions’ coexistence since the Bretton Woods Conference mainly from the perspective of the trade institution and examine the relevant GATT/WTO cases in which the linkage issues between finance and trade were addressed. In addition, the t he role of the primary WTO organ that deals with financial matters, or the Committee on Balance-of-Payments Restrictions (hereinafter “BOP Committee”), is also examined in the context of WTO dispute settlement. More specifically, in section II, the historical review of coexistence of the IMF and the World Bank under the GATT system is presented. A brief history of the Bretton Woods system and legal provisions governing co-operation with other  organizations in each institutional charter are reviewed. In section III, a recent and more formalized WTO agreement with the IMF and the World Bank for the purpose of assuring coherence is discussed. Section IV examines dispute panel decisions under  the GATT and the WTO that addressed roles of the IMF and the BOP Committee in the WTO system. Section V provides proposals to be considered in future efforts to enhance the coherence among these organizations. The conclusion is given in sect section ion VI.

3

Article 3.1 of the SCM Agreement prohibits both subsidies contingent, in law or in fact, upon export performance, and subsidies contingent upon the use of domestic over imported goods. 4 For example, the European Communities raised a complaint against the Korean government concerning its work-out programme for the shipbuilding sh ipbuilding industry, industry, alleging that the IMF financial assistance was channelled to that industry in order to subsidize it in violation of t he SCM Agreement. In response to that argument, the Korean government explained that the IMF fund was merely deposited in the Federal Reserve Bank of New York to support exchange reserve and never actually transmitted to Korea.

LINKAGES BETWEEN INTERNATIONAL FINANCIAL AND TRADE INSTITUTIONS

II.

HISTORICAL REVIEW

A.

BRIEF

OF

COEXISTENCE

UNDER THE

3

GATT

HISTORY ON THE BIRTH OF THE BRETTON WOODS SYSTEM AND THE GATT

After extensive co-operation and negotiation between the United States and the United Kingdom since mid-1941, the Bretton Woods Conference which was the first of the major international conferences to be convened for the purpose of establishing an international organization opened on 1 July 1944, at the Mount Washington Hotel in the remote town of Bretton Woods, New Hampshire.5 Some 730 persons from 44 countries (most of the Allies of World War II) convened at the Conference to develop the new international monetary system.6 The tremendous efforts by those delegates finally materialized when President Harry S. Truman signed the Bretton Woods Agreement Act on 31 July 1945, shortly after the Act obtained the congressional approval in the United States.7 While the international financial system was launched with two pillar institutions of the IMF and the World Bank, following the successful reconciliation at the Bretton Woods Conference, the multilateral effort to develop the international trade system was separately exerted. Following the 1943 Washington Seminar on commercial policy that discussed the initial planning of such an international trade system,8 the US government produced, in December 1995, a detailed set of  “Proposals” on which the negotiations for the “International Trade Organization” could be launched.9 The Proposals called for the convening of a United Nations conference for the purpose of negotiating an international trade charter and for the establishment of the International Trade Organization (ITO).10 In February 1946, the United Nations Economic and Social Council (ECOSOC) at its very first session established a Preparatory Committee with 18 countries to prepare the groundwork for a United Nations Conference on Trade and Employment and a draft Charter for  consideration by the plenary Conference.11 Over the next several months, the t he United States in consultation with the United Kingdom and Canada prepared a detailed draft trade charter elaborating the summary December 1945 Proposals. 12 The Preparatory Committee adopted this “suggested charter” as a basis for its discussion and the agenda for its first session held in Church House, London, during October and 5

For a detailed account concerning the early history of the Bretton Woods Conference, see Richard N. Perspective  (New expanded edn, 1980) and Margaret G. de Vries, The  Gardner, Sterling-Dollar Diplomacy in Current Perspective (New Bretton Woods Conference and the Birth of the International Monetary Fund , in The Bretton Woods-GATT System: Retrospect and Prospect After Fifty Years (Orin Kirshner ed., 1996), p. 3. 6 De Vries, as note 5, above, at p. 13. 7 De Vries, as note 5, above, at p. 17. 8 Gardner, as note 5, abov a bove, e, pp. pp. 103–104. See also Robert Rober t E. Hudec, The GATT Legal System and the World  Trade Diplomacy (2nd edn, 1990), p. 9. 9 Proposals for Consideration by an International Inter national Conference Conf erence on Trade Trade and Employment, (U.S. (U.S. Department Depart ment of State Pub. No. 2411, Commercial Policy Series No. 79, 1945). 10 oods-GATT System: Simon Reisman, The Birth of a World Trading System: ITO and GATT , in The Bretton Woods-GATT Retrospect and Prospect After Fifty Years (Orin Kirshner ed., 1996), pp. 82, 83. 11 As note 10, above. 12 As note 10, above.

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November of 1946.13 The plenary Conference attended by some 54 countries, which account for most of the 61 countries that made up the United Nations at the time, opened at Havana on 21 November 1947. 14 The Final Act establishing the text of the ITO Charter was signed on 24 March 1948. 15 Since the approval of the US Congress was required to authorize the US government to accept the Havana Charter and to participate formally in the ITO, the Havana Charter was submitted for congressional ratification in 1948. Due to several reasons, including protectionist revival in domestic politics and dwindled support from the business community, however, the Truman administration abandoned its efforts to secure congressional approval of the Havana Charter by withdrawing it from the legislative calendar in December 1950.16 Considering the crucial economic power and role of the United States in the world economy at that time, other countries could not further this initiative in the absence of the participation of the United States that had actually taken the principal initiative to develop the ITO Charter in the first place. 17 Thereby, an international trade organization which was supposed to complement the international financial and monetary institutions under the Bretton Woods system was officially dead. Nevertheless, the tariff negotiation among the principal countries of the Preparatory Committee at the second session lasting from 1 April to 30 October  1947 resulted in detailed tariff schedules for each participating country. 18 These tariff schedules together with those articles of the draft charter that provided substantive obligations to protect the integrity of the trade concessions constituted an instrument titled the “General Agreement on Tariffs and Trade”. 19 Although the GATT included provisions on traditional trade issues such as national treatment, quantitative restrictions, subsidies, antidumping, and countervailing duties, it did not contain other provisions of the draft charter governing matters such as employment, investment, restrictive business practices, and the organizational provisions related to the ITO. 20 The GATT finally came into effect on 1 January 1948, pursuant to an ingenious instrument entitled the “Protocol of Provisional Application”.21 This protocol enabled the United States to implement the GATT pursuant to the powers delegated to the executive branch of government by the 1934 Reciprocal Trade Agreements Act, without mandating the congressional 13

As note 10, above.  John H. Jackson, World Trade and the Law of GATT  (1969), p. 45. 15 United Nations Conference on Trade and Employment, Final Act and Related Document, E/Conf.2/78 (April 1948). 16 Raymond Vernon, The U.S. Government at Bretton Woods and After , in The Bretton Woods-GATT System: Retrospect and Prospect After Fifty Years (Orin Kirshner ed., 1996), pp. 52, 58–61. See also William Diebo ld, Jr., The  End of the I.T.O. (1952) and Gardner, as note 5, above, pp. 348–380. 17  John H. Jackson, The World Trading System: Law and Policy of International Economic Relations (2nd edn, 1997), p. 38. 18 As note 10, above, at p. 84. 19 As note 10, above. 20 As note 10, above, at pp. 84–85. 21 See GATT, B.I.S.D. Vol. 1, 77 (1952); Vol. 2, 35 (1952). 14

LINKAGES BETWEEN INTERNATIONAL FINANCIAL AND TRADE INSTITUTIONS

5

approval.22 Nevertheless, the GATT was intended to be me rely a multilateral treaty rather than an organization. Therefore, multilateral decisions under the GATT are to be taken by the “CONTRACTING PARTIES acting jointly” and not by any organizational body.23 Despite such flawed constitutional beginnings that had been termed “birth defects”,24 the GATT has subsequently played the most important role to bolster and develop the world trading system since World War II, filling the vacuum created as a result of the failure of the ITO.25

B.

COEXISTENCE

OF THE BRETTON WOODS SYSTEM AND THE GATT

In August 1948, the Interim Commission for the ITO prepared a “Revised Draft of Provisional Working Arrangements between the ITO and the IMF” in which broad provisions concerning mutual observer status and consultation requirement were given.26 In September 1948, the Interim Commission for the ITO completed an agreement on “Relations between ITO and IMF” that stipulated a consultation obligation with each other, co-ordinated policies, and institutional framework necessary to assure policy co-ordination such as reciprocal representation and joint committees.27 But, when the ITO failed to be established, a formal agreement between trade and monetary organizations was no longer considered necessary. There were, however, continuous efforts to address the financial and balance-ofpayment issues under the auspices of the GATT. Notably, in 1979, the Consultative Group of Eighteen and its mandates were formulated to facilitate, inter alia, the international adjustment process and the co-ordination between the GATT and the IMF.28 In its 1983 Report, the Consultative Group of Eighteen concluded that: “In the context of improved GATT/IMF cooperation, the GATT contribution could be to ensure that the Fund was made aware of trade policy problems for the purposes of discussion with its members and was also able to take better account of the trading environment confronting them. … The most effective contribution the GATT could make to the resolution of trade and financial problems would be the energetic pursuit of its normal activities—the identification of trade problems, efforts to define solutions and help in implementing them.”29 22

 Jackson, as note 14, above, pp. 60–63.  Jackson, as note 14, above, pp. 126–132. 24  John H. Jackson, The World Trade Organization: Constitution and Jurisprudence  (Royal Institute of  International Affairs, 1998), p. 15. 25 For the principles and functions of the GATT system, see generally Jackson, as note 17, above. See also Robert E. Hudec, Enforcing International Trade Law: The Evolution of the Modern GATT Legal System (1993); Kenneth W. Dam, The GATT: Law and International Economic Organization (1970); Oliver Long, Law and its Limitations in the GATT Multilateral Trade System (1987) and Robert Howse, The World Trading System: Critical  Perspectives on the World Economy (1998). 26 U.N. Doc. ICITO/EC.2/2/Add.2, Rev.1 (dated on 14 August 1948). 27 U.N. Doc. ICITO/EC.2/SC.3/6 (dated on 4 September 1948). 28 GATT, B.I.S.D. (26th Supp., 1980), at p. 289. The membership of the Group in 1980 consisted of eight industrial countries and 10 developing countries, i.e., Argentina, Australia, Brazil, Canada, Egypt, European Communities and their Member States, Hungary, India, Japan, Malaysia for ASEAN, Nigeria, Norway for the Nordic Countr ies, Pakistan, Peru, Spain, Switzerland, United States and Zaire. GATT, B.I.S.D. (26th Supp., 1980) at pp. 289–290. 29 As note 28, above, at p. 99. 23

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In other words, the mutual relationship between the GATT and the IMF was viewed as being rather independent and sustainable exclusively by pursuing their  “normal activities”. When ministers determined to launch the Uruguay Round at Punta del Este in 1986, the Functioning of the GATT System (hereinafter “FOGS”) negotiating group was directed to develop agreements, inter alia, “to increase the contribution of the GATT to achieving greater coherence in global economic policy-making through strengthening its relationship with other international organizations responsible for  monetary and financial matters.”30 Pursuant to this mandate, the FOGS negotiating group worked to develop a scheme that promoted greater coherence between the GATT and financial institutions, i.e., the IMF and the World Bank. These efforts, however, could not create a separate agreement to address the interface issues between those institutions. While most developed countries proposed a more formalized cooperation scheme, many developing countries were opposed to that idea mainly due to the possibility of cross-conditionality between the three institutions.31 Despite the absence of rigorous agreements or rules that spelled out a cooperation mechanism, the world economic system bolstered separately by the financial institutions under the Bretton Woods system and the trade regime under the GATT have not experienced any particular incident that cause acute conflict between the regimes of those institutions. Such relatively stable, if not harmonious, coexistence of  them seems to have been sustained mainly by the limited scope of the GATT. Whereas the main focus of the IMF is macro-economic policies to sustain stability in the international financial system and the major function of the World Bank is long-term lending for economic development, the GATT is primarily concerned with sectorspecific trade policies. 32 In addition, a relatively weak institutional status of the GATT and consequent flexibility of the GATT operation also contributed to the avoidance of  any serious discord with regimes under the IMF and the World Bank. However, the  jurisdictions of these institutions have increasingly not been established in accordance with those fundamental missions.33 The provisions that establish co-operation mechanisms for each institution prior  to the WTO system are examined below.

30

Ministerial Declaration on the Uruguay Round, Declaration of September 20, 1986 , GATT, B.I.S.D. (33rd Supp., 1987), at p. 19. 31 Robert A. Weaver & Delphine A. Abellard, The Functioning of the GATT System, in The GATT Uruguay Round: A Negotiating History (1986–1992), (Terence P. Stewart ed., 1993), pp. 1891, 1942. 32 Frieder Roessler, The Relationship Between the World Trade Order and the International Monetary System, in The  New GATT Round of Multilateral Trade Negotiations: Legal and Economic Problems (Petersmann & Hilf eds., 2nd edn, 1991), p. 363. 33 The mandates for each institution are briefly summarized in the GATT document: GATT, MTN.GNG/ NG14/W/6 (9 June 1987).

LINKAGES BETWEEN INTERNATIONAL FINANCIAL AND TRADE INSTITUTIONS

7

Trade Concern in the IMF 

1.

The IMF is mainly an international organization that administers the international monetary system, whose area of responsibility and jurisdiction is the balance-ofpayments of the Member States and the stability of their currencies. Although the IMF began as an organization to manage a global macro-economic policy regime with a specified system of rules about fixed exchange rates, it currently implements two primary functions:  – conducting research and providing advice on macro-economic policies mainly for less developed countries; and  – making a loan at a time of balance-of-payments crisis.34 Nevertheless, the concerns on international trade are indeed specified in the language that presents the purposes of the IMF. The Articles of Agreement of the IMF (hereinafter “IMF Agreement”) stipulate, in Article I, that one of the purposes of the IMF is: “[to] facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of  economic policy.”35

It is noted that the IMF Agreement does not contain a comparable requirement for consultation with the GATT. This is because the IMF Agreement was adopted before the GATT was formulated. Therefore, the text of the IMF Agreement lacks articulated co-operation provisions with the GATT. Instead, Article X of the IMF Agreement, entitled “Relations with Other International Organizations”, summarily provides that “the Fund shall cooperate within the terms of this Agreement with any general international organization and with public international organizations having specialized responsibilities in related fields”.

2.

Organizational Co-operation in the World Bank

The Articles of Agreement for the World Bank (hereinafter “World Bank Agreement”) set out, in Article I, one of the purposes of the Bank “[t]o promote the long-range balanced growth of international trade … by encouraging international investment”.36 Although there is no GATT provision that formulates an institutional relationship with the World Bank parallel to that with the IMF,37 the World Bank Agreement has a mandate for co-operation with other international organizations that

34

David Vines, The WTO in Relation to the Fund and the Bank: Competencies, Agendas, and Linkages, in The  WTO as an International Organization (Anne O. Krueger ed., 1998), pp. 59, 63. 35 The Articles of Agreement of the International Monetary Fund, Art. I, reprinted in  Jackson et al ., Documents Supplement to Legal Problems of International Economic Relations (3rd edn, 1995), p. 451. 36 The Articles of Agreement for the World Bank, Art. I (iii). 37 See Section II.B.3. below.

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are similar to the one for the IMF. 38 For example, Article V, Section 8 of the World Bank Agreement provides that: “(a) The Bank, within the terms of this Agreement, shall cooperate with any general international organization and with public international organizations having specialized responsibilities in related fields. Any arrangements for such cooperation which would involve a modification of any provision of this Agreement may be effected only after amendment to this Agreement under Article VIII. (b) In making decisions on applications for loans or guarantees relating to matters directly within the competence of any international organization of the types specified in the preceding paragraph and participated in primarily by members of the Bank, the Bank shall give consideration to the views and recommendations of such organization.”

The requirement under subsection (b) might raise a question on coherence between the World Bank and the GATT. In fact, many World Bank loans and guarantees were aimed to develop certain industry sectors as well as public infrastructure for less developed or developing countries. Alternatively, a government that received World Bank development loans implemented economic development programmes centred on target industries whose outputs were in competition with foreign products, either in domestic markets when intended to protect domestic “infant” industries, or in foreign markets when a domestic market is insufficient to accommodate its desired production level. Such economic development policies involving industry targeting strategy, however, might constitute either export promotion subsidies or import substitution subsidies. Under the GATT, Article XVI addresses subsidies that might distort international trade, and export promotion subsidies were squarely prohibited after the Tokyo Round.39 Despite this potential conflict between economic development programmes assisted by the World Bank and legal obligations under the GATT, it had not caused any serious problem under the GATT regimes mainly because Article 14 of the Tokyo Round Subsidy Code exempted developing countries that were the primary beneficiaries of the Bank programmes from the Code obligations.

3.

IMF and World Bank in the GATT 

The role of the IMF in the context of the GATT is mainly played in relation to balance-of-payment (BOP) matters. The basic relationship of the IMF to the GATT is established by Article XV:2 as follows: “In all cases in which the CONTRACTING PARTIES are called upon to consider or deal with problems concerning monetary reserves, balances of payments or foreign exchange arrangements, they shall consult fully with the International Monetary Fund. In such 38

GATT, MTN.GNG/NG14/W/6 (dated on 9 June 1987), at p. 6. GATT, Agreement on Interpretation and Application of Articles VI, XVI and XXIII of the General Agreement on Tariffs and Trade (hereinafter “Tokyo Round Subsidy Code”), The Text of the Tokyo Round   Agreements (1986), p. 51. 39

LINKAGES BETWEEN INTERNATIONAL FINANCIAL AND TRADE INSTITUTIONS

9

consultations, the CONTRACTING PARTIES shall accept all findings of statistical and other facts presented by the Fund relating to foreign exchange, monetary reserves and balances of payments, and shall accept the determination of the Fund as to whether action by a contracting party in exchange matters is in accordance with the Articles of Agreement of  the International Monetary Fund, or with the terms of a special exchange agreement between that contracting party and the CONTRACTING PARTIES. The CONTRACTING PARTIES in reaching their final decision in cases involving the criteria set forth in paragraph 2(a) of Article XII or in paragraph 9 of Article XVIII, shall accept the determination of the Fund as to what constitutes a serious decline in the contracting party’s monetary reserves, a very low level of its monetary reserves or a reasonable rate of increase in its monetary reserves, and as to the financial aspects of other matters covered in consultation in such cases.”40

Thus, when a country tries to impose import restrictions by invoking Article XII or  Article XVIII:B of the GATT to safeguard the balance of payments, the IMF may play an important role in determining whether those import measures are justified under  the given BOP situation.41 Concerning the relationship between the IMF and the GATT stipulated in Article XV, there are several points that should be noted. First, the role of the IMF is limited to providing “findings of statistical and other facts”, i.e., technical information and determination on compliance with the IMF Agreement, rather than any interpretation on relevant GATT articles. 42 Second, although the finding and determination by the IMF on statistical and factual matters related to the BOP status would not be contradicted, the final decision on whether BOP measures are justified under relevant GATT articles rests on the CONTRACTING PARTIES. 43 Third, whereas the division of work between the IMF and the GATT was regarded to be “based on the technical nature of government measures rather than on the effect of these measures on international trade and finance” in the early years of the GATT, 44 the Committee on Balance-of-Payments Restrictions (hereinafter “BOP Committee”) in 1981 concluded that a government measure, monetary in form and yet with trade effects, could be considered a trade measure taken for BOP purposes. 45 In other words, the determination of whether a government measure is a trade action or exchange action hinges on the actual effects of that measure, rather than arbitrary demarcation of a technical nature. Another important GATT provision that deals with the integrated area of trade and finance is Article XII governing restrictions to safeguard the balance of payments. In the early years of the GATT, the BOP exception was used primarily to cover many quantitative import restrictions. Since the introduction of the floating exchange rate 40

World Trade Organization, The Results of the Uruguay Round of Multilateral Trade Negotiations: The Legal  Texts (1994), p. 507. 41 For discussion on problems of BOP measures allowed under Articles XII and XVIII:B, see Richard Eglin, Surveillance of Balance-of-payments Measures in the GATT , (March 1987) 10 World Econ. 1, pp. 1–5. 42 GATT, B.I.S.D. (27th Supp., 1981), at p. 149. 43 World Trade Organization, Analytical Index: Guide to GATT Law and Practice (6th edn, 1995), p. 431. 44 GATT, B.I.S.D. (3rd Supp., 1955), at pp. 170, 196. 45 WTO, as note 40, above, pp. 435–436.

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system in 1973,46 however, Article XII has been rarely used. 47 In fact, the Declaration on Trade Measures Taken for Balance-of-Payments Purposes, adopted in 1979, recognized that “restrictive trade measures are in general an inefficient means to restore balance-of-payments equilibrium” and that “developed contracting parties should avoid the imposition of restrictive trade measures for balance-of-payments purposes to the maximum extent possible”.48 Thus, under the current monetary system of flexible exchange rates which replaced the par-value system and subsequently the central rate system, the IMF has a much weaker basis to perform the advisory function stipulated by Article XV, namely to determine the reserve need of the import restrictions for the GATT.49 This, in turn, implies that the BOP Committee would not be able to perform properly the legal function of determining whether or not BOP measures are consistent with Article XII or XVIII:B. 50 On the other hand, the interrelationship between the World Bank and the GATT is formulated in Part IV of the GATT that addresses issues related to trade and development. Since the role of the World Bank in assisting economic development for  less developed countries was fully acknowledged when Part VI of the GATT was drafted in 1965,51 the text of Part VI of the GATT clearly recognized the importance of collaboration between the World Bank and the GATT. For example, Article XXXVI of the GATT provides, in relevant parts, that: “6. Because of the chronic deficiency in the export proceeds and other foreign exchange earnings of less-developed contracting parties, there are important inter-relationships between trade and financial assistance to development. There is, therefore, need for close and continuing collaboration between the CONTRACTING PARTIES and the international lending agencies so that they can contribute most effectively to alleviating the burdens these lessdeveloped contracting parties assume in the interest of their economic development. 7. There is need for appropriate collaboration between the CONTRACTING PARTIES, other intergovernmental bodies and the organs and agencies of the United Nations system, whose activities relate to the trade and economic development of less-developed countries.”52

In other words, the text of Article XXXVI acknowledges the need for “close and continuing” and “appropriate collaboration” between the GATT and the World Bank. This provision, however, does not articulate concrete procedures or substantive obligations between the two institutions. In addition, Article XXXVIII concerning joint action provides, in pertinent parts, that: 46

Nowadays, countries employ various exchange regimes such as fixed, crawling peg, managed float and free float. See, e.g., K. Michael Finger & Ludger Schuknecht, Trade, Finance and Financial Crises (1999), p. 16. 47 Roessler, as note 32, above, p. 372. Concerning the relationship between the GATT and the IMF on the issues of specific duties and floating exchange rates, see GATT, B.I.S.D. (27th Supp., 1980), at p. 149. 48 GATT, B.I.S.D. (26th Supp., 1978), at p. 205. 49 Roessler, as note 32, above, p. 379. 50 Roessler, as note 32, above. 51 The protocol amending the GATT to add Part VI was completed on 8 February 1965 and entered into force on 27 June 1966. GATT, B.I.S.D. (13th Supp., 1965), at p. 2. 52 WTO, as note 40, above, at p. 534.

LINKAGES BETWEEN INTERNATIONAL FINANCIAL AND TRADE INSTITUTIONS

11

“2. In particular, the CONTRACTING PARTIES shall: … (c) collaborate in analysing the development plans and policies of individual less-developed contracting parties and in examining trade and aid relationships with a view to devising concrete measures to promote the development of export potential and to facilitate access to export markets for the products of the industries thus developed and, in this connexion, seek appropriate collaboration with governments and international organizations, and in particular with organizations having competence in relation to financial assistance for  economic development, in systematic studies of trade and aid relationships in individual less-developed contracting parties aimed at obtaining a clear analysis of export potential, market prospects and any further action that may be required.”53

Article XXXVIII:2(c) indicates that the drafters of the GATT indeed envisaged the potential conflict of regimes when “financial assistance for economic development” was utilized to “devis[e] concrete measures to promote the development of export potential and to facilitate access to export markets for the products of industries thus developed”. Thereby, they mandated collaboration in this regard. However, commitments stated in the general language of Article XXXVIII do not sufficiently illustrate how such co-operation should be implemented in the face of regime conflicts between economic development and promotion of free trade.

III. WTO AGREEMENTS A.

WTO

WITH THE

AGREEMENTS AND GATT

IMF

AND THE

WORLD BANK

1994

When the establishment of a new international trade organization was envisioned in the course of the Uruguay Round negotiation, the longstanding question of how the trade regime should be arranged to assure the coherence with the Bretton Woods system drew the attention of the contracting parties. This issue, however, could not generate a separate and rigorous agreement that addresses concerns raised under the GATT system. In the Marrakesh Declaration of April 15, 1994 which announced the completion of the Uruguay Round negotiation, ministers of contracting parties agreed to confirm “their resolution to strive for greater global coherence of policies in the fields of trade, money and finance, including cooperation between the WTO, the IMF and the World Bank for that purpose”.54 In addition, Article III of the Agreement Establishing the World Trade Organization (hereinafter “WTO Agreement”) stipulated, in paragraph 5, that “[w]ith a view to achieving greater coherence in global economic policy-making, the WTO shall cooperate, as appropriate, with the International Monetary Fund and with the International Bank for Reconstruction and Development and its affiliated agencies.”55 This mandate was further elaborated in the Declaration on 53 54 55

WTO, as note 40, above, at p. 537. WTO, as note 40, above, at p. iv. WTO, as note 40, above, at p. 7.

12

 JOURNAL OF WORLD TRADE

the Contribution of the World Trade Organization to Achieving Greater Coherence in Global Economic Policymaking (hereinafter “Coherence Declaration”).56 For  example, paragraph 5 of the Declaration provides that: “5. The interlinkages between the different aspects of economic policy require that the international institutions with responsibilities in each of these areas follow consistent and mutually supportive policies. The World Trade Organization should therefore pursue and develop cooperation with the international organizations responsible for monetary and financial matters, while respecting the mandate, the confidentiality requirements and the necessary autonomy in decision-making procedures of each institution, and avoiding the imposition on governments of cross-conditionality or additional conditions. Ministers further invite the Director-General of the WTO to review with the Managing Director of the International Monetary Fund and the President of the World Bank, the implications of the WTO’s responsibilities for its cooperation with the Bretton Woods institutions, as well as the forms such cooperation might take, with a view to achieving greater coherence in global economic policymaking.”57

Thus, at the time the WTO was established as the new international trade organization to supplement the Bretton Woods institutions in 1995, it was merely mandated to “pursue and develop” further co-operation, rather than follow any settled rules on cooperative relationship. It was only in November 1996 that the separate WTO agreements with the IMF and the World Bank were actually prepared. 58 Even if the institution of GATT is now over,59 the substantive obligations (and some of the procedural obligations) of GATT continue with the text of GATT 1994 as part of Annex 1A of the WTO Agreement. 60 Thus, the discussion supra regarding the GATT is still valid under the context of the WTO.

B.

GENERAL

AGREEMENT ON TRADE IN SERVICES

The General Agreement on Trade in Services (hereinafter “GATS”), Annex 1B of the WTO Agreement, includes several provisions that address the relationship between the WTO and the IMF. For example, Article XI:2 of GATS addressing the issue of payments and transfers, provides that: “2. Nothing in this Agreement shall affect the rights and obligations of the members of the International Monetary Fund under the Articles of Agreement of the Fund, including the use of  exchange actions which are in conformity with the Articles of Agreement, provided that a Member shall not impose restrictions on any capital transactions inconsistently with its specific commitments regarding such transactions, except under Article XII or at the request of the Fund.”61 56

WTO, as note 40, above, at pp. 442–443. WTO, as note 40, above, at p. 443. 58 See section III.C. above. 59 To facilitate the transition from the GATT to WTO system, the legal instr uments under the GATT system were ter minated one year after the date of entry into force of the WTO Ag reement. GATT, B.I.S.D. (41st Supp., 1997), at p. 6. 60  Jackson, as note 14, above, at p. 48. 61 WTO, as note 40, above, at p. 337. 57

LINKAGES BETWEEN INTERNATIONAL FINANCIAL AND TRADE INSTITUTIONS

13

In addition, Article XII:2(b) of GATS requires that restrictions to safeguard the balance of payments be consistent with the IMF Agreement. Article XII:5(e) provides that, in consultation with the BOP Committee with respect to BOP safeguard measures: “all findings of statistical and other facts presented by the International Monetary Fund relating to foreign exchange, monetary reserves and balance of payments, shall be accepted and conclusions shall be based on the assessment by the Fund of the balance-of-payments and the external financial situation of the consulting Member.”

This provision almost duplicates the languages in Article XV:2 of GATT. That is because there is not much difference between GATT and GATS in application of  BOP safeguard measures and thereby the importance of the role of the IMF in relation to adoption of BOP safeguard measures is similarly recognized in GATS. On the other hand, Article XXVI of the GATS on the relationship with other  international organizations provides that: “The General Council shall make appropriate arrangements for consultation and cooperation with the United Nations and its specialized agencies as well as with other intergovernmental organizations concerned with services.”62

Thus, the WTO is again mandated by GATS to establish proper arrangements for cooperative relationship with the IMF. C.

AGREEMENTS

BETWEEN THE IMF/WORLD BANK AND THE WTO

In the meeting on 11 July 1995, the General Council of the WTO required the Director-General to develop draft agreements for co-operation with the IMF and the World Bank pursuant to the Coherence Declaration. 63 The mandates by the General Council included, inter alia, the formalization of the provisional arrangement with the IMF, mutual grant of observer status to the other organization, access to the other’s documentation and database, and maintenance of necessary confidentiality.64 It was also noted that the Members accepted “with reluctance” the participation of the IMF and the World Bank as observers in the Dispute Settlement Body of the WTO. 65 In November 1996, the General Council formally approved the “WTO Agreements with the Fund and the Bank”.66 Those agreements, however, had to be signed to enter into force. Thus, the Agreement with the IMF was signed at the Singapore Ministerial Conference in December 1996 and that with the World Bank was finally signed in late April 1997. 67

62

WTO, as note 40, above, at p. 348. WTO, WT/GC/M/5 (17 August 1995), pp. 6–8. 64 As note 63, above, p. 7. 65 As note 63, above. 66 WTO, WT/L/195 (18 November 1996). This document was previously issued as WT/GC/W/43 (4 November 1996). 67 WTO, WT/GC/W/68 (13 November 1997), p. 1. 63