THE WORLD TRADE ORGANIZATION: FUTURE NEGOTIATIONS
CRS Report for Congress
The World Trade Organization:
July 30, 1999
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress
Future trade negotiations will be launched at the World Trade Organization’s (WTO)
Ministerial Conference to be held in Seattle from November 30 to December 3, 1999. At the
very least, negotiations will include agriculture and services, which are required to begin by
the year 2000 in the Uruguay Round Agreement. Other issues that may be addressed are
intellectual property rights, government procurement, reduction of industrial tariffs, and
reform of the WTO. Some WTO members also want to include investment, competition
policy, and the environment in the negotiations. This report provides an overview of the
possible scope and structure of the negotiations, and an analysis of negotiations on the “built-
in-agenda” issues (agriculture and services), new issues (investment and competition policy)
and the social dimensions of trade (environment and labor). This report, which supercedes
CRS Report 98-841 E, will be updated as major developments occur.
The World Trade Organization: Future Negotiations
The World Trade Organization’s (WTO) Ministerial Conference, to be held
in Seattle from November 30 to December 3, 1999, will launch a new round of trade
negotiations. President Clinton, in his State of the Union Address on January 19,
intellectual property, and government procurement. He also proposed that
negotiations should result in early agreements, and should be concluded in far less
time than the seven years that the Uruguay Round took.
The United States and the other WTO countries are beginning the process of
developing goals and procedures for the negotiations. If negotiations lead to
multilateral agreements that require changes in U.S. law, legislation will be needed for
implementation. Foreign countries are often unwilling to negotiate unless the
President has fast-track authority (which he currently does not have). Should the
Congress decide to act on fast-track legislation, it can influence the negotiations
through specifying the negotiating objectives, and by consulting with the
Administration before and during the negotiations. A likely issue in any debate is the
extent that labor and environmental questions are addressed.
As of July 1999, the scope of future negotiations is still to be decided. All that
is known for certain is that negotiations will include agriculture and services since the
Uruguay Round Agreement clearly specified that negotiations on these issues must
begin by the year 2000. Agriculture and services are seen by many policymakers as
important because of remaining trade barriers; only a relatively small amount of trade
liberalization occurred in the Uruguay Round. Moreover, agriculture and services
trade is very important to the U.S. economy. For example, in 1997, about 20% of the
value of U.S. agricultural production was exported, and the United States is the
largest exporter and second largest importer of services.
WTO working groups are studying the relationship between trade and
investment and between trade and competition policy. Countries disagree
considerably on whether or not these issues are ripe for negotiation and on the
possible benefits of negotiations. The European Union supports, and the United
States opposes, beginning negotiations on these issues. Developing countries
generally oppose WTO discussions on foreign direct investment rules and competition
Including labor and environmental issues in trade agreements is highly
controversial, both within the United States and among the WTO members. For
example, environmentalists and labor unions argue that labor and environmental
standards should be a negotiating goal for humanitarian and environmental protection
reasons. Many economists and the business community maintain that a more
effective way to increase standards abroad is through trade liberalization and
increased economic growth abroad. The Administration supports discussions of
environment and labor in the WTO, while the Congress is divided on the issue. Some
other industrial countries support WTO discussions, while the developing countries
are strongly opposed.
Scope and Structure of Negotiations.................................3
Possible Issues for Negotiation..................................3
A Single Undertaking or Early Harvest?...........................4
The Built-In Agenda.............................................5
Services ................................................... 8
Rules for Foreign Direct Investment.............................10
Social Dimensions of Trade Policy..................................14
Environment .............................................. 15
Implications for Congress........................................17
The World Trade Organization:
The World Trade Organization’s (WTO) Ministerial Conference, to be held in
Seattle from November 30 to December 3, 1999, will launch a new round of trade
negotiations. The Ministerial Conference will be chaired by United States Trade
Representative Charlene Barshefsky. President Clinton, in his State of the Union
Address on January 19, 1999, called for an ambitious round focusing on agriculture,
services, industrial tariffs, intellectual property, and government procurement. He
also proposed that negotiations should result in early agreements, and should be
concluded in far less time than the seven years that the Uruguay Round Agreement
The Uruguay Round, the eighth series of negotiations under the auspices of the
General Agreement on Tariffs and Trade (GATT), was unique in several ways. For
the first time, agriculture, services, intellectual property rights, trade-related
investment measures, and textiles and apparel trade were brought under the discipline
of multilateral rules. The Uruguay Round also established the World Trade
Organization (WTO) and strengthened the dispute settlement procedure. More
traditionally, it also reduced tariffs further and clarified and expanded rules on
subsidies, antidumping, and safeguards. The Uruguay Round Agreement (URA)
requires further negotiations by the year 2000 in agriculture and services, where many
trade barriers remain. Agriculture and services negotiations are often referred to as
Preparations for the negotiations are currently underway by the WTO in Geneva.
In addition to the built-in-agenda items, there are many proposals to negotiate other
issues. Perhaps the most contentious of these are investment and competition policy
and the relationship between trade and the environment. No consensus exists among
WTO members regarding the extent to which these issues should be included in the
If negotiations lead to multilateral agreements that require changes in U.S. law,
implementing legislation will be needed, either through the regular legislative process
or through fast-track procedures.1 A number of foreign countries have expressed
their unwillingness to negotiate unless the President has fast-track authority. Without
such authority, it is argued, Congress can amend an agreement or not vote on it at all,
and the U.S. negotiating position might lack credibility. According to Deputy U.S.
1Under fast-track procedures, Congress agrees to consider trade agreements within mandatory
deadlines, with limited debate, and without amendment while the Administration agrees to
consult with the Congress before and during the negotiations.
Trade Representative Richard Fisher, a new round of multilateral negotiations can be
launched, but not concluded, without fast-track authority.2
The President does not currently have fast-track authority to negotiate trade
agreements. A contentious congressional debate over renewal of fast-track authority
in the fall of 1997 resulted in a postponement of the vote. On July 21, 1998, the
Senate Finance Committee reported out S. 2400, the Trade and Tariff Act of 1998,
which included fast-track authority (Title II). On September 25, 1998, the House
defeated its fast-track bill, H.R. 2621, by a vote of 243-180. It is not clear when fast-
track legislation might again be considered.
The World Trade Organization
The World Trade Organization provides a framework of principles to govern international
trade, a forum for negotiating trade issues, and procedures to settle disputes among nations. It
also monitors national trade policies and provides technical assistance and training for developing
Multilateral rules and principles for trade, agreed on by member countries, play a
significant role in encouraging trade and economic activity. The most important principle
underlying the WTO is nondiscrimination. The most-favored nation (MFN) principle requires
each member country to grant each other member country treatment at least as favorable as it
grants to its most-favored trade partner. The national treatment principle obligates each country
not to discriminate between domestic and foreign products; once an imported product has entered
a country, the product must be treated no less favorably than a “like” product produced
Major WTO decisions are made by the member countries as a whole, usually by consensus.
The highest authority is the Ministerial Conference, which is required to be held at least every two
years. The first Conference, held in Singapore in December 1996, reviewed the implementation
of the Uruguay Round Agreement and considered proposals for new issues to be addressed in the
future. The second Ministerial Conference, held in May 1998 in Geneva, established a process
for future multilateral negotiations. A third Ministerial Conference will be held in Seattle from
November 30 to December 3, 1999.
On January 1, 1995, the WTO replaced the General Agreement on Tariffs and Trade
(GATT), which had been in effect since 1948. Twenty-three countries signed the original GATT
agreement; by July 1999, the WTO had 134 member countries, while more than 30 additional
countries have applied for membership.
The main purpose of this report is to provide an overview of the issues that may
be included in negotiations and the broad negotiating goals of the United States (and
other countries, where available). The report begins with a discussion of the scope
and structure of the negotiations, followed by a more detailed analysis of the built-in
agenda items (agriculture and services), the new issues (investment and competition
policy) and the social dimensions of trade (environment and labor).
2Fisher Says Round Can Be Launched Without Fast-Track Authority. Inside U.S. Trade.
July 23, 1999, p. 22.
Scope and Structure of Negotiations
Possible Issues for Negotiation
As of July 1999, the scope of future negotiations is yet to be decided. All that
is known for certain is that negotiations will include agriculture and services since the
Uruguay Round Agreement clearly specified that negotiations on these issues must
begin by the year 2000. Beyond this, however, a number of other issues may be
considered, such as intellectual property rights and transparency in government
Future trade negotiations were one of the topics addressed at the G-8 Economic
Summit held in Cologne, Germany from June 18-20, 1999.3 In the Communique
issued at the conclusion of the Summit, the G-8 countries called for, among other
things, a new round of “broad-based and ambitious” global trade negotiations to be
launched at the WTO Ministerial Conference in Seattle.4 The Communique
mentioned some broad goals such as the importance of improving the transparency
of the WTO and on the need for addressing the trade and environment relationship
and promoting social and economic welfare worldwide. Other goals included
improving market access for the least developing countries, and greater cooperation
among international financial, economic, labor and environmental organizations. On
the issue of biotechnology trade, the G-8 countries committed themselves to a
science-based, rules-based, approach.
The U.S. Administration is currently consulting with the Congress and the
private sector to determine a specific negotiating agenda for the United States. Some5
broad goals have been announced, however, and include:
!agriculture — reduce tariff and nontariff barriers and lower subsidies.
!services — achieve stronger commitments to liberalization and national
!government procurement — achieve greater openness and transparency.
!intellectual property — strengthen rules and enforcement.
!industrial tariff and non-tariff barriers — reduce them.
!competition and investment policy — begin a work program to study these
3The Group of 8 countries are the United States, France, Germany, United Kingdom, Japan,
Italy, Canada and Russia.
4Text: Group of Eight Cologne Summit Communique.
5The Next Round: America’s View of the Trading System. Speech by Ambassador Charlene
Barshefsky, U.S. Trade Representative, in Davos, Switzerland, January 29, 1999.
!WTO — achieve reform and greater transparency.
!WTO and international financial institutions — achieve greater coordination.
!trade and environment — ensure that trade liberalization complements
!trade and labor — eliminate exploitative child labor and achieve respect for
core labor standards.
!developing countries — assist them in fulfilling their commitments and assure
their market access.
A Single Undertaking or Early Harvest?
Under the auspices of the General Agreement on Tariffs and Trade (GATT),
trade negotiations occurred in “rounds” where a wide array of issues could be, and
were, negotiated. Each round had a specific beginning and ending date (which could
be extended), decided on by the member countries. Between rounds, the GATT
Secretariat focused on implementing the trade agreements, but was not a forum for
actual negotiations. This procedure reflected the nature of the GATT; it was not an
institution or an organization, but basically a trade agreement which had a secretariat
for administrative purposes.
One of the functions of the WTO, however, is to provide a permanent forum for
continuing multilateral trade negotiations. Strictly speaking, rounds are no longer
needed; member countries could decide to negotiate on specific issues at any time.
For example, negotiations in several service sectors — basic telecommunications and
financial services — have been successfully concluded since 1995 when the WTO
went into effect.
Another sectoral agreement was the information technology agreement (ITA),
finalized in March 1997, which reduces trade barriers on a broad range of products,
such as semiconductors, computers, telecommunications equipment, and software.6
The business community in the industrial countries proposed an ITA in 1995, with
U.S. information technology firms providing strong support. Under the ITA, tariffs
will be reduced in four equal stages and will be eliminated by January 1, 2000.
Currently, another information technology agreement (ITA-2) further liberalizing
trade is being negotiated.
Since the more recent negotiating rounds have been long and often contentious,
some analysts argue that future negotiations should be on specific issues. The success
of the telecommunications, financial services, and ITA negotiations suggests to many
that sectoral negotiations can succeed. Others maintain that substantial progress in
negotiations occurs only when cross-sector trade-offs are possible. Some countries
6See also CRS Report 98-376 E, The Information Technology Agreement(ITA): Background
on a Proposal to Expand the Scope of the Multilateral Trade Agreement, by Glennon J.
open their markets in some sectors, while other countries open them in other sectors.
For example, in the Uruguay Round, trade liberalization in services (wanted by the
developed countries) was linked with reform in textiles (important to the developing
countries). The success of the negotiations in basic telecommunications and financial
services were, it is argued, special cases because it was widely recognized that they
were important to the infrastructure of the global economy. And some maintain that
the successful conclusion of the Information Technology Agreement required a side-7
deal on distilled spirits.
As of July 1999, it is not clear how the negotiations will be structured. The
U.S. Administration generally favors continuous negotiations under the auspices of
the WTO, not a new round, arguing that recent rounds were too long (the Uruguay
Round took seven years), and the continuing emergence of new issues as a result of
technological change makes a round less feasible. In this approach, when negotiations
on an issue are completed, an agreement would be signed and implemented; this is
also referred to as an “early harvest” approach. The European Union and Japan
support a new, comprehensive round of trade negotiations, in which all agreements
would be concluded at the same time. Recently, the United States appears to be
open to consideration of this “single undertaking” approach. U.S. Trade
Representative Barshefsky, in congressional testimony on June 24, 1999, stated “We
have not...at this point signed on to the notion that this negotiation should be a single
undertaking and will not until we know the full scope of the agenda contemplated.”8
It is possible that a compromise will be reached in which some negotiations will be9
concluded early within the context of a single undertaking.
A consensus appears to have emerged on the length of the proposed
negotiations. Most countries agree that negotiations should last no longer than three
years. It is argued that the upcoming negotiations will focus on extending and
consolidating the Uruguay Round Agreement (URA), and therefore three years will
be adequate to achieve this goal.10
The Built-In Agenda
The agriculture and services agreements in the URA are similar in two respects.
First, they both began the process of liberalizing trade in new areas, but left much to
be done in the future. Second, in both cases, progress in multinational negotiations
depended on, and fostered, to some extent, domestic reform. Similarly, in the future,
any liberalizing of trade may require economic policy changes in the domestic
economy, unlike in the past when tariff reduction could be achieved in relative
7Sauve, Preparing for Services 2000, p. 6.
8Barshefsky Says U.S. To Consider Single Undertaking for WTO Round. Inside U.S. Trade,
June 25, 1999, p. 4.
9WTO Members Urge Early Harvest Provision Within Single Undertaking for Next Round.
International Trade Reporter. July 14, 1999, p. 1174.
10ECOSOC High-Level Segment, Geneva. Speech by David Hartridge, Director in charge,
WTO, 5 July 1999.
isolation from the domestic economy. At the same time, trade agreements now often
“lock in” past domestic policy changes, since countries are less willing to retract past
reforms when they have committed to them in an international agreement. Many
economists argue that multilateral negotiations are necessary to continue the process
of opening markets and also to reinforce previous policy changes and stimulate further
The Uruguay Round Agreement on Agriculture established, for the first time,
multilateral rules on market access, export subsidies and domestic support for
agriculture.11 Agreement was possible, after long, difficult negotiations, because the
major countries were reforming their domestic agricultural programs. The developed
countries realized the high costs of most domestic support programs, especially amid
strong efforts to reduce government budget deficits. Furthermore, efforts to reduce
the government’s role in agriculture were consistent with, and part of, broad
economic policy changes in a number of countries. Improving the efficiency and the
global competitiveness of agriculture was an underlying motivation for both domestic
reforms and trade liberalization.
Although developing multilateral rules was an historic accomplishment,
relatively little immediate trade liberalization and increased market access was
achieved. Countries agreed to replace non-tariff import measures with tariffs (called
tariffication), an important step, but the rates at which tariffs were bound are very
high. Agricultural tariffs in the industrial countries average more than 40%, compared
with 5-10% in manufactured goods. Moreover, tariffs for some specific products are
much higher. For example, Canadian tariffs on dairy and poultry products are over
200%.12 The URA imposed limits on export subsidies and prohibited new export
subsidies. The Agreement also imposed limits on spending for domestic agricultural
subsidies, but since both U.S. and EU domestic support were well below spending
levels allowed, these limits are not expected to have any practical effect in the URA
implementation period (1995-2001).
Further negotiations in agriculture are important for several reasons. First, the
Uruguay Round Agreement on Agriculture was only a first, albeit significant, step,
and much remains to be done. Second, agricultural exports are very important to
the United States. In 1997, about 20% of the value of U.S. agricultural output was
exported and for some products, the proportion was much higher (for example, 43%13
for wheat and 36% for soybeans). Looked at in another way, in 1997, agricultural
11For more information, see CRS Report 98-254 ENR, Agriculture in the Next Round of
Multilateral Trade Negotiations, updated June 21, 1999, by Charles E. Hanrahan.
12Josling, Timothy. Agricultural Trade Policy: Completing the Reform. Institute for
International Economics. Washington, D.C. April 1998, p. 6-7.
13CRS Report 98-253 ENR, U.S. Agricultural Trade: Trends, Composition, Direction, and
Policy, by Charles E. Hanrahan and Mary L. Dunkley, p. 5.
exports accounted for about 30% of gross cash farm receipts.14 It is expected that,
in the future, productivity in U.S. agriculture will continue to grow faster than
domestic consumer demand. At the same time, foreign demand for U.S. agricultural
products likely will be strong, reflecting both rapid population growth and increasing
consumer incomes abroad. Thus, unrestricted access to foreign markets may help to
prevent domestic farm surpluses from occurring.
Third, it is argued, further agricultural trade liberalization would improve the
efficiency of the U.S. and other economies, lower prices for consumers, and provide
a wider variety and higher quality of products. Finally, trade liberalization is seen by
some as being an impetus to further domestic agricultural reform in the developing
countries, especially those in Asia, and helping to make permanent reforms that have
already occurred in the developed countries.
Within the United States, most agricultural organizations support WTO
negotiations. They maintain that greater market access abroad is necessary, especially
now with declining U.S. farm incomes. Some agricultural organizations representing
small farmers, however, are opposed, arguing that more domestic support programs,
not trade liberalization, are needed.
The Administration is currently collecting information from the public on
agricultural trade barriers in anticipation of the upcoming negotiations. Although a
formal agenda for agriculture negotiations has not yet been determined, Department15
of Agriculture officials have announced the following goals.
!Eliminate export subsidies.
!Reduce tariffs on agricultural products (the world average is 56% compared
with 3% in the United States).
!Improve transparency and disciplines on State Trading Enterprises (STEs),
which allow some countries to undercut U.S. exports into third markets and
!Develop scientifically-justified rules on biotechnology products (genetically
modified organisms, or GMOs).
!Strengthen the rules on the administration of tariff rate quotas, which, in
practice, have been administered to restrict access.16
14Testimony of Ambassador Peter L. Scher, Special Trade Negotiator for Agriculture, before
the Subcommittee on Trade, House Committee on Ways and Means, February 12, 1998, p.
15Ibid., p. 6 and 7 and U.S. Department of Agriculture. Glickman to Participate in WTO
Ministerial Conference, Release No. 0196.98, p. 1.
16In the URA, some nontariff barriers were converted to tariff rate quotas (TRQs), in which
tariff-free imports are permitted up to a certain level.
Services include a wide range of activities, such as travel, tourism,
transportation, accounting, advertising, banking, insurance, construction, architecture,
engineering, communications, health, education, information, and legal, business,
professional, and technical services. Unlike merchandise, which is usually shipped
across a border, services can be delivered in four main ways. The service provider
can travel to the country of the recipient (such as an opera singer), or the service
recipient can travel to the country of the provider (e.g., a tourist). Services can be
sent abroad by mail, telephone, facsimile, or computer network. Finally, services can
be provided through foreign direct investment, as when a firm establishes a branch or
subsidiary abroad. Barriers to services trade often take the form of government
regulations which may limit the provider of the service (such as restrictions on foreign
professionals entering a country) or on the type of investment that can be done by a
World trade in services has grown rapidly over the past several decades and now
accounts for about 20% of global merchandise and services trade. For example, of17
total world exports of $6.2 trillion in 1995, $1.2 trillion was in services. Not only
is services trade large and growing rapidly, but it is an important part of the
infrastructure of the world economy. Much economic activity in the goods sector
depends on services such as banking, accounting and professional services, and
computer networks. Thus, reducing trade barriers in services is seen by many as
crucial to future economic growth in most countries.
Moreover, the United States is the largest exporter and second largest importer
of services. In 1995 U.S. services exports and imports were 16% and 11%,
respectively, of global services exports and imports.18
The General Agreement on Trade in Services (GATS), one of the Uruguay19
Round Agreements, is the first multilateral agreement on services trade.
Conceptually, the GATS can be thought of as having two main components. The
first part is a system of multilateral rules and principles for trade in services which are
less comprehensive than those applying to merchandise trade in the GATT. The
second part contains the schedules of specific commitments in which each country
listed the service sectors for which it would provide market access and/or national
treatment. While the multilateral rules were a significant achievement, any immediate
reduction in trade barriers from the GATS would occur via the specific commitments.
One criticism of the GATS is that it is a complex and difficult document to read
and interpret. The schedules of commitments lack transparency and make future
liberalization more difficult. Another concern is that very little actual trade
17World Trade Organization. Annual Report, 1997. Volume II, p. 6.
18Ibid., p. 5.
19See also CRS Report 95-1051 E, Services Trade and the Uruguay Round, by Arlene
liberalization occurred in the specific commitments. Most of the commitments
reflected a standstill, or ceiling, on existing measures, not a reduction of barriers.20
Also, although many countries scheduled commitments in a large number of service
sectors, these commitments cover a relative small proportion of actual service
One contemplated goal for future negotiations, then, is to expand the market22
access commitments incorporated in the national schedules. Another goal might be
to reform regulations that restrict competition in services, which, as noted earlier, are
one of the major services barriers. Also, the way in which the schedules of
commitments were designed could be reviewed with the aim of increasing
transparency and making future liberalization easier. Finally, since services are often
delivered via foreign direct investment, multilateral rules for foreign direct investment
might also improve market access for services.23
It should be noted that negotiations in a number of services sectors were
continued after the GATS went into effect in 1995. An agreement liberalizing trade
in basic telecommunications was announced in February 1997.24 In financial services,
securities and other financial service markets to foreign service providers. The GATS
also required continued negotiations on government procurement, subsidies and
emergency safeguards in the first few years after 1995; these have not been
concluded, and will likely be part of the services agenda in the year 2000.
One new services issue that has attracted considerable attention is electronic
commerce (e-commerce), which can be defined as commercial transactions by
electronic means, especially over the Internet. It would include, for example, sales
and purchases of goods and services over the Internet. E-commerce was not even an
issue when the Uruguay Round was negotiated, since the Internet was not widely
used at that time. It is a significant development, however, since it makes purchases
and sales by consumers and/or suppliers in remote locations much quicker and
cheaper. At the Geneva Ministerial, the WTO members agreed not to impose tariffs
on electronic transactions for one year and to begin a work program to examine trade-
related aspects of e-commerce. The U.S. Administration favors reaching agreement
at the Seattle Ministerial to extend indefinitely the temporary moratorium on tariffs.
20Schott, Jeffrey J. The Uruguay Round: An Assessment. Washington, D.C., Institute for
International Economics. November 1994, p. 100.
21Snape, Richard H. and Malcolm Bosworth. Advancing Services Negotiations. In The
World Trading System: Challenges Ahead, Jeffrey J. Schott, Ed., Washington, D.C., Institute
for International Economics, December 1996, p. 189.
22Feketekuty, Geza. Setting the Agenda for the Next Round of Negotiations on Trade in
Services. In Launching New Global Trade Talks: An Action Agenda, Jeffrey J. Schott, Ed.,
Washington, D.C., Institute for International Economics, September 1998, p. 92.
23Sauve, Pierre. Preparing for Services 2000. Occasional Paper. Coalition of Service
Industries, October 1997, p. 1.
24For more information, see CRS Report 98-165 E, Telecom Services: The WTO Agreement,
by Bernard A. Gelb.
The European Union, however, said that, before extending the moratorium, the WTO
members should first complete the e-commerce work program.25
The U.S. government is in the process of formulating a services agenda. U.S.
business firms are strong supporters of further negotiations in services. Generally,
services negotiations are not a controversial issue in the United States; most recognize
the benefits such negotiations might bring. The industrial countries are the prime
motivators for services negotiations, although developing countries recognize, to
some extent, the benefits an improved infrastructure can bring to their economies.
The two issues discussed in this section — rules for foreign direct investment
and competition policy — are controversial, both within the United States and among
the WTO members. Countries disagree considerably on whether or not these issues
are ripe for negotiation and on the possible benefits of negotiations. Generally, the
European Union favors, and the United States opposes, beginning negotiations on
investment and competition policy.
To some extent, bilateral and regional agreements already include the new issues,
as does the WTO. Furthermore, Article 9 of the Uruguay Round Agreement on
Trade-Related Investment Measures (TRIMS) requires that, by the year 2000, the
WTO shall consider whether the TRIMS should be complemented with provisions on
investment policy and competition policy. These issues were discussed at the
Singapore Ministerial in December 1996, which established working groups to study
the relationship between trade and investment and between trade and competition
policy. The working groups, which exchange information and undertake analysis,
began meeting in mid-1997.
Investment and competition policy are, in one way, an extension of the more
traditional trade issues (tariffs and import quotas). The goals of reducing tariffs or of
establishing rules for investment and competition policy are generally the same: to
improve the efficiency of the world economy, raise living standards, lower prices for
consumer goods, and increase the variety and quality of consumer goods.
Rules for Foreign Direct Investment
Foreign direct investment (FDI) is very important to the world economy and to
the United States. In 1997 (the most recent year for which data are available), goods
and services sold by foreign affiliates of multinational firms were about $9.5 trillion,
more than total exports.26 Most FDI is by the developed countries, and developed
countries are the largest recipients of FDI, although developing countries are
25EU Says It Will Not Support WTO E-Commerce Moratorium. International Trade
Reporter. July 14, 1999, p. 1162.
26United Nations Conference on Trade and Development. World Investment Report 1998:
Trends and Determinants. New York, United Nations, p. xvii.
attracting a growing share. The United States is both the largest foreign investor
abroad and the largest recipient of foreign investment from abroad.
Foreign direct investment and trade are closely linked. Intra-firm trade accounts
for about one-third of total world trade, with exports by multinational firms to non-
affiliates accounting for another third.27 Foreign direct investment can be either a
complement to trade (as, for example, when a firm establishes a subsidiary abroad to
distribute its exports) or a substitute for trade (when a firm produces abroad to sell
abroad instead of exporting). Both FDI and trade are widely seen as improving the
efficiency of the economy by allocating scarce resources more effectively and allowing
firms to benefit from economies of scale. Moreover, foreign direct investment is seen
by many economists as an important way in which technology is transferred from the
investor to the recipient country.
Many of the barriers to foreign direct investment have been reduced or
eliminated, partly as a result of existing agreements at a number of levels. The
numerous bilateral treaties usually include most-favored nation and national treatment
clauses, as well as provisions insuring the protection and security of investment. The
North American Free Trade Agreement (NAFTA) among the United States, Canada
and Mexico, includes investment rules. In the WTO, investment provisions are
included in the GATS, the Agreement on Trade-Related Aspects of Intellectual
Property Rights (TRIPS), and the TRIMS.28 The OECD began negotiations towards
a Multilateral Agreement on Investment (MAI) in 1995, but after intense opposition,29
ceased all negotiations in December 1998.
Nevertheless, the need for comprehensive, multilateral rules is being discussed
in the trade policy and business communities. Given the importance of FDI in the
world economy, it can be argued that foreign direct investment should be subject to
multilateral rules and disciplines just as trade is. All 134 WTO member countries
would participate in the negotiations in the WTO, not just the OECD countries as is
the case in the MAI. Thus, a WTO agreement might gain the support of the
developing countries. Negotiations might focus on developing rules on the right of
establishment for firms, national treatment, most-favored nation treatment, and
transparency.30 In addition, governmental tax and other incentives that encourage
foreign direct investment to specific localities might also be addressed.
The developing countries have historically opposed investment negotiations,
fearing competition from large, efficient multinational firms and possible infringement
27World Trade Organization. Trade and Foreign Direct Investment. Annual Report, 1996,
Vol. 1, p. 44.
28Under TRIMS (trade-related investment measures), measures such as requirements that
foreign firms achieve a specified level of domestic content in their production or that imports
be balanced by exports are being phased out.
29See CRS Report 98-569 E, The Multilateral Agreement on Investment: A Brief Analysis
of the Current Status, updated February 2, 1999, by James K. Jackson.
30Ostry, Sylvia. A New Regime for Foreign Direct Investment. Group of Thirty,
Washington, D.C. 1997. Occasional Paper 53, p. 12-16.
on their sovereignty. More recently, however, some developing countries have
recognized the benefits that FDI can bring in terms of technology transfer and making
their economies more competitive.
In the United States, foreign direct investment is a very controversial issue.
Although most economists and the business community emphasize its economic
benefits to both the home and host countries, domestic opposition to the MAI by
labor unions, environmental organizations, and the general public was very vocal. A
major criticism is that foreign investment is motivated primarily by lower labor costs
abroad, which causes a loss of U.S. jobs. All agree that in specific instances this can
happen. Most economists, however, respond with data showing that, in the
aggregate, this is not the case. For example, at the end of 1996, more than 81% of
U.S. direct investment abroad was in high-income countries, and 18% in middle-
income countries; only 1% was in low-income nations,31 suggesting that the primary
motivation could not be lower labor costs. Moreover, these economists argue that
the data suggest that U.S. direct investment abroad is associated with a change in the
domestic composition of jobs (more high-technology jobs and fewer unskilled jobs),
not a loss of jobs.
Competition policy refers to laws that regulate trade-restricting practices by
private firms. Such practices include cartels (agreements to fix prices and control
output), predatory pricing (selling at below-cost prices to drive out competitors),
price fixing, vertical or horizontal integration, abuse of dominant power, and mergers
and acquisitions (if they result in trade restriction). About 70 countries (including
most major industrial countries) have competition (or antitrust) laws, but in some
cases, the laws contain a number of exemptions, and in other cases, the laws are not
adequately enforced.32 A significant number of countries have no competition laws
In recent years, trade-restricting practices by private firms have attracted
attention for several reasons. First, as government barriers to trade (e.g., tariffs and
import quotas) have been reduced in previous GATT/WTO negotiations, other types
of barriers have become more visible. When high tariffs were restricting trade, little
thought was given to private business practices that inhibit trade, but such practices
are now viewed by some as a major barrier facing multinational firms. Second, the
rapid increase in foreign direct investment abroad and trade in services have made
competition problems more of an issue.
Third, competition policy is being addressed in regional agreements and, in
specific instances, in the WTO. For example, Chapter 15 (Competition Policy,
Monopolies, and State Enterprises) of the NAFTA requires, in part, that the United
31Graham, Edward M. Trade and Investment at the WTO: Just Do It! In Launching New
Global Trade Talks: An Action Agenda. Jeffrey J. Schott, Ed., Washington, D.C., Institute
of International Economics, September 1998, p. 155.
32World Trade Organization. Trade and Competition Policy. Annual Report, 1997, Volume
States, Canada and Mexico maintain antitrust measures and cooperate in enforcing
competition law. It also requires each country to impose some specific disciplines on
its monopolies. In the WTO, both the GATS and the TRIPS contain provisions on
government actions regarding private business practices that restrict competition. For
example, one provision of the GATS requires WTO governments to supervise the
behavior of firms they designate as monopolies. Furthermore, the recent WTO
telecommunications agreement included pro-competitive regulatory principles.
Finally, several disputes involving private restrictive business practices have
received considerable publicity and suggest that multilateral rules might be helpful.
In 1995, the United States brought a case to the WTO dispute settlement process in
which it argued that Japanese automakers dealt exclusively with Japanese firms when
purchasing auto parts. More recently, the Kodak-Fuji film case was partly about an
exclusive relationship between Fuji and the four largest wholesale distributors of
photographic film products in Japan.33 In another issue, the Boeing-McDonnell
Douglas merger illustrated how the extraterritorial application of competition law can
lead to disputes.
Devising multilateral rules for competition policy might be difficult since the
issue is quite complex. For example, in some cases, business practices that are anti-
competitive may actually improve economic welfare; this might be true of mergers
where a firm benefits from economies of scale.
A wide variety of approaches have been discussed by economists to address
competition policy. At one extreme, a supranational authority might be established
to make rules for competition policy. At the other extreme, cooperation among
national competition authorities, which already exists to some extent, might be
enhanced. There are many options in between. For example, an agreement could
focus on specific goals, such as controlling cartels or requiring notification of
proposed mergers and acquisitions that affect other countries.
Even though competition policy is included in specific instances in the WTO,
some argue that more comprehensive WTO rules are now needed.34 In the United
States, multinational firms support broader WTO rules for competition policy. The
Administration recently suggested exploring the possibility of including pro-35
competitive regulatory principles in services negotiations. The European Union
(which has a supranational competition authority) supports WTO negotiations on
competition policy. Developing countries generally oppose such discussions.
33For more information, see CRS Report 98-442 E, The Kodak-Fuji Film Case at the WTO
and the Openness of Japan’s Film Market, by Dick Nanto.
34For example, see Graham, Edward M. and J. David Richardson. Competition Policies for
the Global Economy. Washington, D.C., Institute for International Economics. November
35Barshefsky, Brittan Take Stab at Fleshing Out New Trade Initiative. Inside U.S. Trade,
September 25, 1998, p. 3-4.
Social Dimensions of Trade Policy
Environmental and labor concerns and their relationship to trade differ from the
other issues discussed in this report. Including the environment and labor rights in
trade negotiations is not aimed at improving economic efficiency and at raising
productivity. Instead, the goals, supported by various groups and countries, are to
insure that trade liberalization does not come about at a cost to the environment, and
contributes toward higher environmental and labor standards. In other words, the
goals focus on sustainable development, health, and improving working conditions
for labor. While most agree that these are important goals, opinions vary widely as
to whether or not multilateral trade negotiations are the most effective way of
One reason these issues are being discussed in the WTO is that there are no
broad environmental or labor organizations with powers to enforce their agreements.
A number of multilateral environmental treaties have been negotiated covering
specific issues, such as endangered species, but enforcement generally relies on trade
sanctions. The International Labor Organization, the traditional multinational forum
for labor issues, has no enforcement mechanism.
Some precedents exist for including labor and the environment in the WTO.
The NAFTA is accompanied by side agreements which focus on improving labor
standards and environmental cooperation. The WTO already allows for some
exceptions to the trade rules, as long as they are not arbitrary or unjustifiable
discrimination among countries and are not disguised barriers to trade. For example,
the environment is addressed indirectly in Article XX, which permits measures
necessary to protect human, animal, or plant life or health, and measures relating to
the conservation of exhaustible natural resources. Another provision of Article XX
allows measures relating to the products of prison labor.
Environment and labor are controversial issues in the United States. Historically,
linking environmental and labor issues to trade agreements was supported by
environmentalists and labor unions (and a growing segment of the public), and
opposed by economists and much of the business community.
The Clinton Administration continues to support linking labor and the
environment to trade negotiations.36 In the Congress, a difference of opinion over
the extent to which environmental and labor standards should be negotiated in trade
agreements was the main reason the fast-track bill was withdrawn before the House
vote in the fall of 1997. In both H.R. 2621 and S. 1269, the use of the fast-track
process would have been limited to provisions that were either “necessary” to37
implement a trade agreement or were “directly related to trade.” As a result,
36Clinton Administration Committed to Labor/Environment Link in WTO. International
Trade Reporter, August 5, 1998, p. 1351.
37See CRS Report 97-879 ENR, Fast-Track Trade Authority: Summary of the Clinton
Administration Proposal, by Susan R. Fletcher, and CRS Report 97-943 E, Fast-Track
Trade Authority Proposals: Which Environmental Issues are Included in the Principal
provisions that are aimed primarily at improving the environment would have been
ineligible for implementation via the fast-track process. A substantial number of
Members who supported environmental and labor provisions in trade agreements
opposed the bills, while those who argued against such provisions supported the bills.
Since it appeared the House bill would not pass, the vote was postponed in November
1997. As mentioned earlier, H.R. 2621 was rejected by a House vote on September
Including environment and labor in trade agreements is also divisive among the
WTO members. Generally, the United States and a few industrial countries support
discussions in the WTO, while the developing countries are opposed.
The relationship between the environment and trade is complex and involves a
number of issues. One question is the relationship between the WTO and multilateral
environmental agreements (MEAs) that include trade sanctions. Governments have
negotiated several MEAs that rely on trade sanctions as a means to enforce
environmental agreements. A second issue is ecolabeling (the process of attaching a
label to a product providing consumers with environmental information). If well
designed, ecolabels can be an effective instrument of environmental policy. Some are
concerned that trade sanctions to enforce MEAs or ecolabeling might be used as
disguised barriers to trade.
Environmental standards raise several questions. If domestic health, safety,
and environmental product and produce standards are stricter than those of foreign
countries, could federal or state standards be weakened if trade rules oblige parties
to harmonize and adopt international standards? Would stricter standards be
successfully challenged in the WTO dispute settlement procedure as nontariff trade
barriers? Could lower foreign environmental standards (or lax enforcement) provide
a competitive advantage (and implicit subsidy) to foreign investment? Analysts
respond that each country has the right in the WTO to establish its own standards,
provided they are not used as disguised barriers to trade. Moreover, many trade
proponents believe that allowing each country to take advantage of its comparative
advantage (in which they include lower standards) will raise world income, and
ultimately lead to higher standards in foreign countries.
Environmental concerns were important during the negotiations for both
NAFTA and the Uruguay Round Agreement. After much discussion and
compromise, the NAFTA and a side agreement addressed issues such as enforcement
of environmental standards in the three NAFTA countries, safeguarding stricter U.S.
standards, and addressing border pollution.38
Negotiating Objectives? by Arlene Wilson.
38See CRS Report 97-291 ENR, NAFTA: Related Environmental Issues and Initiatives, by
Although the Uruguay Round Agreement addressed a few environmental
concerns, the major issues were referred to a WTO Committee on Trade and the
Environment, established in January 1995. The Committee has been meeting
periodically to address the ten items on its agenda, including transparency of trade
measures used for environmental purposes, exports of domestically prohibited goods,
ecolabeling, and trade sanctions to enforce MEAs. The Committee issued a report
in November 1996, summarizing its discussions and analysis, but made no major
recommendations. The Singapore Ministerial Declaration stated that the Committee
on Trade and Environment has made an important contribution towards fulfilling its
mandate, and directed the Committee to continue its work under the existing terms
A major argument for including labor standards in trade agreements is
humanitarian. Some argue that workers in all countries deserve to work under
conditions that protect their health and safety, which might be better achieved if trade
agreements required basic labor standards. Others, however, maintain that the best
way to raise labor standards is to allow developing countries to produce and export
more, thereby raising incomes and ultimately leading to higher wages and improved
Another argument is that multinational firms will shift production to those
countries with lower labor standards which, it is argued, is unfair competition Not
only would this hurt domestic workers, it is suggested, but it might force countries
with higher standards to lower their standards in order to compete. As mentioned
earlier, the data suggest that lower labor (or environmental) standards abroad are not
a major motivation for multinational firms’ decisions on plant location.
The link between trade and labor was the most controversial issue discussed39
during the Singapore Ministerial. The United States and a few other industrial
countries supported the establishment of a working group to discuss labor rights in
the WTO. Developing countries were strongly opposed, arguing that such a working
group might lead to inclusion of labor rights in trade agreements. That, in turn, would
weaken their ability to export by reducing their comparative advantage in production
of goods whose labor costs are low. Moreover, it was argued that labor rights might
be used as protectionist tools.
The Singapore Ministerial Declaration supported the observance of
internationally recognized core labor standards, but stated that the ILO is the
competent body to set and deal with those standards. Additionally, the Ministers
“believe that economic growth and development fostered by increased trade and40
further trade liberalization contribute to the promotion of these standards.” No
39See CRS Report 97-272 E, Worker Rights and U.S. Trade Policy: WTO Singapore
Ministerial and Fast-Track Extension, by Mary Jane Bolle.
40Singapore Ministerial Declaration, Adopted on 13 December 1996. WTO Focus, January
working group was established to discuss labor rights in the WTO, but the
Declaration noted that cooperation between the WTO and the ILO will continue.
Implications for Congress
Fast-track negotiating authority is important for multilateral negotiations on
agriculture, services, and the other agenda items since foreign countries are unlikely
to make the necessary compromises without such authority. Also, rules for foreign
direct investment and competition policy, now being studied by WTO working
groups, may be a topic for negotiations in the not-too-distant future. Some observers
believe the United States has much to gain from reaching agreement on all of these
Should the Congress decide to act on fast-track legislation, it would be able to
influence the negotiations in several ways. First, Congress could participate in setting
the agenda for negotiations through the objectives specified in fast-track legislation.
For example, in H.R. 2621 and S. 2400, the principal negotiating objectives included
reducing specified barriers in services, foreign investment, intellectual property, and
Second, the fast-track process requires that the Administration consult with the
Congress at a number of points in the negotiating process: before negotiations begin,
during the negotiations, and before the Administration enters into an agreement.
Congress can request consultations frequently, if desired. If the Administration fails
to consult adequately with Congress, either House of Congress may pass a resolution
denying use of the fast-track procedures to an implementing bill submitted with a
Proponents of fast-track legislation may seek a compromise on the extent to
which labor and the environment are the subject of negotiations. In both H.R. 2621
and S. 2400, the principal negotiating objectives included the following:
!to ensure that foreign governments do not lower or waive existing
environmental and labor standards to gain a competitive advantage in trade or
!to require that U.S. negotiators take into account U.S. domestic objectives,
including protection of legitimate health, safety, environmental, consumer, and
employment opportunity interests.
The 1998 rejection of fast-track in the House shows the diversity of views on
the environmental and labor objectives. Fast-track bills in the 105th Congress were
not successful, partly because these principal negotiating objectives were not strong
enough to satisfy the goals of labor, and, to a lesser extent, environmentalists.