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  • Writer's pictureDyon A. Elliott

[OPINION] Maybe it's time to 'also' invoke GATT Article XVIII:B

A Legitimate Premise

With the exogenous downside risks continuing to threaten a weakening of Belize’s balance of payments (BoP)'s position, maybe the time has come for Belizean authorities to join the ranks of countries like Ecuador and invoke a seldom-used provision contained within the legal constructs of the multilateral trading system.

More specifically, the General Agreement on Tariffs and Trade (the "GATT")'s Articles XII and XVIII (Section B)—with the latter being most relevant for developing countries—allows World Trade Organization (WTO) members to implement otherwise prohibited trade restrictions for “balance-of-payments reasons.” Particularly, Article XVIII (Section B) reads:

“In order to safeguard its external financial position and to ensure a level of reserves adequate for the implementation of its programme of economic development…[a member] may, subject to the provisions of paragraphs 10 to 12, control the general level of its imports by restricting the quantity or value of merchandise permitted to be imported; Provided that the import restrictions instituted, maintained or intensified shall not exceed those necessary:

(a) to forestall the threat of, or to stop, a serious decline in its monetary reserves, or

(b) in the case of a contracting party with inadequate monetary reserves, to achieve a reasonable rate of increase in its reserves.

“Due regard shall be paid in either case to any special factors which may be affecting the reserves of the contracting party or its need for reserves, including, where special external credits or other resources are available to it, the need to provide for the appropriate use of such credits or resources

Now, as is true for most trade-rules “exceptions”, there are conditions. In this case, those parameters are outlined in the “Understanding on the Balance of Payments Provisions of the GATT 1994” (the “Understanding”), and include notification requirements and even a role for consultations to be carried out by The Committee on Balance-of-Payments Restrictions (the “Committee”).

However, this is where the role of Article XVIII:B trumps its Article XII counterpart. The language between the former and the latter is fairly similar in their relevant sub-clauses except that XII conditions the use of the BoP mechanism for situations where it is necessary to “forestall the imminent threat of, or to stop, a serious decline in its monetary reserves.” The careful reader would observe that Article XVIII:B—again, catering for developing economies—does not limit the application of the provision to instances where there is an “imminent” threat.

Another key distinction between the two articles is that XVIII:B uses the phrase “inadequate monetary reserves” as opposed to XII’s language which states that the provision could be utilized “in the case of a contracting party with very low monetary reserves, to achieve a reasonable rate of increase in its reserves”. Lastly, even the rules regarding consultations are relaxed for developing nations.

Import restriction and the Ecuadorian Case

So, clearly, it appears that Article XVIII:B is legally within reach. Therefore, it becomes useful to discuss the types of import restrictions that can be used.

The “Understanding” touches on this point as follows:

Members confirm their commitment to give preference to those measures which have the least disruptive effect on trade. Such measures (referred to in this Understanding as “price-based measures”) shall be understood to include import surcharges, import deposit requirements or other equivalent trade measures with an impact on the price of imported goods. It is understood that, notwithstanding the provisions of Article II, price-based measures taken for Balance-of-Payments purposes may be applied by a Member in excess of the duties inscribed in the Schedule of that Member. Furthermore, that Member shall indicate the amount by which the price-based measure exceeds the bound duty clearly and separately under the notification procedures of this Understanding.

There’s a lot that could be unpacked there. However, suffice to say here that a member state—invoking Article XVIII:B—could apply import (or tariff) surcharges on imported goods that could even cause the “applied tariff” to surpass even countries' bound rates, a practice that under normal circumstances would not have been countenanced by the WTO and its members.

This was the case with Ecuador, the South American country that employed this trade-law exception from March 2015 to June 2017, reportedly generating more than US$1.5 billion (or about 1.4% of 2017 GDP) in additional government revenues thanks to the “special tax”.

In accordance with the rules, the country established a timetable (15 months initially) within which the tariff surcharge was to be phased out. However, via a May 2016 letter to the chairman of the “Committee”, Ecuadorian authorities informed that the measure needed to have been extended following the 7.8 magnitude earthquake that struck the country in April that year.

In its 2019 Trade Policy Review, the WTO reported that the surcharge was applied to more than 2,900 tariff lines at varying rates. “The surcharge was ad valorem calculated on the basis of the c.i.f. value of imports,” the WTO review explained. “There were five rates of 5%, 15%, 20%, 25% and 45%; the majority of lines were subject to a surcharge above 25%: the 45% rate applied to 45.4% of tariff lines and the 25% rate to 13.2%; the 5% surcharge applied to 24% of lines.”

The WTO’s review had also highlighted that as a result of the surcharge, “28% of all tariff lines… were subject to applied tariffs above the bound levels.

Of course, the move was not without its dissenters, but government officials in Quito had a problem to solve. To put it succinctly, the Ecuadorian authorities needed to respond to the sharp decline in oil prices that occurred between 2014 and 2015. Considering that oil represent close to 40% of the country’s exports earnings, world prices being slashed virtually by half contributed significantly to the value of South American country’s total exports falling from US$25.7 billion in 2014 to roughly US$18.3 billion a year later.

Belize’s International Reserves

The Ecuadorian example, while distinct in its own right, does carry a few relatable overtones to the present Belizean situation.

For instance, while it was oil exports that caused the headaches in Quito, for the authorities in Belmopan it’s the fallout of the tourism sector, which Belizean officials and the International Monetary Fund (IMF) say contributes approximately 60% of the country’s foreign exchange (FOREX) earnings and 40% of GDP.

To make matters worse, projections suggest that the sector isn’t likely to, in the words of the IMF, “pick up” until “2022 when vaccines are more widely available in advanced countries.” This prediction has, therefore, inspired the Fund to revise down its original outlook from a 2021 rebound of 8% GDP growth to an anemic 1.9%, with the latter still subject to ‘downside risks’.

It is within this contextual backdrop that the Fund, via its recent “concluding statement”, warns the small, developing country that reserve adequacy is projected to worsen over the medium term”.

More specifically, the IMF cautioned: “The continued primary deficits and high public debt are expected to limit Belize’s access to external financing going forward and lead to a fall in international reserves below 3 months of imports and 100 percent of gross external financing needs in 2024”. The IMF's baseline scenario projects import cover of 2.9 and 2.6 for 2024 and 2025, respectively.

The use of the term “baseline scenario” is important here. The fact is that Belize remains extremely vulnerable to a host of exogenous downside risks, not least of which includes the potential that there would be an active 2021 Atlantic hurricane season. Additionally, there is the risk of “an intensification of the pandemic domestically and abroad”, which would delay the tourism sector’s revival. Furthermore, there continues to be the conventional risks such as large upswings in energy prices, weaker-than-expected global growth (which again could harm tourism), or other climatological events such as the drought the stymied agricultural output in 2019.

Consequently, the point here is that even that anemic 1.9% outlook could be missed, if the wrong cards are played against the Belizean economy.

In the meantime, while one would want to think that international (external) creditors would extend as concessionary of a helping hand as possible under the circumstances, if history is any teacher (and she’s a pretty good one), the twin occurrences of increased emergency and social spending matched with depressed government revenues (reportedly down by about 30%) would likely leave the country out in the cold to contend with the vicious debt cycle.

Already, reports place Belize's debt as a percent of GDP around 126%. However, in an environment where Foreign Direct Investment (FDI) has slowed and tourism foreign-dollar receipts are mere shadows of their former selves, the country has had to rely on bilateral and multilateral lenders to help it ‘shore up’ its international reserves throughout 2020. The country even employed a unique US$30 Treasury note for a similar purpose. But as the debt stays elevated, the “vicious cycle” may start to set in: The higher debt levels could lead external creditors to make access to credit more "expensive", which in turn affects the deficit, thereby, leading to an even wider deficit, and, thus, the need for more expensive debt.

Debt access aside, it would be remiss to not likewise mention that the country’s reserves—aside from being necessary for essential imports—is central to the preservation of its Fixed-Exchange rate peg with the United States dollar. The peg, established since 1976, has served as the "cornerstone" of the country's "macroeconomic stability".

A Place for Article XVIII:B

The case, therefore, can definitely be made that Central American country satisfies the conditions set by Article XVIII:B of the GATT. From this writer’s vantage point, the only outstanding decision is exactly how it would be administered and implemented.

Clearly, the “Understanding” regarding the use of this trade-policy ‘lever’ prefers “price-based” measures; therefore, like Ecuador, the import surcharge appears to be ideal. As Quito had demonstrated, the surcharge—again, in accordance with the WTO rules—need not be applied evenly across all tariff lines. Moreover, the rules permit members to distinguish between “essential” (which classification includes necessary intermediary inputs for domestic production) and “non-essential” merchandise imports.

Without a doubt, the administration of such a measure must be near immaculate for it to yield the intended results, after all the 'world' shalt be watching. As a result, if the government adopts this approach, it must endeavor to ensure that the existing tax-system leakages are simultaneously addressed and corrected (which correction should itself yield additional revenues).

In the end, Belize—like the rest of the world—has taken a hard economic hit under the heavy hand of the present pandemic. Deficits are high, fiscal space is low, and reserves are troubled at time when the citizenry (households and business owners alike) need as much help as they could get. Therefore, every available option—especially those for revenue-enhancement that have minimal negative impacts on the speed of the economic recovery—need to be on the table.

As was true in the Ecuadorian case, while the ultimate goal would be to improve the Balance-of-Payment position of the member state, there’s the natural “byproduct” of additional revenues that could help narrow the country’s fiscal deficit.

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