Public Information Notice No. 05/49

Public Information Notice: IMF Executive Board Reviews Fund's Work on International Trade

April 11, 2005

On February 28, 2005, the Executive Board of the International Monetary Fund (IMF) reviewed the work of the Fund on international trade.¹

Background

Trade policy has traditionally been an important part of IMF surveillance and, in a number of cases, Fund-supported programs. While other, more specialized institutions such as the World Trade Organization and the World Bank typically take the lead in trade policy discussions with member countries, the macroeconomic implications of member countries' trade regimes is a common topic in the IMF's annual surveillance discussions. Where considered critical to achieving macroeconomic objectives, trade-related measures have featured in IMF programs. The IMF has also been active in surveillance of the multilateral trading system and as a vocal supporter of the Doha Round.

Every few years, the Fund reviews aspects of its work on trade. Past reviews have focused on the nature and effectiveness of trade-related conditionality in IMF-supported programs. The current review of Fund work on trade takes a broader perspective and examines the entire breadth of the IMF's work in the trade area. The review considers such issues as what trade-related challenges face member countries, how the Fund has carried out its work on trade (in terms of surveillance, program design, research, and communication), and whether aspects of this work could be improved. The review also considers how the IMF collaborates on trade with other agencies, such as the World Bank and the World Trade Organization, and whether this collaboration reflects an appropriate division of labor.

Executive Board Assessment

Directors welcomed the opportunity to discuss the Fund's work in the area of trade, which remains an essential part of its mandate in the context of its contribution to promoting global stability and growth. They considered that, overall, the Fund's current trade policy agenda and the positions that the Fund advocates remain appropriate, and consistent with the challenges that member countries face. Directors reaffirmed the importance of successfully concluding the Doha Round of multilateral trade negotiations, which should help promote efficiency and economic growth and thus contribute to poverty reduction, thereby supporting the achievement of the Millennium Development Goals. Directors pointed to the critical role that developed countries can play in addressing remaining impediments to trade by removing market access restrictions, reducing tariff escalation, and cutting agricultural and other subsidies. In the same vein, Directors also called on developing countries, for their part, to commit themselves to further trade liberalization.

Directors discussed the conclusions of the staff paper reviewing the Fund's work on trade, and considered that the Fund has appropriately carried out its work under bilateral and multilateral surveillance, program work, technical assistance, research, and outreach activities. They broadly endorsed the staff's recommendations for fine-tuning the Fund's work on trade.

Directors considered several suggestions for improving trade-related surveillance by the Fund. They agreed that there is additional scope for more selectivity in the coverage of trade issues, as set out in the context of the 2004 Biennial Review of Surveillance. They felt that the considerations identified in the staff paper should be helpful in guiding individual country teams in decisions on the selection of topics. Several Directors underlined the importance of maintaining symmetry in trade policy surveillance in industrial and developing countries.

Directors considered that it would be useful to extend the staff's analysis of spillover effects of the trade policies of key industrial countries to cover also the trade policies of larger middleincome countries, whose trade policy decisions (particularly on market access) increasingly affect the export prospects of other countries. In this vein, a few Directors asked for an assessment of the impact of subsidies related to agricultural production on the debt sustainability of developing countries that rely on agricultural exports.

Directors noted the growing importance of trade in services, and the possible overlap between services trade negotiations and traditional areas of Fund advice relating, for example, to financial sector liberalization and financial vulnerabilities. They encouraged the staff to increase the coverage of trade in services, as more information becomes available.

Directors noted the proliferation of regional trade integration arrangements, and the associated pooling of trade policy and administrative decisions. While recognizing that multilateral trade liberalization on a most-favored-nation basis is the preferred way to secure open markets globally, Directors emphasized that regional trade agreements, if appropriately structured, can provide immediate economic benefits and can be complementary and compatible with multilateral liberalization. Most Directors looked forward to a more comprehensive discussion of these issues at the forthcoming Board seminar on regional trade arrangements. They felt that it would be helpful to complement bilateral surveillance of individual members of regional trade arrangements with more systematic discussions at the regional level on the occasion of staff visits to countries where regional trade organizations are located.

With regard to the Fund's program work, Directors appreciated the staff's analysis of the incidence of trade-related conditionality under Fund-supported programs. Directors welcomed the reduction in trade conditionality, reflecting inter alia the general streamlining of structural conditionality and the adoption of more open trade policies by many countries. However, a few Directors cautioned that the streamlining of conditionality should not lead to neglect of longer-term trade policy reforms that may be essential for stability and growth over time, and urged that this aspect be kept under review. Directors looked forward to discussing overall trade conditionality in the context of the recent review of the 2002 Conditionality Guidelines.

Directors agreed that the Fund, in collaboration with other IFIs and donors, should continue to give trade-related policy advice to low-income countries with the aim of integrating trade reforms more systematically into their Poverty Reduction and Strategy Papers (PRSPs). Such advice can be provided through the Fund's regular policy dialogue with these countries, and should draw on the work prepared in the context of the Integrated Framework. Given the home-grown nature of PRSPs, however, it will be up to individual countries to consider to what extent such policies should be included in their PRSPs without overburdening the process. Adequate supportive outreach and capacity-building efforts will be of considerable importance in this context. In response to calls by several Directors, we will need to consider how best to work in a complementary way with other partners, through the Integrated Framework, to explore further ways of easing adjustment in low-income economies. In addition, some Directors encouraged the staff to do further research and analysis on the links between trade liberalization and economic growth, and hence on poverty reduction.

Directors endorsed the recent emphasis in the Fund's program work on trade-related macroeconomic vulnerabilities, which remain a pressing issue for the Fund's poorest members. They welcomed the introduction of the Trade Integration Mechanism (TIM) as one means of dealing with these pressures, and encouraged its use by other members with Fund-supported programs. Several Directors suggested that trade-related vulnerabilities be assessed systematically in Fund surveillance, in particular for low-income countries most susceptible to terms of trade shocks or the erosion of trade preferences. Some Directors called for further progress in adapting the Fund's instruments to deal with balance of payments shortfalls due to exogenous shocks.

Directors considered that the current approach to collaboration and division of labor on trade issues among international institutions (principally the Fund, the World Bank, and the World Trade Organization (WTO) is appropriate and effective, reflecting the respective mandates and expertise of the institutions. All three institutions foster the progressive liberalization of trade in goods and services. The Fund focuses on the overall policy framework; the World Bank, on development and sectoral trade issues; and the WTO, on a rules-based approach to liberalization and transparency. They all collaborate to ensure policy coherence. Directors were of the view that the Fund's assessment of trade policy issues remains indispensable in the context of Article IV surveillance and other functions. They acknowledged that the related work of other institutions can provide valuable insights in such assessments from a different perspective, but it cannot replace the Fund's own work. In this context, the Fund should wherever feasible draw on the expertise of the World Bank and the WTO in areas such as regional trade agreements and trade in services, as well as on other institutions such as the OECD and UNCTAD. Directors observed that members' commitments with respect to trade in services within the WTO framework may influence their approaches to financial sector liberalization, a core area of Fund expertise. They called on the staff to be alert to any emerging need for a clearer delineation of responsibilities between the WTO and the Fund in this regard.

Directors welcomed the background paper on the Fund's Trade Restrictiveness Index (TRI), and considered that the index, while not a fully comprehensive indicator of a country's trade policy stance, still remains a useful tool for the Fund's work, as it balances reasonably well the requirements of accuracy, country coverage, timeliness, and methodological soundness. At the same time, they called on the staff to consider ways to improve the TRI and explore the development of alternative indices. Directors agreed with the staff's recommendation that, in order to avoid a false sense of precision, including with respect to cross-country comparisons—for which the TRI is not suited—the index should henceforth be used mainly as a starting point in discussions with national authorities, and not be included in individual country staff reports.

Directors also considered the background paper on the revenue consequences of trade reforms, and broadly endorsed its conclusions. They noted that many low-income and some middle-income countries have had difficulties replacing trade-related tax revenue lost as a result of trade reforms. However, they were encouraged that the experience of other countries has shown that this problem can be mitigated by appropriate reforms to domestic tax systems and tax administration.

The staff papers for today's discussion, while providing a broad overview of the Fund's work on trade policy in the context of its surveillance, balance of payments support, technical assistance, and research and outreach activities, have not sought to address further questions relating to the appropriateness and effectiveness of its advice on trade reforms. Directors generally agreed with the view that, resources permitting, it would be desirable for the staff and/or independent experts to conduct case studies on the impact and design of trade policy reforms recommended by the Fund. Such studies would be helpful for drawing lessons for future country-specific policy advice and program design. Management will consider how best to organize such case studies and their scope in the period ahead in light of Directors' views expressed today.