POTENTIAL IMPACT ON THE U.S. ECONOMY AND INDUSTRIES OF THE GATT URA

EXECUTIVE SUMMARY

The Uruguay Round Agreements (URA) are the result of a series of negotiations among 117 countries held under the auspices of the General Agreement on Tariffs and Trade (GATT). Negotiations began on September 20, 1986, at Punta del Este, Uruguay, and reached agreement in Geneva, Switzer land, on December 15, 1993. The Final Act was signed on April 15, 1994, at a conference in Marrakesh, Morocco.

The URA are part of a document entitled Agreement Establishing the World Trade Organization (WTO). The document includes four annexes that contain agreements relating to agriculture, sanitary and phytosanitary (SPS) measures, textiles and clothing, antidumping, trade-related investment measures (TRIMs), subsidies and countervailing measures, safeguards, technical barriers to trade, customs valuation, preshipment inspection, rules of origin, import licensing procedures, services, trade-related aspects of intellectual property rights (TRIPs), and dispute settlement. Agreements on agriculture, textiles and clothing, services, and TRIPs bring these areas under comprehensive, multilateral dis- cipline for the first time.

The purpose of this report is twofold: (i) to review and analyze studies of the economy-wide effects of the URA; and (ii) to analyze the impact of both tariff and nontariff provisions of the URA on agricultural, industrial, and service sectors of the U.S. economy.

Likely Impact of the URA on the U.S. Economy

Economic theory suggests that multilateral trade liberalization under the URA likely will lead to increased exports by more efficient U.S. industries, increased imports of goods for which the United States does not have a comparative advantage, increased U.S. disposable income, and improved U.S. economic growth. Increased exports likely will increase production and employment in exporting industries while raising consumer prices. Increased imports likely will lower consumer prices but reduce production and employment in industries that compete with imports.

The Commission's assessment of the likely impact of the URA on the U.S. economy is based on a review of available economy-wide studies employing static computable general equilibrium (CGE) models and one dynamic linked-macroeconomic model. In general, studies using CGE models predict that U.S. gross domestic product (GDP) and national income will increase. In percentage terms, static estimates of gains in GDP are expected to be small, although the long-run dynamic growth effects of trade liberalization may be two to three times the static estimates. The URA likely will result in a minor increase in aggregate employment in the United States. U.S. exports and imports are expected to increase, but the rate of increase is not predicted by these studies. These estimates represent a lower bound estimate of the effect of the URA on the U.S. economy, since they do not reflect the impact of the reduction in nontariff barriers (NTBs), such as trade-related performance requirements, import licensing, or lack of intellectual property protection, that generally are not quantifiable.

Likely Impact of the URA on U.S. Agriculture,Industry, and Service Sectors

For most sectors of the U.S. economy, the net trade effects of the URA in the long term are likely to be small or negligible (5 percent or less); 1 of the 48 sectors with estimated effects of this magnitude, 35 are likely to experience beneficial effects, while the impact for the remainder is likely to be negative. Modest positive net trade effects (over 5 percent to 15 percent) are likely in two agricultural sectors (fruits and vegetables; and grain, milled grain, and animal feed); miscellaneous chemicals; electrical equipment and components; recorded media; and value-added telecommunications; modest negative net trade effects are likely for recreational goods. Three sectors are expected to experience sizeable net trade effects (over 15 percent): (1) pharmaceuticals (positive), (2) textiles (negative), and (3) apparel (negative). Certain industries may experience effects that differ from those anticipated for the sector as a whole.

Agreements other than tariff reductions are likely to have a significant impact on a number of sectors. Agreements that improve TRIPs protection and that increase transparency and standardize procedures for sanitary and phytosanitary measures, government procurement, preshipment inspection, and TRIMs are expected to have a positive impact that will augment trade gains due to tariff reductions.

1 The Commission used the following terms to describe the expected impact of the Uruguay Round Agreements (URA) on U.S. trade, production, employment, and U.S. consumers in individual sectors of the U.S. economy in the long term, once all agreements are implemented:

         negligible   a change of 1 percent or less;
         small . .    a change of over 1 percent to 5 percent;
         modest       a change of over 5 percent to 15 percent;                      and
         sizeable     a change of over 15 percent.

In certain sectors, broad tariff reductions were proposed. Zero-for-zero tariff agreements, under which the United States, Japan, the European Union (EU), Canada, and others would reduce all tariffs to zero, were reached for most pharmaceuticals, beer and certain distilled spirits, furniture, toys, medical equipment, certain types of industrial equipment, and steel. Although the United States pursued zero- for-zero agreements for wood products, oilseeds, and certain nonferrous minerals, agreements were not achieved. Tariffs for many chemical products were reduced to 6.5 percent ad valorem or less under the Chemical Tariff Harmonization Agreement, which was adopted by many developed countries.

In assessing the impact of the URA at the sector level, a static partial equilibrium framework was used in which products from the United States, other GATT countries, and non-GATT countries were treated as imperfect substitutes in markets in both the United States and other GATT countries. The trade, consumption, production, and employment effects of the URA were analyzed in two separate simulations: one simulation focused on changes in the U.S. market, while the other focused on changes in other GATT-country markets. These simulations provided quantitative estimates of changes in U.S. production, employment, U.S. imports and import prices, and U.S. exports.2 This analysis was supplemented by qualitative analysis based on interviews with experts in trade, industry, and government; written submissions received by the Commission; and Commission staff expertise.

Summaries of the likely impact of the URA on U.S. net trade, production, employment, and consumers are provided below, corresponding to each of the eight parts of the Commission's report that analyzed agriculture, industry, and service sectors.

U.S. Agriculture, Fishery, and Forestry Sectors (Part II, Chapters 3-17)

The net effect of the URA on agricultural sectors of the U.S. economy will be generally positive, increasing the overall level of trade, providing increased employment opportunities, and benefitting consumers. Because the URA will increase both export opportunities and the level of imports for most agri-

2 The Commission used 1993 trade data in assessing the relative likely impact of the URA after full implementation of the agreements.

cultural sectors, the overall net trade effects are likely to show negligible (1 percent or less) to modest(over 5 percent to 15 percent) gains at the sector level. Exports in the following sectors are likely to reflect a small amount of growth (over 1 percent to 5 percent): livestock and meat; poultry and eggs; tropical and specialty products; and pulp, paper, and printed matter. Sector exports likely to show modest gains include: fruits and vegetables, grains, and tobacco and tobacco products. Exports of dairy products and beverages are expected to increase by a sizeable amount (over 15 percent). There are likely to be accompanying negligible or small increases in employment (5 percent or less) in most sectors.

Certain industries are likely to experience small or negligible negative production and employment effects, due to increased import competition as U.S. nontariff measures are liberalized. These industries include the domestic peanut and vegetable oil industries and producers of certain processed fruits and vegetables, such as frozen asparagus, broccoli and cauliflower, canned mushrooms, and dehydrated onions and garlic. On a sector basis, trade and production of oilseed and wood products may decline negligibly due to the URA.

The Agreement on Agriculture is the most important URA for these sectors.3 Under this agreement, access to the U.S. and foreign markets will be increased as export and production subsidies are reduced; U.S. section 22 quotas and the Meat Import Act will be replaced by tariffs that will then be reduced. Average domestic and foreign tariff reductions under the URA generally will be small for most sectors (5 percentage points or less), as many U.S. agricultural imports enter duty-free under preferential tariff provisions or are subject to quota limitations. Zero-for-zero tariff agreements were achieved in beer and certain distilled spirits, but not in wood products or oilseeds.

Certain agricultural sectors will benefit under the Sanitary and Phytosanitary Agreement, in part because of provisions for mutual acceptance of national inspection systems and adoption of a regionality provision that permits exports from certified disease-free areas within a country. Agricultural sectors likely to be most affected include tobacco, fruits

3 The Agreement on Agriculture is discussed in detail in ch. 3 of the report.

and vegetables, poultry, livestock and meat, beverages, and certain tropical and specialty products.

Increased transparency and standardization of other import procedures should benefit many types of U.S. agricultural exports by reducing NTBs frequently encountered. Other important provisions of the URA, and the principal sectors affected, include customs valuation (tobacco products); dispute resolution (alcoholic beverages and fish); preshipment inspection (wood and lumber; paper, pulp, and printed matter); rules of origin (wood and lumber); and technical barriers to trade (wood and lumber). In addition, provisions of the TRIPs agreement likely will improve protection of U.S. seed patents and trademarks for brand names of cigarettes and certain alcoholic beverages.

U.S. Energy and Chemicals Sectors (Part III, Chapters 18-24)

The likely impact of the URA on the energy and chemicals sectors is expected to be positive. The net trade effect likely will be a negligible to small gain (5 percent or less) for most sectors; the miscellaneous chemicals and pharmaceutical sectors are expected to exhibit modest (over 5 percent to 15 percent) and sizeable (over 15 percent) increases, respectively. For all sectors, the URA are generally expected to result in negligible to small positive increases in production and employment. For U.S. consumers of sector products, there are likely to be negligible benefits (1 percent or less) associated with lower prices and increased product diversity. Gains to consumers of pharmaceuticals and miscellaneous chemicals are expected to be relatively larger, but will remain small.

Tariffs on U.S. imports of energy and chemicals products are generally low. Under the Chemical Tariff Harmonization Agreement, tariffs in many developed countries will be harmonized at zero, 5.5, and 6.5 percent ad valorem for most chemical products. In addition, tariffs on most phar- maceutical trade will be eliminated as a result of a zero- for-zero tariff agreement.

Although tariff reductions are the most significant URA provision for most energy and chemicals sectors, TRIPs provisions also will be beneficial for a number of industries, including pesticides and pharmaceuticals. In the pharmaceutical sector, for example, strengthened intellectual property rights are expected to result in increased U.S. exports and to provide pharmaceutical companies the opportunity to recoup a portion of their research and development expenditures.

U.S. Textile, Apparel, and Footwear Sectors (Part IV, Chapters 25-28)

The net trade effects of the URA are expected to be similar for both the textile and apparel sectors, although the magnitude will differ. The U.S. trade deficit for both textiles and apparel is likely to increase. A sizeable increase in apparel exports (over 15 percent) is expected to be more than offset by increased imports; as a result, production and employment likely will fall by a modest amount (over 5 percent to 15 percent). For the textile sector, a small increase in exports (over 1 percent to 5 percent) will be offset by a modest increase in imports; a negligible decline (1 percent or less) in production and employment in the sector is expected. U.S. textile exports could increase to an even greater degree if certain potential markets with high tariff rates, such as India and Pakistan, offer addi- tional tariff concessions. U.S. consumers of both textiles and apparel will benefit to a small degree, due to lower prices and increased variety of products.

The net trade effects of tariff reductions under the URA are likely to be negative but negligible for the U.S. footwear sector, as tariff cuts by all countries were low. Moreover, the United States did not offer tariff reductions on products for which non-GATT countries, such as China, are major suppliers. Footwear production and employment are expected to decline by a negligible degree, but consumers are likely to benefit negligibly, due to lower prices and increased product diversity.

The Agreement on Textiles and Clothing4 will have agreater impact on the U.S. textile and apparel sectors than any other provision under the URA. This agreement will require the United States and other countries with import quotas under the Multifiber Arrangement to phase out these limits in 3 stages over 10 years and to accelerate growth rates for quotas remaining in place during the phaseout period. The agreement

4 The Agreement on Textiles and Clothing is discussed in detail in ch. 25 of the report.

requires countries to reduce trade barriers to textiles and apparel in their home markets and allows countries to take action against quota circumvention.

The textile and apparel sectors also will benefit from the TRIPs agreement. Under the agreement, pirating of textile and garment designs, labels, and trademarks of U.S. firms should be reduced.

U.S. Minerals and Metals Sectors (Part V, Chapters 29-35)

The net trade effects of the URA on the minerals and metals sectors of the U.S. economy are likely to be negligible (1 percent or less) with improve- ment in sector trade balances, production, and employment for nonferrous minerals, metals, and related products; flat glass, fiberglass, and miscellaneous glass products; and steelmaking raw materials. Other minerals and metals sectors likely will experience negligible declines in their trade balances, production, and employment. U.S. consumers in all sectors likely will benefit to a negligible degree, due to lower prices and increased product diversity; consumers of industrial and household ceramics likely will benefit by a small amount (over 1 percent to 5 percent).

Although the general effect of the URA on minerals and metals sectors likely will be negligible, the effect on certain individual industries and product groups is expected to be greater. A modest increase (over 5 percent to 15 percent) in imports of steel wire products is expected to occur, prompting negligible declines in domestic production and employ- ment. The ceramic tile industry likely will experience a modest decline in its trade balance, and a small decrease in production and employment. The reduction of high U.S. tariffs on unwrought zinc alloys likely will result in increased imports, resulting in declines in production and employment.

For the most part, tariffs on minerals and metals products entering the United States are low and U.S. and foreign tariff reductions under the URA were minor. In addition, many sector products enter the United States subject to zero or reduced duties under various trade agreements, including the North American Free-Trade Agreement (NAFTA), and the Generalized System of Preferences (GSP). Tariffs on most steel products will be eliminated under zero-for-zero agreements.

Although tariff reductions are the most significant URA provision affecting U.S. minerals and metals sectors, certain sectors may be affected by agreements on safeguards (steel products) and antidumping and subsidies and countervailing measures (certain nonferrous minerals and metals, basic iron and steel, and fabricated metal products). The impact of these agreements depends on how implementing legislation affects the administration of their provisions and the likelihood of imposi- tion of additional import duties. Agreements related to standards and government procurement are expected to benefit non-metallic industrial minerals and steel products, respectively, by opening foreign markets to U.S. exports.

U.S. Machinery and Transportation Sectors (Part VI, Chapters 36-44)

U.S. machinery and transportation sectors are expected to benefit overall from the URA. The trade balance in most sectors is expected to reflect a negligible to small improvement (5 percent or less), with increases in exports generally larger than increases in imports; a modest improvement (over 5 percent to 15 percent) is expected for electrical equipment and components. As a result of increased trade, corresponding increases in U.S. production and employment are expected. U.S. consumers of many sector products are likely to experience negligible to small gains under the URA due to lower prices.

Average tariff rates in certain sectors are low because many products are subject to preferential trade agreements, such as the Civil Aircraft Agree- ment, the Automotive Products Trade Act, and various bilateral agreements. Tariff reductions on a sector basis are generally minor under the URA. However, U.S. and many foreign tariffs on certain machinery and equipment will be eliminated. Products subject to zero-for-zero tariff agreements include certain wrapping, packaging, and can-sealing machinery; forklift trucks; certain farm and garden equipment; certain pulp, paper, and paperboard machinery; and certain construction, mining, and mineral processing equipment.

While most gains likely will be due to tariff reductions, other URA provisions may also benefit certain machinery and transportation sectors. The agreement on subsidies and countervailing duties, for example, allows nonactionable government subsidies for research and development below certain levels; this may be advantageous for certain segments of the aerospace and transportation sectors. Agreements that improve procedures for preshipment inspection and government procurement are likely to contribute to increased U.S. exports of industrial machinery and electrical equipment and components.

U.S. Electronics Sectors (Part VII, Chapters 45-52)

U.S. electronics sectors are likely to benefit from the URA as net trade is expected to increase by negligible to modest amounts (15 percent or less). Production and employment are expected to increase by negligible to small amounts (5 percent or less), with employment in the recorded media sector increasing modestly (over 5 percent to 15 percent). U.S. consumers of most sector products are expected to gain by a negligible or small degree, due primarily to lower prices and increased product availability.

Imports of telephone and telegraph apparatus and of consumer electronic products are expected to exceed exports, leading to modest and negligible (1 percent or less) declines in their respective trade balances. Employment and production in the telephone and telegraph apparatus and consumer electronics sectors are likely to decline negligibly.

Tariff reductions under the URA will lower the level of tariffs faced by sector products, which now vary from zero to 6.5 percent ad valorem. In addition, tariffs on medical equipment are scheduled to be eliminated under a zero-for-zero agreement.

In addition to tariff provisions of the URA, the TRIPs agreement is also expected to significantly affect U.S. electronic sectors. Increased protec- tion of copyrights and emerging technologies likely will increase revenues and help maintain the high levels of research and development enjoyed by many of these sectors. Trade also likely will benefit from increased transparency and standardization of procedures associated with agree- ments on rules of origin (particularly important for components of computers and office equipment, telephone and telegraph apparatus, semiconductors, instruments, and photographic and optical equipment); customs valuation (instruments and photographic equipment); and technical barriers to trade (instruments and medical equipment).

U.S. Miscellaneous Manufactures Sectors (Part VIII, Chapters 53-57)

The net trade effects of the URA for most miscellaneous manufactures sectors generally is likely to be small (over 1 percent to 5 percent) and negative; the trade balance for recreational goods is expected to decline modestly (over 5 percent to 15 percent). As a result, U.S. production and employment in these sectors are expected to decline by a negligible degree (1 percent or less). The sector comprised of miscellaneous manufactured articles is expected to show a negligible improvement in net trade, production, and employment. Consumers of all sector products likely will benefit as prices fall and a somewhat greater variety of goods is available in the U.S. market. Consumers of recreational goods and luggage, handbags, and flat goods, are likely to experience small gains; those of silverware, flatware, and jewelry; furniture and lamps; and miscellaneous manufactured articles are expected to receive a negligible benefit.

Tariffs in the miscellaneous manufactures sectors vary widely, ranging from zero to 21 percent ad valorem. However, many sector products enter the United States subject to zero or reduced duties under various trade agreements, including NAFTA, the Caribbean Basin Economic Recovery Act, and GSP.

Tariff reduction offers on most sector products under the URA ranged from 10 to 73 percent. Tariffs on toys and furniture are to be eliminated under zero-for-zero agreements. Because U.S. tariff reductions will be extended on a most-favored-nation basis, non-GATT countries, such as China and Taiwan major suppliers of sector imports, also will benefit from these reductions.

Tariff cuts are generally the most important URA provision affecting these sectors, although other provisions may significantly affect certain sectors. More comprehensive protection of copyrights and trademarks under the TRIPs agreement is particularly important for trademarks, copyrights, and designs of recreational products, such as toys, games, and sporting goods; stronger rules under the TRIPs agreement are expected to increase export opportunities for U.S. products in markets where such protection has been lax. If China and Taiwan become members of GATT, the elimination of the Multifiber Arrangement may lead to a significant increase in imports of certain luggage, handbags, and flat goods, increasing the negative effects for this sector.

U.S. Service Sectors (Part IX, Chapters 58-63)

For most service sectors, the URA are expected to have a small positive effect (over 1 percent to 5 percent) on trade, increasing the trade surplus in these sectors. Value-added telecommunications and audiovisual services are likely to experience a modest (over 5 percent to 15 percent) and negligible (1 percent or less) increase, respectively. Revenues earned by service providers are expected to increase by small to modest levels (over 1 percent to 15 percent), while employment is expected to increase by a negligible to small amount (5 percent or less). U.S. consumers are expected to benefit from the URA by a negligible to small degree, largely due to lower prices.

The most significant URA provision affecting U.S. service sectors is the General Agreement on Trade in Services (GATS).5 Under the GATS, trade in services will be covered by multilateral disciplines for the first time. In addition, certain service sectors will be affected beneficially by agreements on TRIPs (audiovisual services) and government procurement (architectural, engineering, and construction services).

5 The General Agreement on Trade in Services is discussed in detail in ch. 58 of the report.