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A Comment On Wynne Godley And Non-selective Protectionism On The Article XII Of The GATT

Summary:
Nick Edmonds commented on my post Wynne Godley And Non-Selective Protectionism—which documented all the references where Wynne Godley proposes the usage of the Article XII of the GATT—pointing out that the Article XII of the GATT can only be invoked reserve assets are under threat.Hence it is difficult for the United States to invoke it. I agree with this. It’s looks more designed for nations who accumulate reserve assets and for whom sales of reserve assets is an important way to finance current account deficits. The U.S. has some reserve assets but is under no imminent threat. (And it finances its current account deficit mainly by net incurrence of liabilities instead of sale of reserve assets).The WTO page Technical Information on Balance of Payments has this

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Nick Edmonds commented on my post Wynne Godley And Non-Selective Protectionism—which documented all the references where Wynne Godley proposes the usage of the Article XII of the GATT—pointing out that the Article XII of the GATT can only be invoked reserve assets are under threat.

Hence it is difficult for the United States to invoke it. I agree with this. It’s looks more designed for nations who accumulate reserve assets and for whom sales of reserve assets is an important way to finance current account deficits. The U.S. has some reserve assets but is under no imminent threat. (And it finances its current account deficit mainly by net incurrence of liabilities instead of sale of reserve assets).

The WTO page Technical Information on Balance of Payments has this information:

Introduction

Under the rules of the WTO, any trade restriction taken by a Member must be consistent, or in compliance, with the rules of the international trading system. Under the provisions of Article XII, XVIII:B and the “Understanding of the Balance-of-Payments Provisions of the GATT 1994”, a Member may apply import restrictions for balance-of-payments reasons.

GATT: Articles XII and XVIII:B

Article XII and XVIII:B in their current form were redrafted in 1957 by the Working Party on Quantitative Restrictions. At that time, balance-of-payments measures referred to quantitative restrictions and were an exception to Article XI which prohibits the use of quantitative restrictions. Article XII can be invoked by all Members and Article XVIII:B by the developing country Members (defined as those in the early stages of development and with a low standard of living.

The basic condition for invoking Article XII is to “safeguard the [Member’s] external financial position and its balance-of-payments”; Article XVIII:B mentions the need to “safeguard the [Member’s] external financial position and ensure a level of reserves adequate for the implementation of its programme of economic development”. Both Articles refer to the need to “restore equilibrium on a sound and lasting basis”. While Article XII mentions the objective of “avoiding the uneconomic employment of resources”, Article XVIII:B refers to “assuring an economic employment of production resources”.

Article XVIII:B contains somewhat less stringent criteria than Article XII. Article XII (para. 2)states that import restrictions “shall not exceed those necessary (i) to forestall the imminent threat of, or to stop, a serious decline in its monetary reserves” or (ii) “…in the case of a contracting party with very low monetary reserves, to achieve a reasonable rate of increase in its reserves”.

Article XVIII:B (para. 9) omits the word “imminent” from the first condition and refers to an “inadequate” level rather than a “very low” level of reserves; “adequate” is defined as “adequate for the implementation of its programme of economic development”.

Both Articles require Members to progressively relax the restrictions as conditions improve and eliminate them when conditions no longer justify such maintenance.

The 1979 Declaration

After the Tokyo Round, the 1979 Declaration on Trade Measures Taken for Balance-of-Payments Purposes (BISD 26S/205) extended the disciplines to all trade measures imposed for balance-of-payments reasons, not just quantitative restrictions. Thus all trade measures taken for balance-of-payments purposes come within the purview of notification and consultation requirements.

The 1979 Declaration introduced three new conditions for the application of balance-of-payments measures: (i) that preference shall be given to the measure which has “the least disruptive effect on trade” while abiding by disciplines provided for in the GATT; (ii) that the simultaneous application of more than one trade measure for balance-of-payments purposes shall be avoided; and (iii) that “whenever practicable, contracting parties shall publicly announce a time schedule for the removal of the measures”. It also spelled out that measures should not be taken “for the purpose of protecting a particular industry or sector”.

I am sure Wynne was aware of this, so it’s curious why he mentions it over the years. If anyone knows, I’ll be grateful!

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