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Legal aspects of countertrade under the General Agreement on Tariffs and Trade and the national laws… Urapeepatanapong, Kitipong 1987

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LEGAL ASPECTS OF COUNTERTRADE UNDER THE GENERAL AGREEMENT ON TARIFFS AND TRADE AND THE NATIONAL LAWS OF CANADA AND THAILAND By KITIPONG URAPEEPATANAPONG LL.B. (Hons.)/ Chulalongkorn University, 1976 Barrister-at-Law, I n s t i t u t e of Legal Education, 19 LL.M., Chulalongkorn University, 1984 A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE DEGREE OF MASTER OF LAWS i n THE FACULTY OF GRADUATE STUDIES (Faculty of Law) We accept t h i s thesis as conforming to the required standard THE UNIVERSITY OF BRITISH COLUMBIA September 1987 Kitipong Urapeepatanapong, 1987 In presenting this thesis in partial fulfilment of the requirements for an advanced degree at the University of British Columbia, I agree that the Library shall make it freely available for reference and study. I further agree that permission for extensive copying of this thesis for scholarly purposes may be granted by the head of my department or by his or her representatives. It is understood that copying or publication of this thesis for financial gain shall not be allowed without my written permission. Department of Law  The University of British Columbia 1956 Main Mall Vancouver, Canada V6T 1Y3 Date S e p t e m b e r 3, 1987 DE-6(3/81) i i ABSTRACT Countertrade i s no longer a new term i n international trade. Countertrade w i l l continue to grow i n the next decade despite opposition from various developed countries. Nevertheless, l i t t l e attention has been given to develop a generally acceptable d e f i n i t i o n of countertrade and a c l a s s i f i c a t i o n of i t s forms. More importantly, the study of the l e g a l implications of countertrade under GATT and national laws of countries involved i n countertrade i s s t i l l l i m i t e d . This thesis i s a f i r s t step to explore the d e f i n i t i o n and forms of countertrade, as well as i t s national and international l e g a l implications. The f i r s t part of t h i s thesis, respecting the overview and framework of countertrade, contains three chapters. The f i r s t chapter describes the purposes and methodology employed i n the research of t h i s t h e s i s . Chapter two discusses the development of countertrade i n world trade and the d e f i n i t i o n s and major forms of countertrade transactions. A d e f i n i t i o n of "countertrade" i s proposed. The discussion of elements contained i n each form of countertrade w i l l a s s i s t c l a s s i f i c a t i o n of the forms of countertrade. The advantages and disadvantages of countertrade from the perspective of both developed and developing countries i s also discussed. In Chapter three, the development of countertrade p o l i c y i n Canda and Thailand i s examined. The writer concludes that countertrade should be encouraged but with care taken to adopt the form most suitable to the s p e c i f i c problems each country i s facing. Generally, Thailand and Canada should study the impacts of countertrade on t h e i r economies p r i o r to implementing countertrade p o l i c i e s . In respect of t h e i r mutual r e l a t i o n s , Thailand and Canada should put an emphasis on the development of countertrade practice i n the forms of Offsets and Compensation. The second part respecting the l e g a l implications of countertrade, consists of Chapters four, f i v e and s i x . Chapter four examines the l e g a l implications of countertrade under the major provisions of the GATT and i t s Codes. The writer concludes that there are a number of unresolved problems with which GATT and the Codes cannot deal e f f i c i e n t l y because they were drafted while countertrade was s t i l l unimportant i n international trade. A study of the impact of countertrade and a de t a i l e d study of the l e g a l implications under GATT i s s t i l l required. In Chapters f i v e and s i x , the writer examines countertrade transactions under the pr i v a t e and regulatory laws of Canada and Thailand. The discussion, within the l i m i t e d scope of the the s i s , i s aimed only at providing some precautions respecting possible e f f e c t s of such laws on countertrade transactions. The private law aspect deals only with basic problems of choice of law p r i n c i p l e s , the State Immunity p r i n c i p l e , and the enforcement of foreign or int e r n a t i o n a l a r b i t r a l awards that a r i s e from disputes concerning countertrade agreements. The discussion of regulatory law i s i v divided into three parts based on the purposes and nature of the l e g i s l a t i o n : F i s c a l and other regulatory control laws; Remedial regulatory laws; and the Promotion and Administrative regulatory law. S p e c i f i c provisions of the l e g i s l a t i o n are examined. Certain suggestions are made for reform of the law. The l a s t part of t h i s thesis, Chapters seven relates to p r a c t i c a l consideration of negotiating and d r a f t i n g countertrade agreements. The purpose of t h i s part i s to guide p r a c t i t i o n e r s i n preparing and structuring countertrade agreements e f f i c i e n t l y . The writer also suggests the preparation of model countertrade agreements to overcome problems of time and cost i n dr a f t i n g agreements, and to strengthen the developing countries' bargaining power. Chapter eight, the conclusion, summarizes the major points which are discussed i n previous chapters. The d i v e r s i t y of countertrade transactions probably precludes the development of uniform domestic or int e r n a t i o n a l r u l e to regulate t h i s type of international commerce. This thesis has shown that lawyers i n developed and. developing countries need, however, to be aware of the spe c i a l nature of countertrade transactions when considering the app l i c a t i o n of laws of a general character so as to preserve the value of t h i s form of trade. V ACKNOWLE DGEMENT My study a t U n i v e r s i t y of B r i t i s h Columbia and the r e s e a r c h of t h i s t h e s i s was made p o s s i b l e by f i n a n c i a l support from Baker & McKenzie under the Firm Graduate Study Program. In t h i s r e gard, I would l i k e t o thank a l l p a r t n e r s of Baker & McKenzie; i n p a r t i c u l a r Mr. S u c h i n t Chaimungkalanont, Mr. John W. Hancock, Mr. Athueck Asvanund, Mr. S i r i p o n g S i l p a k u l , and Mr. Anurat Tiyaphorn of Bangkok o f f i c e ; Mr. Edward J . Kowal, Q.C. and Mr. Roy K. Kusano of Toronto o f f i c e ; Mr. Mark S. Goetze, J a k a r t a o f f i c e . I would a l s o l i k e t o thank Mr. Donald C. Freeman, (former D i r e c t o r of the P r o f e s s i o n a l Development of Baker & McKenzie) and Mr. David Yates ( c u r r e n t D i r e c t o r of the P r o f e s s i o n a l Development of Baker & McKenzie). A l s o , I wish t o thank P r o f e s s o r W i l l i a m A.W. N e i l s o n , Dean of the F a c u l t y of Law, U n i v e r s i t y of V i c t o r i a , who p r o v i d e d me w i t h g r e a t a s s i s t a n c e i n a p p l y i n g t o study a t UBC. I would l i k e t o express my s i n c e r e thanks t o my t h e s i s s u p e r v i s o r , P r o f e s s o r Robert K. Paterson, U n i v e r s i t y of B r i t i s h Columbia, who p r o v i d e d me w i t h v a l u a b l e comments. I am a l s o g r a t e f u l t o my c o - s u p e r v i s o r P r o f e s s o r Ted L. McDorman, U n i v e r s i t y of V i c t o r i a , who, d e s p i t e h i s busy schedule, read and c o r r e c t e d the d r a f t s w i t h much p a t i e n c e . I a l s o a p p r e c i a t e the comments and suggestions of P r o f e s s o r J o o s t Blom and P r o f e s s o r M a r i l y n T. MacCrimmon, both of UBC, on p a r t s of the Income Tax A c t and Competition Act r e s p e c t i v e l y . I am g r a t e f u l f o r the support and encouragement from P r o f e s s o r Donald J . McDougall, P r o f e s s o r D.L. Guth, both of UBC F a c u l t y of Law, and P r o f e s s o r Malcolm D.H. Smith, F a c u l t y of Law, Melbourne U n i v e r s i t y . A l s o , my thanks t o Ms. Linchong Suwannapokin, Mr. Michael F a r r , Mrs. Barbara Tamprasert, Mr. Buncherd and Mrs. Amphorn P r a s o b s i n , Mr. P r a s e r t and Mrs. Supatra Utokaparch, Mr. H e n r i C. A l v a r e z , Mr. Alexander W. Gardner, and a l l the s t a f f o f the UBC Law L i b r a r y . In a d d i t i o n , I am t h a n k f u l f o r the support from my f a m i l y and f r i e n d s . Most of a l l , thanks t o my beloved w i f e , Wipa, who put a l o t of e f f o r t i n t o t y p i n g t h i s t h e s i s and gave me encouragement t o f i n i s h my study. v i Table of Contents Part I Overview and Framework of Countertrade Page Chapter One: Introduction 1 1.1 Overview 1 1.2 Purpose of Study 2 1.3 Methodology of Study 3 1.4 Outline 4 Footnotes 10 Chapter Two: D e f i n i t i o n and Form of Countertrade Transactions and Their Development 11 2.1 Overview 11 2.2 H i s t o r i c a l Overview of Countertrade 11 2.3 Share of Countertrade i n World Trade 13 2.4 Definitions 16 2.5 Major Forms of Countertrade Transactions 21 2.5.1 Introduction 21 2.5.2 Barter 26 2.5.3 Counterpurchase 32 2.5.4 Compensation 39 2.5.5 Offsets 44 2.5.6 Miscellaneous Forms of Countertrade Transactions 49 2.5.6.1 Advance Purchase 49 2.5.6.2 B i l a t e r a l Agreement or Switch Trading 53 2.5.6.3 Evidence Account 56 2.6 Advantages and Disadvantages of Countertrade 60 2.6.1 Overview 60 2.6.2 Advantages of Countertrade: Developing Countries Perspective 63 2.6.3 Advantages of Countertrade: Developed Countries Perspective 65 2.6.4 Disadvantages of Countertrade 67 2.6.5 Conclusion 69 Footnotes 74 v i i Chapter Three:The Development of Countertrade Po l i c y i n Canada and Thailand 83 3.1 Introduction 83 3.2 Development of Countertrade i n Canada and I t s Position 83 3.3 Development of Countertrade i n Thailand and I t s Position 86 3.4 Prospect of Countertrade Between Canada and Thailand 95 3.5 Conclusion 97 Footnotes 99 Part II The Legal Implications of Countertrade  Under GATT and National Laws Chapter Four: Legal Implications Under the General Agreement on T a r i f f s and Trade (GATT) 101 4.1 Introduction 101 4.2 Overview of GATT and Its Applications 103 4.2.1 GATT Objectives and P r i n c i p a l Obligations 104 4.2.2 Application of the GATT Rules to Private Sectors Involving i n Countertrade Transactions 104 4.2.3 Application of the GATT Rules to Government Sectors Involving i n Countertrade Transactions 105 4.2.4 Trade i n Services Which Relate to Countertrade and the GATT Rules 106 4.2.5 Government Mandated Countertrade Requirement and the GATT Objective 107 4.2.6 The Application of the Codes Resulting From M u l t i l a t e r a l Trade Negotiations to Non-Signatory Members of GATT 109 v i i i 4.3 Legal Implications of Major P r i n c i p l e s of GATT Under Countertrade 113 4.3.1 Introduction 113 4.3.2 Most-Favoured Nation (MFN) P r i n c i p l e 113 4.3.3 National Treatment Obligation 118 4.3.4 Non-Tariff B a r r i e r P r i n c i p l e s 121 4.3.4.1 Introduction 121 4.3.4.2 Quantitative R e s t r i c t i o n Obligation 122 4.3.4.3 Subsidies and Counter-v a i l i n g R e s t r i c t i o n s 127 4.3.4.4 Anti-Dumping 13 6 4.3.4.5 State Trading Enterprise 143 4.3.4.6 Government Procurement Code 147 4.3.4.7 Customs Valuation 150 4.3.5 Miscellaneous Provisions Under the GATT and the M u l t i l a t e r a l 4.3.6 Codes 156 4. 3 .5. 1 Introduction 156 4. 3 .5. 2 T a r i f f Concession 156 4. 3 .5. 3 N u l l i f i c a t i o n and Impairment 157 4. 3 .5. 4 Exchange Arrangement 158 4. 3 .5. 5 Protocol of Accession 159 4. 3 .5. 6 Other M u l t i l a t e r a l Trade Agreements 160 Exception P r i n c i p l e s 162 4. 3 .6. 1 Introduction 162 4. 3 .6. 2 Waiver Clause 162 4. 3 .6. 3 The Escape Clause 163 4. 3 .6. 4 Balance of Payment Provision 164 4. 3 .6. 5 Exceptions f o r Developing Countries 165 4. 3 .6. 6 Custom Unions and Free Trade Area 167 4. 3 .6. 7 General Welfare and National Security Exceptions 168 4.4 Conclusion Footnotes 169 172 i x Chapter Five: Legal Implications Under National Laws: Canadian Law 180 5.1 Introduction 180 5.2 Canadian Consitution and Trade Laws 181 5.3 Private Law Aspects 187 5.3.1 Introduction 187 5.3.2 C o n f l i c t of Laws: Choice of Law 187 5.3.3 State Immunity Act and Crown Proceeding Act 193 5.3.4 Dispute Resolution: International A r b i t r a t i o n 197 5.4 Regulatory Law Aspects 201 5.4.1 Introduction 201 5.4.2 F i s c a l and Regulatory Control Laws 2 02 5.4.2.1 Introduction 202 5.4.2.2 Customs Laws 203 5.4.2.3 Income Tax Act 216 5.4.2.4 The Export and Import Permits Act 229 5.4.3 Remedial Regulatory Laws 2 35 5.4.3.1 Introduction 235 5.4.3.2 The Special Import Measures Act 23 6 5.4.3.3 Competition Act 247 5.4.4 Promotion and Administrative Regulatory Laws 260 5.4.4.1 Introduction 2 60 5.4.4.2 Investment Canada Act 261 5.4.4.3 Export Development Act 267 5.4.4.4 Department of Supply and Services Act: Agreement on Government Procurement 275 5.5 Conclusion 279 Footnotes 280 X Chapter Six: Legal Implications Under National Law: Thai Law 296 6.1 Introduction 296 6.2 Private Law Aspect 297 6.2.1 Introduction 297 6.2.2 C o n f l i c t of Laws: Choice of Law 298 6.2.3 Sovereign Immunity Rule Under Thai Law 3 06 6.2.4 Dispute Resolution: International A r b i t r a t i o n 310 6.3 Regulatory Law Aspects 314 6.3.1 Introduction 314 6.3.2 F i s c a l and Regulatory Control Laws 314 6. 3 .2 . 1 Introduction 314 6. 3 .2 .2 Customs Law 315 6. 3 .2 .3 Revenue Code 320 6. 3 .2 .4 Exchange Control Act 333 6. 3 .2 .5 The Export and Import of Goods Act 341 6. 3 .2 .6 Thai A l i e n Business Control Law (NEC 281) 343 Remedial Regulatory Laws 352 6. 3 .3 .1 Introduction 352 6. 3 .3 .2 Anti-Dumping Act 352 6. 3 .3 .3 Price Control and Anti-Monopoly Act 357 6.3.4 Promotion and Administrative Regulatory Laws 359 6.3.4.1 Introduction 359 6.3.4.2 Investment Promotion Act 3 60 6.3.4.3 Government Procurement Regulations 367 6.3.4.4 Regulation on Creation of the National Debt 373 6.4 Conclusion Footnotes 377 379 x i Part III P r a c t i c a l Consideration and Conclusion P a c r e Chapter Seven:Negotiating and Drafting Countertrade Agreements 389 7.1 Introduction 389 7.2 Negotiation Strategies 390 7.2.1 Pre-Negotiation Steps 391 7.2.2 Negotiation Steps 393 7.2.2.1 S imultaneous Negotiation of the Countertrade Deal 393 7.2.2.2 A Separate Agreement 393 7.2.2.3 Choice of Products for Countertrade 395 7.2.2.4 A Countertrade Ratio 396 7.2.2.5 Penalty Provision 398 7.2.2.6 Duration of Countertrade Commitment 399 7.2.2.7 T r a n s f e r a b i l i t y 399 Provision 7.2.2.8 Marketing R e s t r i c t i o n s 400 7.3 Drafting of Countertrade Agreements 401 7.3.1 The Protocol or Framework Agreement 4 01 7.3.2 Barter Agreement 403 7.3.3 Counterpurchase Agreement 405 7.3.4 Compensation Agreement 412 7.3.5 General Provisions 416 7.3.6 The Model Countertrade Agreement and Standard Clause 419 7.4 Conclusion 42 0 Footnotes 42 2 Chapter Eight:Conclusion 429 Bibliography 43 6 1 Part I OVERVIEW AND FRAMEWORK OF COUNTERTRADE Chapter One  Introduction 11 While p o l i t i c a l factors w i l l continue to dominate the countertrade scene present p o l i t i c a l and economic developments seem l i k e l y to gravitate toward even greater increases i n the volume of world counter-trade than i n the past ... Countertrade then w i l l not j u s t go away i f i t i s ignored, on the contrary, those i n the international business community who disregard the vigorous growth i n t h i s sector do so at t h e i r p e r i l , f or i n the s i t u a t i o n the gods are u n l i k e l y to temper the wind for the shorn lamb". Brian D. Townsend The Financing of Countertrade, 1986 1.1 Overview Countertrade transactions have increased greatly during the past several years. They are playing an important r o l e i n the overcoming of the economic d i f f i c u l t i e s that have beset in t e r n a t i o n a l world trade and i n p a r t i c u l a r have assisted many countries to develop t h e i r markets and economies. Countertrade i s no longer j u s t between Eastern bloc countries and developing countries or within t h e i r own group. I t now extends to trade between these groups and developed countries. A recent OECD report suggests that there w i l l be considerable 2 development i n the commercial law f o c u s i n g on the d r a f t i n g and l i t i g a t i o n o f c o u n t e r t r a d e agreements. 1 1.2 Purpose of Study In w r i t i n g t h i s t h e s i s , the w r i t e r hopes t o accomplish the f o l l o w i n g o b j e c t i v e s : 1. To understand the l e g a l framework and the s t r u c u t r e of c o u n t e r t r a d e t r a n s a c t i o n s i n t h e world t r a d e today. 2. To propose an a c c e p t a b l e d e f i n i t i o n of " c o u n t e r t r a d e " by examining the d e f i n i t i o n s and the forms of c o u n t e r t r a d e p r a c t i c e s used by v a r i o u s i n t e r n a t i o n a l o r g a n i z a t i o n s , government bodies and e x p e r t s . 3. To examine the p r a c t i c a l c o n s i d e r a t i o n s of n e g o t i a t i n g and d r a f t i n g s p e c i f i c types of c o u n t e r t r a d e agreements from a d e v e l o p i n g c o u n t r i e s ' p e r s p e c t i v e . 4. To examine the l e g a l i m p l i c a t i o n s of c o u n t e r t r a d e agreements under the GATT. 5. To study . the c o u n t e r t r a d e p o l i c y and p r a c t i c e of the Canadian and T h a i governments and the p o t e n t i a l f o r c o u n t e r t r a d e t r a n s a c t i o n s between Canada and T h a i l a n d . 3 6. To examine the l e g a l implications and p r a c t i c a l considerations of countertrade practices which may ar i s e under Canadian and Thai substantive laws. In order to achieve the above broad objectives i t i s impossible for the writer to analyze or focus on s p e c i f i c l e g a l questions or issues i n d e t a i l . In addition, the lack of information on countertrade, e s p e c i a l l y the l e g a l aspects of countertrade, have forced the writer to l i m i t the discussion to general and p r a c t i c a l considerations. 1.3 Methodology of Study The methodology employed i n t h i s thesis consists of 2 description, explanation and l e g a l a n a l y t i c a l discussion. The writer w i l l f i r s t depict the c h a r a c t e r i s t i c s , development and forms of countertrade and present an overview of the l e g i s l a t i o n that may be applicable to countertrade transactions. The writer w i l l then discuss the advantages and disadvantages of countertrade and examine the s p e c i f i c l e g a l implications that a r i s e under the GATT, Canadian and Thai laws. In some circumstances, the writer w i l l give hypothetical facts and rais e s p e c i f i c l e g a l questions about these facts i n order to narrow the discussion only to countertrade practice. 4 1.4 Outline The t h e s i s i s divided into three major parts. Each part i s divided into several chapters. The f i r s t part i s designed to outline the framework of countertrade and consist of three chapters. The second part i s also divided into three chapters covering the l e g a l implications of countertrade under GATT, Canadian and Thai law. The t h i r d part discusses the p r a c t i c a l considerations involved i n negotiating and d r a f t i n g countertrade agreements. Part I, Chapter one w i l l provide the outline of t h i s thesis, the purpose and method employed i n studying t h i s t o p i c . The framework of countertrade w i l l be discussed i n Chapters two and three respectively. In Chapter two, a h i s t o r i c a l overview of countertrade w i l l be provided and the current share of world trade that i s accomplished through countertrade noted. Then the d e f i n i t i o n s and the forms of countertrade and the c h a r a c t e r i s t i c s of each form, including the advantages and disadvantages of countertrade and the reasons why countertrade should be encouraged w i l l be examined. In Chapter three, the development of countertrade p o l i c y i n Canada and Thailand w i l l be explored, as well as the prospects for countertrade between the two countries. 5 Part I I , which i s the most important part of t h i s t h e s is, i s divided into three chapters. In Chapter four, the l e g a l implications of countertrade under GATT, which i s the most important international agreement regulating trade among nations, w i l l be discussed. In Chapters f i v e and six, the examination w i l l focus on the l e g a l implications of countertrade transactions from the national private and regulatory perspective. Chapter V w i l l examine the Canadian law. Before discussing the private and regulatory law aspects, the l e g a l problems of c o n s t i t u t i o n a l law and trade law w i l l be b r i e f l y noted. The private law aspects w i l l emphasize C o n f l i c t of Law Rules with respect to choice of law, the state immunity p r i n c i p l e under the State Immunity Act and the Crown Proceeding Act. and dispute resolution with regard to the enforcement of foreign or international a r b i t r a l awards. The regulatory laws are sub-divided into three parts, the f i r s t part i s the f i s c a l and regulatory control laws which includes custom laws, the Income Tax Act. the Export and Import Permits  Act. The second part i s the remedial regulatory laws which includes the Special Import Measures Act ("SIMA"), and the Competition Act. The l a s t part i s the promotion and administrative regulatory laws which includes the Export  Development Act and the government procurement regulations under the Department of Supply and Services Act. In Chapter six, the substantive laws of Thailand w i l l be examined i n the same s t r u c t u r a l manner as was the Canadian law. 6 The p r i v a t e law a s p e c t s w i l l i n c l u d e the C o n f l i c t of Law Act, the p r i n c i p l e of s t a t e immunities under T h a i law, and d i s p u t e r e s o l u t i o n as t o the enforcement of f o r e i g n a r b i t r a l awards. The f i s c a l and r e g u l a t o r y c o n t r o l laws i n c l u d e custom laws, t a x and d u t i e s r e b a t e law, Revenue Code, the Exchange C o n t r o l Act, the Export and Import of Goods Act, and the A l i e n Business C o n t r o l  Law. The remedial r e g u l a t o r y law i s Anti-dumpincr A c t . The promotion and a d m i n i s t r a t i v e r e g u l a t o r y laws i n c l u d e the Investment Promotion Act, Government Procurement R e g u l a t i o n s and  R e g u l a t i o n on the C r e a t i o n of the N a t i o n a l Debt. Chapter seven, the f i n a l p a r t of the t h e s i s , w i l l d i s c u s s from a d e v e l o p i n g country's p e r s p e c t i v e the p r a c t i c a l c o n s i d e r a t i o n s i n v o l v e d i n n e g o t i a t i n g and d r a f t i n g s p e c i f i c t y p e s of c o u n t e r t r a d e agreements, namely: Framework or P r o t o c o l Agreements, B a r t e r Agreements, Counterpurchase Agreements and Compensation Agreements. F i n a l l y , i n the c o n c l u d i n g chapter, the w r i t e r w i l l summarize the major p o i n t s made i n the p r e v i o u s c h a p t e r s and o f f e r some c o n c l u s i o n s . O v e r a l l , t h i s t h e s i s should: 1. propose a d e f i n i t i o n of " c o u n t e r t r a d e " . 2. propose the elements necessary t o determine the v a r i o u s forms of c o u n t e r t r a d e . 7 3. emphasize the f a c t t h a t c o u n t e r t r a d e i s a new form of t r a d e between p a r t i e s which i s d i f f e r e n t from the t r a d i t i o n a l t r a d e i n goods and s e r v i c e s and because of t h i s the l e g a l instruments t h a t r e g u l a t e i n t e r n a t i o n a l t r a d e , such as GATT and i t s M u l t i l a t e r a l Code, are of l i t t l e a s s s i t a n c e i n r e s o l v i n g d i s p u t e s t h a t a r i s e from c o u n t e r t r a d e t r a n s a c t i o n s . 4. show t h a t the n a t i o n a l laws of Canada and T h a i l a n d have an impact on c o u n t e r t r a d e t r a n s a c t i o n s . Canadian r e g u l a t o r y laws seem t o be more developed than T h a i law i n copi n g w i t h the growth of c o u n t e r t r a d e . The c u r r e n t n a t i o n a l laws, i n some circumstances, should be developed and m o d i f i e d t o encourage c o u n t e r t r a d e i n a d i r e c t i o n t h a t w i l l not d i s t o r t t r a d e p a t t e r n s . The examination of the l e g a l i m p l i c a t i o n s o f Canadian and T h a i laws on c o u n t e r t r a d e from a p r a c t i c a l s t a n d p o i n t , h o p e f u l l y , w i l l c r e a t e an awareness among l e g a l p r a c t i t i o n e r s i n the two c o u n t r i e s t h a t the c u r r e n t knowledge of t r a d i t i o n a l i n t e r n a t i o n a l s a l e o f goods and s e r v i c e s i s not s u f f i c i e n t . Legal p r a c t i t i o n e r s have t o have g r e a t e r knowledge of the c o m p l e x i t i e s of the t r a n s a c t i o n , as w e l l as the r e l e v a n t laws, so t h a t they can s t r u c t u r e the t r a n s a c t i o n e f f e c t i v e l y , both i n terms of c o s t s and time. The fundamental t e n s i o n r e s p e c t i n g c o u n t e r t r a d e i s between developed c o u n t r i e s which s t o n g l y oppose mandatory government 8 co u n t e r t r a d e requirements and wh i l e d e v e l o p i n g c o u n t r i e s which b e l i e v e t h a t c o u n t e r t r a d e may be one of the most important t o o l s they have t o achieve economic re c o v e r y and f u t u r e development. While t h e s e c o n t r a d i c t o r y views w i l l undoubtedly remain u n r e s o l v e d f o r a t l e a s t f o r the next decade, h o p e f u l l y , t h i s t h e s i s w i l l be a f i r s t s t e p t o the f i n d i n g o f a s o l u t i o n t o the problem. For the purpose of d i s c u s s i o n i n t h i s t h e s i s , u n l e s s i t i s otherwise e x p r e s s l y p r o v i d e d f o r , 1 . "Countertrade t r a n s a c t i o n s " w i l l i n c l u d e B a r t e r t r a n s a c t i o n s , Counterpurchase t r a n s a c t i o n s , Compensation t r a n s a c t i o n s , O f f s e t t r a n s a c t i o n s , Advance Purchase t r a n s a c t i o n s , B i l a t e r a l Agreement or Switch T r a d i n g t r a n s a c t i o n s , and Evidence Account T r a n s a c t i o n s . 2. " E x p o r t e r s " , " S u p p l i e r s " o r " E x p o r t i n g C o u n t r i e s " s h a l l mean both government and s t a t e t r a d i n g e n t e r p r i s e s o r p r i v a t e f i r m s i n developed c o u n t r i e s who are f o r e i g n s e l l e r s or c o n t r a c t o r s . 3. "Importer" o r "Importing c o u n t r i e s " s h a l l mean both the government or s t a t e t r a d i n g e n t e r p r i s e s o r p r i v a t e f i r m s i n 3 . . 4 E a s t e r n b l o c c o u n t r i e s , and d e v e l o p i n g c o u n t r i e s . 9 4. A "Primary Agreement" s h a l l mean the Primary S a l e s or S e r v i c e s Agreement where an e x p o r t e r o r s u p p l i e r i n a developed country p r o v i d e s i t s products o r s e r v i c e s t o an importer i n the E a s t e r n b l o c o r d e v e l o p i n g country, as the case may be. 5. The "Countertrade Agreement" s h a l l mean the B a r t e r Agreement, the Counterpurchase Agreement, the Compensation and the O f f s e t s Agreement or the Secondary S a l e s o r S e r v i c e s Agreement where the e x p o r t e r i s o b l i g e d t o comply w i t h the commitments t o puchase or take a d e l i v e r y o f goods and s e r v i c e s p r o v i d e d by the importer. 10 Footnotes - Chapter One OECD, Countertrade: Developing Country Practice (Paris: OECD, 1985) at 11. S.G. P h i l l i b e r ; M.R. Schwab; G.S. Gloss, S o c i a l Research: Guides to a Decision-Making Process (USA: F.E. Peacock Publishers, Inc., 1980) at 9. According to Banks, he quoted that under GATT, eastern trading areas comprise of Albania, Bulgaria, Czechoslovakia, the German Democratic Republic, Hungary, Poland, Romania, the USSR, The People's Republic of China, Mongolia, North Korea, Vietnam. (G. Banks, "Economic and P o l i t i c s of Countertrade" (1983), 6 The World Economy, No. 2 at 179, footnote 11). Based on Art. XVIII of GATT, a developing country i s one which can support only low standard of l i v i n g and i s i n the early stage of development (this i s not meant to apply only to countries which have j u s t started t h e i r economic development, but also to whom those economy are undergoing a process of i n d u s t r i a l i z a t i o n to correct an excessive dependence on primary production (E. McGovern, International Trade Regulation, 2nd ed. (U.K.: Exeter Globefield Press, 1986) at 273. 11 Chapter Two D e f i n i t i o n and Forms of Countertrade Transactions  and Their Development 2.1 Overview This part of the thesis w i l l review the d e f i n i t i o n s and the forms of countertrade transactions given by various international trade organizations, namely: OECD, GATT and UNCTAD, some government departments i n the United States, England and Canada, and also the d e f i n i t i o n and forms used by experts. The proposed d e f i n i t i o n of countertrade to be used i n t h i s thesis w i l l be given and the controversial issue of advantages and disadvantages of countertrade from both a developed and developing countries' perspective w i l l also be examined. F i r s t , however, i t i s useful to give an overview of the hi s t o r y of countertrade and the current state of countertrade i n world trade. 2.2 H i s t o r i c a l Overview of Countertrade H i s t o r i c a l l y countertrade was developed from the barter arrangement, the world's oldest form of trading. Countertrade operated as a form of international barter i n most western countries during 1930-1933 when there was a breakdown of the inte r n a t i o n a l trade and payment system during the world economic depression. 1 Germany had established an extensive barter and b a r t e r - l i k e program with eastern European countries through 12 inter-governmental agreements using b i l a t e r a l c l e a r i n g accounts 2 i n 1934 and again during the Second World War. In the 1950's, while the trading partners i n western and eastern European countries attempted to avoid barter arrangements by s h i f t i n g from b i l a t e r a l trade to m u l t i l a t e r a l trade, the states of southern Latin America were engaging i n international barter among themselves. The major reasons for international barter i n t h i s region were monetary problems and the need to market surplus commodities. The commodities exchanged i n such arrangements were petroleum products, minerals and a g r i c u l t u r a l commodities. The growth of t h i s b a r t e r - l i k e program i n southern Latin America was reduced at the end of the 1950's when international payments were improved and the LAFTA m u l t i l a t e r a l c l e a r i n g system was established. However, some countries, l i k e Mexico, B r a z i l , and Argentina, have continued international b a r t e r - l i k e arrangements with developed countries i n eastern Europe and with Asia's developing countries 3 up u n t i l the present. During the mid 1950's the group of Eastern bloc countries 4 engaged i n the b i l a t e r a l balancing practices among themselves and developed international barter between themselves and groups of developing countries i n Asia, Latin America and A f r i c a that has continued u n t i l the present. Apart from p o l i t i c a l reasons, the major economic reasons for Eastern bloc countries engaging i n 13 the b i l a t e r a l barter trade was the lack of convertible currencies, the lack of access to international markets, the lack 5 of Western marketing methods, and the low qu a l i t y of products. From the 1960's to 1970's various forms of countertrade transactions developed between Eastern bloc countries and Western countries and with developing countries, commencing with barter or b a r t e r - l i k e programs and evolving to the more recent i n d u s t r i a l countertrade arrangements involving commercial and i n d u s t r i a l compensations. 6 Developing countries have engaged i n countertrade transaction with Eastern European countries since 7 the 1960's, and more recently with developed countries. The major motive for engaging i n countertrade i s the economic necessity of developing the manufacturing sector i n t h e i r c o u n t r i e s . 8 2.3 Share of Countertrade i n World Trade Due to the complexity of the d e f i n i t i o n and form of countertrade transactions given by various international organizations and experts and the c o n f i d e n t i a l nature of transactions, the o f f i c i a l share of countertrade of world trade i s not avai l a b l e . However, estimates of the share of countertrade have been made by various international organizations such as UNCTAD, OECD and IMF, by national organizations i n developed countries, and by some experts. In 14 1986, an UNCTAD report estimated that countertrade transactions, using a broad d e f i n i t i o n , may account for at le a s t 15 (fifteen) 9 percent of the t o t a l world trade. IMF and GATT estimates for the countertrade share range from 1 (one) percent and to approximately 8 (eight) percent of t o t a l world t r a d e . 1 0 A recent OECD study published i n 1985 sub-divided the countertrade share of world trade based on the types of countertrade and the countries involved as w i l l be discussed below. 1 1 The OECD study estimated countertrade i n i n d u s t r i a l areas at approximately 60 (sixty) percent of world trade. F i f t e e n (15) percent was trade between i n d u s t r i a l i z e d countries and Eastern European countries. The countertrade between i n d u s t r i a l countries and the o i l produced countries accounts for 2 (two) percent of world trade and the countertrade between OECD and other developing countries (non-oil countries) i s approximately 5 (five) percent. The countertrade between i n d u s t r i a l i z e d countries i s approximately 2 (two) percent. F i n a l l y , the trade among the developing countries ( o i l producing countries) or between them and the Eastern European countries was approximately 10 (ten) percent of i n t r a -developing countries trade and 30 (thirty) percent of developing country trade with Eastern European countries. In t h i s report i t was estimated that the value of world trade i n 1983 was amount of 80 (eighty) b i l l i o n U.S. d o l l a r s with approximately 4.8 (four point eight) percent of t h i s conducted i n the form of countertrade (excluding trade among the Eastern European 12 countries and trade under Clearing Agreements). 15 A 1987 survey by economist i n the GATT Secretariat showed that i n the 1983-86 period countertrade had accounted for not 13 le s s than 3 (three) to 4 (four) percent of world trade. Various press reports c i t e d the amount of countertrade during the 1980's 14 as being anywhere from 1 (one) to 40 (forty) percent. However, a conservative estimate of 10 (ten) percent of t o t a l world trade being conducted i n the form of countertrade was suggested by the 15 Canada Department of External A f f a i r s and t h i s i s reasonable. In the early 1970's there were f i f t e e n countries, mainly i n Eastern Europe, engaged i n countertrade deals i n one form or another. By 1979 the figure was about twenty-seven countries, including countries from Central and South America, and by 1983 i t had r i s e n to sixty-seven, from a l l over the world, and as many as eighty-eight i f those OECD countries whose countertrade requirements r e l a t e s o l e l y to contracts f o r m i l i t a r y supplies were added. A recent s p e c i a l survey noted by the press reported that about one hundred countries now have formal or informal . . 17 countertrade p o l i c i e s . Apart from the Eastern European countries (such as the German Democratic Republic, the USSR, Poland, Romania, Czechoslovakia, 18 Bulgaria, and Hungary) who use countertrade as a t o o l for t h e i r trade, the developing countries, both non-oil and o i l producing countries i n A f r i c a (such as Egypt, Kenya, Ghana, et c . ) , Asia 16 (such as Indonesia, Iran, Malaysia, the Philippines, South Korea, 19 China and Thailand), Europe (such as Malta and Yugoslavia) have also developed countertrade p o l i c i e s with t h e i r foreign trading partners. In addition, some developed countries, l i k e A u s t r a l i a , New Zealand, Denmark, Belgium, Luxembourg, and the Netherlands have also introduced some countertrade p o l i c i e s with respect to 2 0 government procurement and/or defense equipment. Some other developed countries, e s p e c i a l l y i n the private sectors, play a v i t a l r o l e i n countertrade transactions, namely: the U.S.A., 21 France, Belgium, Canada, and Japan. The above estimation are s u f f i c i e n t to show that countertrade has played and continues to play an important r o l e i n world trade. 2.4 Def i n i t i o n s Since there i s s t i l l no uniform typology or precise legal terminology which has been accepted i n international commercial 22 prac t i c e or i n l e g a l writing, the d e f i n i t i o n and c l a s s i f i c a t i o n of countertrade transactions depends on the nature of the arrangements and contracts, the number of parti e s involved and the l e g a l system of the countries involved. Sometimes i t even 23 depends on the experts involved. Each countertrade transaction 24 presents unique features. In some cases the same type of arrangements may be defined or c l a s s i f i e d d i f f e r e n t l y . For 17 example, i t may be referred to as "compensatory" or 2 6 "compensation". Various d e f i n i t i o n s have been given to the word "countertrade" by d i f f e r e n t international organizations, national i n s t i t u t i o n s and experts. The Organization for Economic Cooperation and Development ("OECD") defines "countertrade" a s : 2 7 "an international commercial operation i n the framework of which the s e l l e r has to accept i n p a r t i a l or t o t a l settlement of h i s d e l i v e r i e s the supply of products (or more r a r e l y services) coming from the purchasing country". The United Nations Conference on Trade and Development ("UNCTAD") defines "countertrade" a s : 2 8 "... a ce r t a i n type of business arrangement under which an exporter undertakes to be generated by others, benefits such as revenues for an importer. The arrangements t y p i c a l l y e n t a i l linked trading obligations of enterprises into countries involving exchange of products, technology and other services". The Canadian Department of External A f f a i r s defines 29 "countertrade" as: "... a generic term encompassing a l l transactions where a sale to an importer (public or private sector) i s conditional upon a re c i p r o c a l purchase or undertaking by the exporter". 18 The Department of Trade and Industry, United Kingdom defines 30 "countertrade" as: "... an umbrella term for a whole range of commercial mechanisms for re c i p r o c a l trade... The common c h a r a c t e r i s t i c of countertrade arrangements i s that export sales to a p a r t i c u l a r market are made conditional upon undertakings to accept imports from that market". The United States International Trade Commission (USITC) 31 takes the view that "countertrade": "... refers to a l l forms of re c i p r o c a l or " t i e d " i n t e r n a t i o n a l contractual or "best e f f o r t " commitments". Professor Schmitthoff i n h i s recent book defines 32 "countertrade" as: "... a c o l l e c t i v e term which denotes various methods of l i n k i n g two export transactions, one emanating from the exporter's country and the other from that of the importer". 3 3 McVey defines "countertrade" as: "... a practice i n international trade i n which two partie s l i n k an import transaction and an export transaction i n a rec i p r o c a l fashion". 34 Verzariu defines "countertrade" as: "reciprocal and contingent exchange of goods and services are s p e c i f i e d by contract and each flow of d e l i v e r i e s i s valued and s e t t l e d i n monetary units". 19 Kostecki, an economist i n the GATT Secretariat, defines 35 11 countertade" as: "... a special case of a linked transaction providing for rec i p r o c a l buying and s e l l i n g . This type of r e c i p r o c i t y arrangement i s frequent not only i n home markets but also i n international trade". Townsend, i n h i s recent book, defines "countertrade" i n general terms a s : 3 6 "... those foreign trade deals i n which the export of goods to a foreign country are coupled to imports from that country, at i d e n t i c a l values or agreed upon volume r a t i o s " . I t may be noted that some of the d e f i n i t i o n s are very broad and loose and some are very narrow. This writer i s of the opinion that the common elements i n the countertrade transactions consist of: 1. t h e i r being ad hoc (monetized) forms of barter or a 37 transaction-by-transaction form of barter; 2. being an international business arrangement between at 3 8 l e a s t two parti e s (public or private sectors); 39 3. the arrangement being on a re c i p r o c a l basis; 20 4. the commitment of both par t i e s being l e g a l l y binding on 40 the basis of a contract; and 5. the transaction includes the sale or exchanges of goods 41 and the services or transfer of technology. I f the above elements ex i s t , the transaction should then be c l a s s i f i e d as a "countertrade" transaction. Arrangements which 42 are based on a "best e f f o r t " basis should not be regarded as "countertrade" transactions because such arrangements would not be enforceable and they have no meaning on e i t h e r the national or i n t e r n a t i o n a l law l e v e l . In addition, i t i s the GATT Secretariat's view that transactions that involve d i r e c t investment such as "co-production arrangements", " i n d u s t r i a l cooperation agreements", or transactions between two countries which originates from the i n c o n v e r t a b i l i t y of currency such as comprehensive b i l a t e r a l trade and payments arrangements (except 43 switch trading), should not be categorized as "countertade". This writer i s of the view that the most important element i n a "countertrade" transaction i s the r e c i p r o c a l contractual commitment between at l e a s t two p a r t i e s . Without the binding contractual commitment of trading parties, the transaction w i l l have no l e g a l e f f e c t and thus cannot have any l e g a l implications at the i n t e r n a t i o n a l or national l e v e l . 21 Based on the elements summarized above and for the purpose of the discussion i n t h i s thesis, the following i s proposed as the d e f i n i t i o n of the word "countertrade": "A general practice of an international transaction between at l e a s t two parties (from eit h e r the public or priva t e sector) who agree to l i n k or reciprocate t h e i r import and export transaction on a contractual and ad hoc basis. The transaction may deal not only with the sale or exchange of goods but also with services or the tr a n s f e r of technology between two p a r t i e s . There are a number of forms of trade that can be c l a s s i f i e d as countertrade depending on various, elements, namely the nature and the duration of the agreement, the parties and the products involved." 2.5 Major Forms of Countertrade Transactions 2.5.1 Introduction Similar to the problem of defining the word "countertrade", there are d i f f e r e n t forms of countertrade c l a s s i f i e d by d i f f e r e n t organizations and experts. The following elements may be taken 44 into account i n c l a s s i f y i n g the forms of countertrade: 1. The nature of,goods traded; 2. The extent to which the trade flows o f f s e t one another; 3. The length of time needed to complete both trnasactions; 4. The type of agreement or agreements (the number of agreements, and the r e s t r i c t i o n s of the agreements); 5. The number of the pa r t i e s involved except for the importer and the exporter; 22 6. The re l a t i o n s h i p between imported products and exported products; and 7. The financing procedures. The following forms of countertrade transactions have been u t i l i z e d by the various organizations and le g a l commentators and may be of assistance. OECD c l a s s i f i e s countertrade transactions 45 . . . into two major forms. F i r s t , Commercial Compensation, which consists of Barter Transactions and Compensation Deals or Counterpurchase. The compensation deals are sub-divided into (a) precompensation; (b) p a r a l l e l transactions and counter transaction; and (c) counterpurchase as part of an ov e r a l l arrangement. Second, I n d u s t r i a l Compensation which consists of Buy Back Arrangements and other forms such as Framework Agreements or a long term Protocol-type Agreements. UNCTAD c l a s s i f i e s the form of countertrade to include: (1) Barter; (2) Counterpurchase; (3) Compensation or Buy Back; (4) In d u s t r i a l Co-operation (including Offset Arrangements); and (5) Switching. The GATT Secretariat c l a s s i f i c a t i o n s of countertrade 47 include: (1) C l a s s i c a l Barter; (2) Counterpurchase which includes Offset Arrangements; (3) Buy-Back; and (4) Switch Trading. 23 The Department of External A f f a i r s , Canada, c l a s s i f i e s the 48 forms of countertrade as: (1) Barter; (2) Counterpurchase; (3) Advance Purchase; (4) Offsets; (5) Buy Back; and (6) B i l a t e r a l Agreements. The Department of Trade and Industry, United Kingdom , , 49 c l a s s i f i e s the forms of countertrade to include: (1) Counter-purchase; (2) Barter or Compensation Trading; (3) Buy-Back; (4) Offset; (5) Switch Trading (Switch or Swap); and (6) Evidence Account. 50 USITC c l a s s i f i e s the forms of countertrade to include: (1) Counterpurchase; (2) Compensation; (3) Barter; (4) Switch; and (5) Offset. Professor Schmitthoff c l a s s i f i e s countertrade into four types 51 namely: (1) Reciprocal Sales Agreements; (2) Barter; (3) Buy Back; and (4) Disposal and Switch Transactions. McVey takes a very broad view and c l a s s i f i e s the forms of 52 countertrade into fourteen forms: (1) Counterpurchase; (2) Compensation or Buy Back; (3) Barter or Swap; (4) Import Entitlement Programs; (5) Offsets; (6) Clearing; (7) Switch Trading; (8) Progressive or Proactive Countertrade; (9) Franchise Agreements; (10) P o s i t i v e and Reverse Countertrade; (11) Develop for Import Transactions; (12) Performance Requirements; (13) 24 C o l l e c t i o n Through Export Transactions; and (14) Miscellaneous Countertrade Variations. 53 Verzariu c l a s s i f i e s countertrade into three forms: (1) Direct Compensation (Buy Back); (2) Indirect Compensation (or Counterpurchase); and (3) Reverse Countertrade (Junktim). . . 54 Welt, a U.S. countertrade expert, c l a s s i f i e s countertrade to include: (1) Barter; (2) Counterpurchase; (3) Compensation (or Buy Back); (4) Evidence Account; and (5) B i l a t e r a l Clearing Agreements or Switch Trading. 55 Kostecki's c l a s s i f i c a t i o n of countertrade includes: (1) Counterpurchase; (2) Offsets; (3) Buy Back; (4) Advance Purchase; and (5) Barter. Townsend c l a s s i f i e s countertrade into f i v e forms: 5 6 (1) Barter; (2) Compensation; (3) Countertrade (or Counterpurchase or P a r a l l e l Trade); (4) Co-operation Trade, which includes I n d u s t r i a l co-operation and J o i n t ventures; (5) Offset; and (6) Countertrade C o l l e c t i o n s . I t i s i n t e r e s t i n g to note that c i v i l i a n lawyers c l a s s i f y countertrade into four forms. For example, Guyot c l a s s i f i e s countertrade into: (1) Barter; (2) Counterpurchase; (3) Offsets; 57 . . and (4) Buy Back. Loeber c l a s s i f i e s them as (1) Barter; (2) 25 Compensation; (3) Counterpurchase; and (4) I n d u s t r i a l Co-58 operation or Buy Back. Raj s k i c l a s s i f i e s countertrade into four forms but ref e r s to them i n d i f f e r e n t names: (1) Barter; (2) 59 B a r t e r - l i k e Contract; (3) Counterpurchase; and (4) Buy Back. In Canada, the Department of External A f f a i r s , has c l a s s i f i e d the forms of countertrade d i f f e r i n g from the c l a s s i f i c a t i o n used by the Canadian l e g a l commentators, Castel, de Mestral, and Graham, who u t i l i z e d : (1) Counterpruchase; (2) Compensation; (3) Barter; (4) B i l a t e r a l Clearing or Switch Trading; and (5) Other 6 0 forms of countertrade, e.g. progressive p o s i t i v e countertrade. The I n s t i t u t e of Soviet and East European Studies, Carleton University, c l a s s i f i e s countertrade to include: (1) Barter; (2) (2) Switch Trading; (3) Counterpurchase; and (4) Co-operation Agreements which includes (a) Product Pay Back (Buy Back), (b) Commercial Co-operation, and (c) In d u s t r i a l Co-operation. In Thailand, however, there have been no authorities or i n s t i t u t i o n s which have been working on eit h e r d e f i n i t i o n s or c l a s s i f i c a t i o n s of countertrade forms. C l e a r l y countertrade i s c l a s s i f i e d d i f f e r e n t l y by various organizations and experts. Sometimes, the nature of the transactions i s the same but i t i s c a l l e d d i f f e r e n t things. The c l a s s i f i c a t i o n of countertrade forms by some l e g a l commentators, 26 l i k e Townsend and McVey, are too detailed. In fact, such countertrade forms may f a l l under major forms of countertrade. In addition, the broader terms used f o r some forms of countertrade practices, e s p e c i a l l y i n trade between Eastern bloc countries and the West, such as i n d u s t r i a l cooperation, commercial and i n d u s t r i a l compensation, make the traders confused about what the actual form of countertrade i s or how to r e f e r to the arrangement. This t h e s i s , however, does not intend to examine and work out acceptable categories of forms and terminology for countertrade pr a c t i c e i n world trade. Therefore, only the major forms of countertrade practices which are most s i g n i f i c a n t and widely adopted i n international trade w i l l be examined. These are: Barter; Counterpurchase; Compensation or Buy Back; Offsets; and Miscellaneous forms of countertrade arrangements which originate from a lack of hard currency of one or both the importing or exporting countries, which includes Advance Purchase, B i l a t e r a l Agreement or Switch Trading, and Evidence Account. The structure and agreements involved i n each arrangement w i l l be demonstrated i n the form of a flow chart. 2.5.2 Barter 62 Barter i s often referred to as "swap" or "Compensation 6 T Trading". I t i s defined by OECD as a " B i l a t e r a l contractual 27 exchange of goods and/or services avoiding the use of i n t e r n a t i o n a l currency". I t should be noted that OECD categorizes international barter into 3 categories: (1) pure Barter with no payment other than i n goods between trading partners; (2) b i l a t e r a l trade agreements associated with c l e a r i n g arrangments i n order to avoid payment i n convertible currencies; and (3) b i l a t e r a l trade agreements with arrangements only on the commercial side for p a r t i a l or t o t a l compensation through more or 64 l e s s firm commitments of imports and exports. The major purposes for imposing Barter Arrangments 6 5 are: (1) to dispose of surplus products that cannot be otherwise sold i n the world market; (2) to solve a debt c r i s i s facing a country; and (3) to allow for the importation of products when a country has no hard currency. 6 6 The main c h a r a c t e r i s t i c s of "Barter" are: 1. I t i s a single agreement containing provisions covering d e l i v e r i e s mainly between government sectors or between state enterprise or government with the private sector. 2. Except for "barter l i k e " arrangements, there i s no t r a n s f e r of funds, no financing or t h i r d party involvement. 3. The exchange of goods or services generally takes place 28 s i m u l t a n e o u s l y o r w i t h i n a v e r y s h o r t time. 4. A p a r a l l e l bank guarantee i n the form of a stand-by l e t t e r o f c r e d i t may be needed i f i t i n v o l v e s a s u b s t a n t i a l amount of merchandise or the product has a h i g h commercial v a l u e such as o i l . T h i s type o f t r a n s a c t i o n has been undertaken f r e q u e n t l y between E a s t European c o u n t r i e s and d e v e l o p i n g c o u n t r i e s , among de v e l o p i n g c o u n t r i e s , and between o i l pr o d u c i n g c o u n t r i e s and de v e l o p i n g o r developed c o u n t r i e s . Most of the products i n v o l v e d 67 i n B a r t e r a re a g r i c u l t u r a l commodities, o i l and raw m a t e r i a l s . A t r a d i t i o n a l b a r t e r t r a n s a c t i o n i s now uncommon i n i n t e r n a t i o n a l t r a d e p r a c t i c e . However, a contemporary b a r t e r a g reement 6 8 o r b a r t e r - l i k e arrangement or " q u a s i b a r t e r " 6 9 arrangement i s s t i l l used. These contemporary b a r t e r s w i l l not c o n t a i n c e r t a i n o f the c h a r a c t e r i s t i c s o r elements of the t r a d i t i o n a l b a r t e r agreement. The d e l i v e r y p e r i o d of products may be l o n g e r ; i t may not be necessary t o d e l i v e r the products s i m u l t a n e o u s l y ; and the agreement may be p a r t i a l l y i n v o l v e d w i t h a monetary payment f o r the balance o f the account. In t h i s t h e s i s the word " B a r t e r " w i l l i n c l u d e c o n v e n t i o n a l B a r t e r and contemporary B a r t e r . 29 The Barter Arrangements which Canada and Thailand have been engaged i n with other countries are: (1) A 1982 Barter Arrangement between the Canada Potash Corporation of Saskatchewan (PCS) and the Indonesia government, where bulk potassium chloride was exchanged f o r rubber, coffee, and cocoa. (2) Thailand had entered into Barter Arrangements with South Korea, Romania, and the USSR, exchanging a g r i c u l t u r a l commodities (primarily tapioca and corn) for f e r t i l i z e r . In addition, r i c e has been exchanged for jute from Bangladesh; for palm o i l from Malaysia; and f o r crude o i l from Nigeria and The People's 71 Republic of China. (3) The Port Authority of Thailand purchased s i x tower cranes from Yugoslavia with a value of 226.4 m i l l i o n Baht (approximately 11.3 m i l l i o n Canadian dollars) where 25% w i l l be paid i n cash and 75% w i l l be bartered for r i c e , tobacco leaves, tapioca, rubber, 72 t e x t i l e products, and canned foods from Thailand. 30 Figure 1 Structure and Agreements Involved i n Barter Arrangement Raw Materials (Potassium) Commodities such as r i c e Canada (The Supplier) Barter Agreement Services Thailand (The Importer) P a r t i a l Payment for products or services J L P a r a l l e l Bank Guarantee (Stand-by Letter of Credit) Notes 1. For provisions that should be included i n a Barter Agreement see discussion i n Chapter seven, 7.3.2., i n f r a . 2. I f i t i s a Barter Arrangement between developing countries, normally i t w i l l have no p a r t i a l payment being only an exchange of products. 3. I f i t i s a Barter Arrangement between a developing 31 coun t r y and developed country, i t may i n v o l v e not o n l y the exchange o f pr o d u c t s but a l s o p a r t i a l payment. 4. A p a r a l l e l bank guarantee i n the form of a stand-by l e t t e r o f c r e d i t may be r e q u i r e d i f the p a r t i e s i n v o l v e d are s t a t e t r a d i n g e n t e r p r i s e s o r from the p r i v a t e s e c t o r . 32 2.5.3 Counterpurchase Counterpurchase i s sometimes referred to as " i n d i r e c t 73 74 compensation" , " p a r a l l e l trade" or "countertrade". I t i s defined as a transaction i n which the exporter d e l i v e r s the goods and/or services to the importer and the exporter contractually agrees to purchase the goods from the importer i n an amount equal to an agreed percentage of the o r i g i n a l sales or services 75 contract value. Sometimes the counterpurchase requirements w i l l be equal to the f u l l amount of the imports or even ten percent over. Very often, the importer has to agree to a discount on the products exported as a fee or commission to an international 7 6 trading company to dispose of the products. The main c h a r a c t e r i s t i c s or elements of counterpurchase 77 arrangements can be summarized as follows: 1. Supply and counter-delivery are covered by two separate agreements which operate independently and each of which refers to the other by way of an independent protocol within the framework agreement. 2. The time for the exporter to f u l f i l l the o b l i g a t i o n i s short, usually from 1 to 5 years. 33 3. The payment i n cash or hard cur r e n c y f o r the goods or s e r v i c e s w i l l be made s e p a r a t e l y by the importer and the • e x p o r t e r . 4. The goods of the two agreements are not r e l a t e d . 5. The t r a n s f e r of the counterpurchase o b l i g a t i o n t o a t h i r d p a r t y i s normally p o s s i b l e . 6. T h i s t r a n s a c t i o n i s composed o f t h r e e separate agreements, namely: a. The Primary S a l e s or S e r v i c e s Agreement which i s a s t a n d a r d s a l e s or s e r v i c e s agreement w i t h a cash payment; b. The Counterpurchase Agreement or Secondary S a l e s Agreement c o n t a i n i n g terms and c o n d i t i o n s f o r the e x p o r t i n g country t o buy the products from the i m p o r t i n g country; and c. A P r o t o c o l or a Framework Agreement t h a t serves to l i n k the s a l e s or s e r v i c e s c o n t r a c t and the Counterpurchase Agreements. However, the P r o t o c o l or the Framework Agreement i s sometimes p r o v i d e d i n the Counterpurchase Agreement. There are d i f f e r e n t s u b d i v i s i o n s of Counterpurchase Arrangements. Townsend, f o r example, s u b d i v i d e s Counterpurchase 34 into 4 categories: (1) p a r a l l e l deals; (2) linked deals; (3) psychological countertrade; and (4) p o s i t i v e or reverse 78 countertrade. There i s another type of Counterpurchase c a l l e d 79 an "Advance Purchase", but the Canadian Department of External 8 0 A f f a i r s regards "Advance Purchase" as one form of countertrade. The writer w i l l use the term Counterpurchase for a l l transactions that meet the c h a r a c t e r i s t i c s or have the elements discussed above. The reasons importing countries engage i n Counterpurchase arrangements are s i m i l a r to those for Barter Arrangements. For example, where a product i s i n over-supply or where i t i s not marketable. The major differences i n the elements of Counterpurchase as d i s t i n c t from Barter are: the number of agreements involved; a separate financing and the monetary settlement made by each party; and the time to f u l f i l l the the obligations by the exporter i s longer than the Barter Arrangement. The product offered by the importing countries to the exporting countries i n a counterpurchase arrangement are s i m i l a r to the products offered i n Barter. They normally involve a g r i c u l t u r a l commodities, and raw materials including o i l and minerals.. Therefore, subject to mandatory Counterpurchase, the exporter i s u n l i k e l y to accept a Counterpurchase deal unless a 81 s i z a b l e discount i s given. USITC takes the view that an Evidence Account should also be 35 considered as part of a Counterpurchase scheme since the exporter may resort to an Evidence Account i n order to overcome problems 82 associated with a Counterpurchase Arrangement. The writer, however, does not regard t h i s Evidence Account as part of a Counterpuchase Arrangement as i t only constitutes one form of countertrade. The Counterpurchase Arrangement i s the most common form of countertrade arrangement. I t i s usually the arrangement made between a government or state trading enterprise and a foreign 8 3 p rivate firm. So far , only Romania and Indonesia have mandatory l e g i s l a t i o n that requires foreign exporters to enter into Counterpurchase Arrangements. Under Romanian O f f i c i a l Decree No. 276 (of J u l y 25, 1979), f u l l countertrade coverage i s requested for almost a l l imports, including items that f a l l i n the 84 catergory of p r i o r i t y imports. In Indonesia, a trade development program introduced i n 1982 includes the government countertrade p o l i c y which i s to apply to a l l government funded projects valued i n excess of 500 m i l l i o n rupiah ($450,000) and the foreign supplier must agree to a 100 percent Counterpurchase of non-oil and gas products against the value of the imports into Indonesia. 8 5 Counterpurchase Arrangements which had been entered into by Canada and Thailand are noted below. 36 a. Canada 1. The sale of Canadian nuclear reactors and transfer of technology to Romania, financed by the Export Development Corporation where the Canadian sub suppliers of such nuclear reactor are required to counterpurchase 100% (one hundred 8 6 percent) of product from Romania. 2. The supply of s t e e l by Sydney Steel Co., Canada, to the Indonesian government valued US$9,758 m i l l i o n involved the counterpurchase by the Sydney Steel Co., Ltd. of tea, rubber, and 8 7 satex t i n from Indonesia. b. Thailand 1. The Counterpurchase Arrangement between the Thai government and the Senegal government involved the purchase of 60,000 tons f e r t i l i z e r s from Senegal with the Senegal government 8 8 i n turn purchasing 60,000 tons of Thai r i c e . 2. In the Counterpurchase Arrangements between the Thai government and both Hungary and Yugoslavia the Thai government i s to purchase medical equipment from Hungary and dentistry equipment from Yugoslavia and, i n turn, Hungary i s to buy f a b r i c , coffee, r i c e , canned foods and rubber from Thailand, and Yugoslavia i s to buy r i c e from Thailand. The t o t a l value of t h i s 89 arrangement i s 1 m i l l i o n U.S. d o l l a r s per annum. 37 F i g u r e 2 S t r u c t u r e and Agreements Invo l v e d i n Counterpurchase Arrangement Products or s e r v i c e s Canada (The S u p p l i e r ) Import t o Canada Payment T h i r d P a r t y or or t r a d i n g house Other C o u n t r i e s Primary S a l e s or S e r v i c e Agreement I I I I I The P r o t o c o l o r the Framework Agreement I Counterpurchase of Secondary S a l e Agreement I I ± Payment T h a i l a n d (The Importer) Countertrade Products Subsequent Counterpurchase O b l i g a t i o n Notes 1. The P r o t o c o l o r Framework Agreement may or may not l i n k t he Primary or S e r v i c e s Agreement w i t h the Counterpurchase 38 Agreement depending on the agreement of both p a r t i e s . The supplier, however, usually prefers not to l i n k the agreements together. 2. The time that the suppliers have to f u l f i l l t h e i r Counterpurchase obligations w i l l range from 1-5 years following the execution of the Primary Sales or Services Agreement. 3. Normally the Counterpurchase Agreement w i l l provide for the t r a n s f e r a b i l i t y or assignment of the countertrade product to a t h i r d party or trading house i n order to dispose of the product. 39 2.5.4 Compensation Compensation i s sometimes referred to as "Buy Back", 90 " I n d u s t r i a l Compensation" or "Indu s t r i a l Co-operation Trade". The writer w i l l use the term "Compensation" or "Buy Back" i n the context of the discussion of t h i s t h e s i s . In a Compensation or Buy Back transaction the exporting country, mainly through private firms, w i l l s e l l equipment, technology and/or an entire turnkey plant to the importing country, eith e r a private firm or government, and the exporter agrees to buy back from the importing country the products derived from the output of the 91 plant and/or the use of the technology or the equipment. Compensation or Buy Back Arrangement have been widely used i n the USSR, China and ce r t a i n developing countries i n order to 92 obtain foreign technology without spending hard currency. Some commentators, l i k e Townsend, subdivided Compensation into two 93 forms which are Total Compensation and Part Compensation. At present, t h i s p ractice i s being widely used among developed countries where they have subsidiaries or associated companies i n foreign countries. In f a ct, Compensation has s i m i l a r c h a r a c t e r i s t i c s to Counterpurchase except that the countertrade product to be supplied by the importer i s the product of the equipment or technology provided by the suppliers and therefore, i n most 40 cases, the time for the suppliers to f u l f i l l t h e i r obligations i s quite long. The main c h a r a c t e r i s t i c s or elements of Compensation or Buy 94 Back can be summarized as follows: 1. The value of the transaction i s quite high, often i n the hundreds of m i l l i o n s of d o l l a r s because the products supplied involve i n d u s t r i a l equipment or plants with sophisticated technology. 2. The goods and the products are related to the equipment or technology imported. 3. The payment of hard currency, i n whole or i n part, w i l l be made and the value of the Compensation or Buy Back commitment i s usually greater than the value of the primary sales or services transactions. 4. The period of the arrangements i s usually quite long ranging from f i v e to twenty years. 5. The value of the products produced during the agreement usually equals the value of the plant/technology or equipment, plus an amount to cover the i n t e r e s t expenses during the period of the Buy Back. 41 6. The Agreements involved i n the Compensation transaction are s i m i l a r to those i n Counterpurchase Agreement. They consist of three agreements: 6.1 A Primary Agreement which covers not only the conventional international sales agreements which cover the equipment, but also covers the services (technology t r a n s f e r ) , construction and/or turnkey agreements; 6.2 A Secondary Sales or Services Agreement or Compensation Agreement which i s s i m i l a r to the agreement required i n a Counterpurchase or Barter transaction; and 6.3 A Protocol or Framework Agreement to separate or to l i n k the Primary Agreement and the Secondary Agreement (Compensation Agreement). There are no examples of a Canadian firm and a Thai firm being engaged i n a Compensation Arrangement with other countries. However, one example i s the Buy Back Arrangement between Austria and the USSR which involves the sale of Austrian pipelines, equipment, and materials to enable the USSR to develop certa i n gas f i e l d s . The payment w i l l be paid by the production being 95 piped to Austria. 42 Figure 3 Structure and Agreements Involved i n Compensation Agreement Machinery/Technology Plant Canada (The Supplier) Payment Trading House Primary Sales or Services Agreement or Turnkey Agreement Payment $ The Protocol or Framework Agreement Thailand (The Importer) Secondary or Compensation Agreement Product from Factory or Plant Other Countries Notes 1. The Protocol or Framework Agreement need not be i n the Compensation Arrangement, i t may be included i n the Primary Sales or Services Agreement. 2. The time for Canadian suppliers to purchase the output from the plant ranged from 5-2 0 years and the value of the 43 compensation i s normally h i g h e r than the Primary S a l e s or S e r v i c e s Agreement. 3. In some circumstances the s u p p l i e r may a s s i g n the product t o a t r a d i n g house f o r d i s p o s i t i o n t o t h i r d c o u n t r i e s as i s done i n the Counterpurchase Arrangement. 44 2.5.5 Offsets Offsets are sometimes referred to as being part of i n d u s t r i a l 96 . . . . 9 7 co-operation. They are sub-divided into three categories: (1) d i r e c t o f f s e t s , including business that re l a t e s d i r e c t l y to products being sold; (2) i n d i r e c t o f f s e t s , including a l l business unrelated to the products being sold; (3) a combination of d i r e c t and i n d i r e c t o f f s e t s . Direct forms of o f f s e t s includes the 9 8 following business: (1) co-production; (2) licensed production; (3) sub-contract product; (4) overseas investment; and (5) technology transfer. Offsets usually involves exports of high technology, m i l i t a r y equipment or a i r c r a f t from an i n d u s t r i a l i z e d exporting country. The exporting country may be required to hi r e a sub-contracter i n the importing country or to use raw materials o r i g i n a t i n g from the importing country, to f u l f i l l l o c a l content requirements, or to a s s i s t the importing country i n s e l l i n g i t s 9 9 products to a t h i r d party. T r a d i t i o n a l l y , o f f s e t s apply only to the sale of m i l i t a r y equipment or a i r c r a f t , but i t i s becoming common where the importing country i s seeking to develop i t s own i n d u s t r i a l c a p a b i l i t y and to finance the purchase of investment goods where other sources of financing are not a v a i l a b l e . 1 0 0 The main c h a r a c t e r i s t i c s of o f f s e t s can be summarized as f o l l o w s : 1 0 1 45 1. Offsets involve investment products such as communications equipment of high value, high technology or m i l i t a r y equipment, such as commercial a i r c r a f t and spareparts. 2. Normally, the importing country i s a government or state enterprise. 3. There may be various forms of i n d i r e c t o f f s e t s such as co-production, sub-contract production, etc. The number of agreements w i l l depend on what type of o f f s e t arrangement the trading pa r t i e s entered into. Normally there w i l l be two agreements: (1) the primary sale and/or services agreement, and (2) the secondary sub-contract or co-production agreement. These two agreements may be separated or t i e d together. Offset arrangements may be entered into on a permanent basis as i s the case when there i s investment i n an importing country. A number of developed countries, such as A u s t r a l i a and New Zealand, have set out guidelines for o f f s e t p o l i c y for government procurement. 1 0 2 Thailand has never been engaged i n o f f s e t arrangements with any countries. Canada has entered into o f f s e t arrangements when purchasing CF-18 a i r c r a f t worth US$2.37 b i l l i o n from the U.S. 46 companies McDonald Douglas and General Dynamics. These U.S. firms agreed to h i r e Canadian sub-contractors, transfer proprietory aerospace and e l e c t r o n i c a l technology to Canadian firms, e s t a b l i s h Canadian plants, promote the Canadian t o u r i s t s industry, and develop the export market program of Canadian , 103 good. 47 Ficfure 4 S t r u c t u r e and Agreements Invol v e d i n O f f s e t s Arrangement Mi] eqi a i i etc L i t a r y lipment r c r a f t , Canadian S u p p l i e r < Primary s a l e o r s e r v i c e Agreement payment S u p p l i e r I n t e r n a t i o n a l or Domestic F i n a n c i a l I n s t i t u t i o n s Importer —Credit—•£> ^ Co-production Agreement L i c e n s e d P r o d u c t i o n Agreement Sub-contract Agreement HQ-Investment Agreement "4 Technology T r a n s f e r Agreement T h a i Purchaser L o c a l C o n t r a c t Requirement e t c 3 _y 1. Other L o c a l Firms Notes 1. The payment f o r such equipment w i l l n o r m a l l y be on an i n s t a l l m e n t b a s i s and the purchaser s h a l l get f i n a n c i n g from 48 domestic or i n t e r n a t i o n a l f i n a n c i a l i n s t i t u t i o n s . 2. The s u b - d i v i s i o n o f d i r e c t o f f s e t w i l l depend on the r e s u l t o f the n e g o t i a t i o n between the p a r t i e s . P l e a s e note t h a t some forms of o f f s e t arrangements (namely, Investment Agreements or Co-Production Agreements) may be on a permanent b a s i s r a t h e r than ad hoc as i s the case of a Subcontract Agreement or L i c e n s e d P r o d u c t i o n Agreement. 49 2.5.6 Miscellaneous Forms of Countertrade Transactions The following forms of countertrade were introduced by importing countries because of a lack of hard currency to pay for imports as a r e s u l t of the current debt c r i s i s . 2.5.6.1. Advance Purchase Advance Purchase i s a transaction where an exporting country buys product from an importing country i n advance and e f f e c t s payment through an escrow account which w i l l serve to finance 104 imports by the importing country. This arrangement i s being used by severely indebted countries. The major purpose of Advance Purchase i s to secure payment i n advance for exporter's goods and thereby eliminate non-payment. This arrangement can be used to generate hard currency for the importer and to avoid time-consuming, cumbersomes foreign exchange regulations and 105 central bank's foreign exchange procedures. In t h i s arrangement commercial banks play a major r o l e i n handling the 106 "escrow account" and i n some cases act as a p r i n c i p a l i n the arrangement. As discussed e a r l i e r , (in 2.5.2, supra note 79), UNCTAD categorized Advance Purchase as one form of Counterpurchase, but External A f f a i r s , Canada, categorized i t as a separate form of 50 countertrade. Based on the elements i d e n t i f i e d with Counterpurchase the writer agrees with the External A f f a i r s Canada c l a s s i f i c a t i o n . An example of Advance Purchase Arrangement i s not r e a d i l y a v a i l a b l e . I t i s the writer's opinion that the banks which handle t h i s type of arrangementss are not w i l l i n g to disclose d e t a i l s because of the c o n f i d e n t i a l nature of the transaction and because they do not want to have t h e i r technique for acquiring c o n f i d e n t i a l market knowledge or expertise made availa b l e to 107 possible competitors. 51 Figure 5 Structure and the Agreements Involved i n Advance Purchase  Arrangement Sale Agreement Canadian 2) Payment -p* Escrow Account Exporter <A for 1 Agreement •«a-4) Payment for 3 Bank Z i n Canada or other countries Product from Canada 3) Notes Sale Agreement or Secondary Sale Agreement Product from Thailand Thai Importer 1. A Canadian supplier w i l l purchase the product from Thailand and the payment w i l l be made into an escrow account i n Bank Z i n Canada or another country except Thailand. For t h i s type of export arrangement some countries, l i k e Thailand, are required to obtain approval to open a foreign escrow account under the exchange control law. 2. An Escrow Account Agreement between the Canadian 52 s u p p l i e r , the T h a i importer and Bank Z must be entered. The payment from the Canadian e x p o r t e r t o the escrow account f o r the produ c t s w i l l be made. 3. Subsequently, the Canadian s u p p l i e r w i l l d e l i v e r t o the T h a i importer the products under the S a l e Agreement arranged i n 1 or the Secondary S a l e Agreement. 4. The payment t o the Canadian e x p o r t e r w i l l be made upon the p r e s e n t a t i o n o f documents as r e q u i r e d i n the Escrow Account Agreement. 53 2.5.6.2 B i l a t e r a l Agreement or Switch Trading B i l a t e r a l Agreements or Switch Trading are sometimes referred 108 to as a B i l a t e r a l Clearing Agreement. The reason for the existence of t h i s arrangement i s the lack of hard currency for one or both of the countries involved or p o l i t i c a l or other economic reasons. I t i s an arrangement i n which the two governments agree to exchange a number of products over a s p e c i f i e d period, usually 1 year, on an agreed exchange rate between t h e i r two national currencies. These arrangements commonly make use of c l e a r i n g accounts, which permit trade to take place without the need for foreign exchange. After the s p e c i f i e d period, i f the d e f i c i t exceeds the c l e a r i n g account the debtor country must pay the excess i n hard currency or a s p e c i f i e d currency. The trading country w i l l be allowed to switch the excess balance of product to a t h i r d party i n order to generate hard currency for the paymnet to the c r e d i t o r country 109 under the c l e a r i n g account. The p r i c e of the goods transferred are usually s u b s t a n t i a l l y discounted from the nominal value sometimes up to 40%. This practice i s used mostly by Eastern bloc countries and developing countries i n t h e i r b i l a t e r a l t r a d e . 1 1 0 For example, U.S. medicines and European-made components for Rank-Xerox copier machines manufactured i n India, have been shipped to the Soviet Union through the Indo-Soviet Clearing Agreement and U.S. f e r t i l i z e r s have been exported to Pakistan through the Romanian-Pakistan Agreement. 1 1 1 54 F i g u r e 6 S t r u c t u r e and the Agreements Invol v e d w i t h Switch T r a d i n g or  B i l a t e r a l Agreement B i l a t e r a l C l e a r i n g Agreement Government of Country A C e n t r a l Bank JL E x p o r t e r «3— -Payment i n hard c u r r e n c y or c o n v e r t -i b l e c u r r e n c y I. E x p o r t e r r I J l E x p o r t e r _2_ I C e n t r a l Bank of Country A, B . . w i l l c r e d i t and d e b i t f o r e i g n L ^ account and pay domestic " e x p o r t e r i n l o c a l c u r r e n c y or hard cur r e n c y Switch T r a d e r i i Goods 1 from B Goods 2 from B 4^| Goods 3 from A Goods 4 from B Importer i n Country C Government of Country B, C e n t r a l Bank Importer Importer I Importer V 55 Notes 1. The B i l a t e r a l Clearing Agreement between central banks of countries A and B w i l l specify the l i s t of goods for exchange, the value of the goods i n each currency, and the time l i m i t for the s e t t l i n g of the balance. 2. The central banks w i l l pay t h e i r l o c a l suppliers i n domestic currency or hard currency when they receive i t from the other country or a t h i r d party a f t e r the completion of Clearing Arrangement. 3. A f t e r Goods 1 and Goods 2 have been exchanged, the importer and exporter i n Countries A and B w i l l receive payment i n domestic currency. 4. A f t e r completion of c l e a r i n g account, Country A w i l l c r e d i t Country B for the Goods 3 that Country A has supplied to the importer i n Country B. Generally Country B w i l l have to pay a convertible or hard currency to Country A. 5. I f Country B does not want to take the goods of Country B, Country A w i l l ask the switch trader to s e l l Goods to a t h i r d country (Country C) i n a discounted manner, and Country A w i l l have to pay the switch trader for the services. Country C w i l l normally be required to pay i n convertible or hard currency to the central bank i n Country A. 56 2.5.6.3 Evidence Account An Evidence Account i s an agreement where a group of suppliers or exporting countries, mainly developed countries, undertake to buy and s e l l goods from importing countries i n one or more Foreign Trade Organizations (FTO) over a given period of up to three years. Such sales and purchases are recorded i n an evidence account maintained by banks i n both countries. I f the importing country s e l l s more to the exporting country than i t purchases from i t , i t w i l l receive c r e d i t at the exporting country's bank i n hard currency. In a reverse case, the exporting country w i l l receive c r e d i t at the importing country's bank i n the l o c a l currency. This arrangement i s widely used i n Eastern bloc countries where the trades are under the responsible of the FTOs and the products involved are usually raw materials, 112 chemical or other basic commodities. The Evidence Account Arrangement may be used to overcome . . 113 problems a r i s i n g from Counterpurchase. The Evidence Account provides a great deal of f l e x i b i l i t y for the importer i n buying export products with guaranteed, o f f s e t t i n g , hard currency exports. The exporter can take the benefit of having a broader range of goods to choose from compared to the counterpurchase transaction and i t i s less time consuming for both the negotiation of the agreement and the approval procedures. 1 1 4 Generally, an exporting country i s r e s t r i c t e d under the Evidence 57 Account from t r a n s f e r r i n g i t s obligations or products from the 115 importing country to a t h i r d party. An example of an Evidence Account Agreement i s where a U.S. firm signed several Evidence Account Agreements with the Chinese I n d u s t r i a l Ministry and the Agreement between Bowater, a B r i t i s h Trading House, and Gwangdon 116 Province. 58 F i q u r e 7 S t r u c t u r e and the Agreements Invol v e d With Evidence Account Evidence Account Agreement E x p o r t e r i n Country A V M o n i t o r i n g bank which C r e d i t s and d e b i t s payments E x p o r t e r of Goods 1 E x p o r t e r of Goods 2 Importer of Goods 3 payment ^ Notes Goods 1 Goods 2 Goods 3 3L government s e c t o r or FTOs M o n i t o r i n g bank which c r e d i t s and d e b i t s payments Importer of Goods 1 payment Importer of Goods 2 payment E x p o r t e r of Goods 3 1. Evidence Accounts can a l s o be e s t a b l i s h e d w i t h one or more F o r e i g n Trade O r g a n i z a t i o n s (FTOs). The Accounts w i l l s t a t e the v a l u e of the s a l e and how the balance i s t o be determined a t the end of the agreement. I f the s t i p u l a t e d volume o r v a l u e i s not f u l f i l l e d , the u n f u l f i l l e d p o r t i o n w i l l be added t o the 59 following years purchase obligation. 2. Numerous companies w i l l be involved i n Country A and i n the FTOs i n Country B so that the l i s t of goods w i l l be f l e x i b l e . 3. When Exporter 1 i n Country A s e l l s Goods 1 to the Importer i n Country B, the payment for Goods 1 w i l l be credited to Exporter l ' s bank account i n Country B i n the l o c a l currency. 4. When the exporter of Goods 3 i n Country B s e l l s Goods 3 to the importer i n Country A, the payment w i l l be credited to the bank account i n Country A i n the l o c a l currency which i s mainly a convertible currency. 60 2.6 Advantages and Disadvantages of Countertrade 2.6.1 Overview The discussion on advantages and disadvantages of countertrade i s a controversial one. Most of the developed countries (mainly the OECD members) oppose mandatory government countertrade requirements and do not encourage t h e i r private sectors to enter into countertrade agreements since they are perceived to be contrary to the m u l t i l a t e r a l rules of trade. For example, Carey and McLean wrote about the U.S. government's 117 p o l i c y on countertrade that: "The U.S. government has no means of encouraging non m i l i t a r y countertrade, nor does i t consider countertrade an appropriate mechanism to enhance i t s p o l i c i e s of economic assistance to developing countries... The U.S. government's view ... i s that countertrade i s i n e f f i c i e n t , increases the cost of each trade transaction, encourages b i l a t e r a l i s m and hence threatens "free" m u l t i l a t e r a l trade arrangements and probably conceals unf a i r trade practices, p a r t i c u l a r l y subsides... (U.S. government) i t has made clea r i t s opposition to foreign government-mandated countertrade and seeks to l i m i t the p r o l i f e r a t i o n of countertrade both through b i l a t e r a l and m u l t i l a t e r a l channels". The United Kingdom, Canadian and French governments share the view of the U.S. government respecting countertrade practices. However, these three governments s t i l l o f f e r advice, information, and general guidances to exporters and w i l l allow private 61 exporters to engage i n countertrade. Most of the developing countries, on the other hand, tend to engage i n countertrade i n one form or another because of t h e i r wish to increase t h e i r exports, obtain hard currency and improve t h e i r competitive . . 119 pos i t i o n . An OECD report has concluded that countertrade does not 120 provide a basis f o r a long term trade strategy. In addition, Kostecki concluded that countertrade was not an e f f i c i e n t form of trade as i t has a l l the f a m i l i a r shortcomings of b i l a t e r a l i s m . Kostecki suggested various alternatives to remove the di s t o r t i o n s 121 which are the root of countertrade and which w i l l be discussed l a t e r i n the following part of t h i s Chapter. The writer w i l l f i r s t discuss the most common advantage of countertrade f o r both developed and developing countries. Second, the advantages from d i f f e r e n t perspectives w i l l be discussed along with the disadvantages of countertrade from both a developed and developing countries* perspective. F i n a l l y , the writer w i l l discuss the reasons why countertrade should be encouraged. One major advantage that both developing and developed countries share i s that countertrade can be used as a means to 122 increase market shares i n foreign markets. For example, developing countries can use countertrade as an export promotion 62 t o o l f or non-traditional goods or to penetrate new markets 123 r e l y i n g on the marketing network of experienced partners. Private firms i n developed countries can also use countertrade as a t o o l to expand t h e i r foreign markets, e s p e c i a l l y with the Eastern European and developing countries. Pepsi-Cola entered the USSR market by buidling so f t drink plants i n Moscow, Lenningrad, and T a l l i n n . Pepsico's costs and returns w i l l be met by the sale of Russian Vodka i n the U.S. fo r which Pepsico i s the 124 sole agent. 63 2.6.2 Advantages of Countertrade: Developing Countries  Perspective 1. Economic d i f f i c u l t i e s faced by developing countries resulted i n trade d e f i c i t s and a lack of convertible currency to pay for imported products and external debts. Countertrade i n the form of Barter and Counterpurchase can be used to pay for the importation of goods and services and some times the payment of external debts. For example, when Indonesia and Malaysia's current account imbalances became more marked i n 1981, Indonesia took the f i r s t step to impose a counterpurchase p o l i c y for government procurement between the end of 1982 and mid 1983. Malaysia has followed Indonesia's p o l i c y . Another example i s where several o i l producing countries (namely, Kuwait, Libya, and 12 5 Qatar) have recently offered to pay creditors i n o i l . 2. Developing countries may use countertrade as a t o o l for development p o l i c y , e s p e c i a l l y i n the form of Compensation or Buy Back and Offsets. For example, countertrade i n the form of Compensation has frequently been used by Eastern European countries to f a c i l i t a t e the transfer of technology i n order to produce competitive goods. In developing countries which do not face serious economic d i f f i c u l t i e s , l i k e Maylasia p r i o r to 1981, countertrade can be used as a means of saving resources which may 12 6 then be assigned to major public i n d u s t r i a l projects. 64 3. Developing countries may use countertrade e s p e c i a l l y Compensation or Offsets as a financing t o o l i n i n d u s t r i a l projects. For example, the USSR entered into Compensation Arrangements with various western firms to construction chemical i n d u s t r i a l projects and paid for the construction and equipment through export of the output from the project. The People's Republic of China has also been engaging i n countertrade to finance i t s i n d u s t r i a l base. In 1984 Saudi Arabia used Barter to finance the purchase of ten Boeing 747 a i r c r a f t at a value of 1 127 b i l l i o n U.S. d o l l a r s with an exchange of t h e i r o i l products. 4. Developing countries may use countertrade e s p e c i a l l y Barter and Counterpurchase as a marketing t o o l f o r surplus commodites or products i n order to sustain the prices of primary products when there i s a declining market demand and/or to s e l l unwanted low qu a l i t y or excessive products and products which are d i f f i c u l t to s e l l f or c y c l i c a l or s t r u c t u r a l reasons. For example, o i l producing countries l i k e Iran, Libya, and Nigeria have attempted to export o i l beyond the quota set by OPEC to other developed and developing countries and have wanted to avoid unloading o i l on the spot market. The additional advantages of engaging i n countertrade i s that some suppliers of products, who are subject to international commodity agreements or producer c a r t e l , may lower t h e i r prices i n a clandestine manner without o f f i c i a l l y contravening those agreements or se t t i n g o f f a 65 128 reaction on international commodity exchanges. 5. Developing countries may use countertrade, e s p e c i a l l y Switch Trading, to increase integration of trade among 129 themselves. For example, the establishment of the Latin American Integration Association (ALADI) authorizes b i l a t e r a l trade and economic complimentary agreements between i t s members 130 and between member and non-member countries within the region. 6. Developing countries may also use countertrade to overcome trade b a r r i e r s among trading partners. However, t h i s i s not important insofar as countertrade goods are subject to import 131 controls and b a r r i e r s . 7. F i n a l l y , developing countries can use countertrade as a 132 means to induce foreign investment, for example, by requiring foreign investors to invest i n the country through Compensation and Offset Arrangements. 2.6.3 Advantages of Countertrade: Developed Countries  Perspective 1. Developed countries can u t i l i z e countertrade to develop new supply sources and ensure the supply of c r i t i c a l materials 133 from developing countries, e s p e c i a l l y mineral products. 66 2. Developed countries can obtain new and lower cost materials and products supplied or produced by developing c o u n t r i e s . 1 3 4 3. Developed countries may gain goodwill from importing countries i f they o f f e r to enter into countertrade arrangements and t h i s may lead to a p r i v i l e g e d p o s i t i o n f o r future projects 135 and the maintenance of t h e i r work force. 4. In the present debt c r i s i s where developing countries cannot pay back t h e i r loans, countertrade may be used to pay the loans. The f i n a n c i a l i n s t i t u t i o n s i n developed countries can arrange to market the products produced by the developed countries or firms i n the developed countries can take products , . ^ 136 i n l i e u of money. 5. Multinational firms and banks of developed countries which have expertise i n countertrade, e s p e c i a l l y those with t h e i r own trading houses or trading companies, may become the main actor i n a countertrade transaction being responsible for financing a deal, buying and s e l l i n g a product, acting as an intermediary or a broker i n which case they w i l l receive fees for 137 t h e i r services. 6. Developed countries may use countertrade to support production and development among themselves or i n developing 67 countries. An example of t h i s are the o f f s e t programs for the m i l i t a r y or aerospace equipment i n place between the USA and NATO 139 countries 2.6.4 Disadvantages of Countertrade As previously mentioned, most international organizations l i k e OECD and GATT, as well as developed countries are opposed to mandated government countertrade practices and do not encourage t h e i r private firms to engage i n countertrade. There are a number of reasons developed by these organizations and countries on why they do not support countertrade. 1. Countertrade threatens to undermine the m u l t i l a t e r a l trading and international monetary system. I t encourages b i l a t e r a l i s m which d i s t o r t s m u l t i l a t e r a l t r a d e . 1 4 0 2. A countertrade deal i s complicated, cumbersome and time-consuming. I t also increases the cost of the transaction. Developing countries may have to buy products at a higher price since the suppliers may increase t h e i r prices to cover anticipated costs such as commissions paid to trading houses. Some developing countries may not be able to achieve a f u l l advantage from countertrade transactions since they may have to pay higher prices for import products due to a weaker negotiating p o s i t i o n . In addition, the r i s k of trade increases as long as 68 the countertrade commitment by foreign suppliers i s not 141 f u l f i l l e d . A recent World Bank survey of Counterpurchase i n Indonesia showed that most trading house firms or brokers got a commission i n the amount of 85-12 0 m i l l i o n U.S. d o l l a r s while only an eighth to a t h i r d of the commissions went to Indonesian e x p o r t e r s . 1 4 2 3. Developing countries may lose control over t h e i r private sectors that engage i n countertrade, both i n terms of the monitoring of foreign currency earned by such companies and the covering up of commercial fraud such as underdeclared import products that allows for the paying of l e s s duties or overdeclared export products that allows for i l l i c i t c a p i t a l 143 t r a n s f e r s . 4. A countertrade transaction, e s p e c i a l l y where there i s government intervention, may conceal the u n f a i r trade practices i n the form of subsidies. In addition, i t can also lead to the 144 dumping of countertrade products. 5. Countertrade can l i m i t the choice of suppliers for the importing countries since the products offered by suppliers may 145 be more expensive or non competitive m terms of qu a l i t y . 6. The prices of countertrade products may not be determined by market forces but may be dictated by the bargaining power of 69 one of the partners. Developing countries have less advantages compared with t h e i r foreign suppliers, e s p e c i a l l y where the product i s i n surplus or no reference prices e x i s t . Sometimes countertrade may disrupt the market of the country which s e l l s the goods. For example, Ghana and Guinea unintentionally disrupted t h e i r own cocoa export markets i n a series of poorly 146 structured barter deals. 7. From a short term perspective countertrade may be a means of overcoming c e r t a i n economic d i s t o r t i o n s . However, from a long term perspective such countertrade may r e s u l t i n unfavourable impacts upon developing countries. These impacts w i l l include: disruption i n commodities markets, both on prices and on quota production; the loss of control over the marketing and d i s t r i b u t i o n aspect of the products; and a f a i l u r e to develop expertise. Also, because most of the countertrade products are raw materials or semi-processed goods with an i n e l a s t i c demand 147 the hope of countertrade expanding the market i s doubtful. 8. F i n a l l y , i n the long run, countertrade practices run up against trade b a r r i e r s that e x i s t i n c e r t a i n markets, for example 148 quota r e s t r i c t i o n s . 2.6.5 Conclusions A f t e r examining the various arguments about countertrade the 70 writer i s i n favour of countertrade provided that the form of countertrade u t i l i z e d f i t s the s p e c i f i c needs of developing countries and that, except i n s p e c i a l circumstances, countertrade not be made mandatory. The following are reasons why countertrade should continue to play an important r o l e i n world trade. F i r s t , i t must be accepted that not a l l countertrade arrangements create an unfavourable impact. I t w i l l depend on whether developing countries choose an appropriate form. For example, i f a country facing a debt c r i s i s and has no convertible currency, i t may be useful to e s t a b l i s h a mandatory Barter or Counterpurchase Agreement. On the other hand, i f developing countries want to change from being the suppliers of primary commodities to the suppliers of manufactured or i n d u s t r i a l products, the Compensation or Offsets Arrangements may be the 1 4 9 most suitable way to accomplish t h i s . Second, countertrade may not be the same as t r a d i t i o n a l b i l a t e r a l trade since most countertrade w i l l normally be open for a l l trading pa r t i e s to p a r t i c i p a t e i n on a non-discriminatory basis. There currently e x i s t several proposals on the 1 5 0 m u l t i l a t e r i z a t i o n of countertrade. In addition, the idea of r e c i p r o c i t y or conditional Most Favoured Nation (MFN) has become associated with the concept of equivalent market access across trade sectors and may become a popular approach i n the 1980's and 71 beyond. Third, the problem with respect to the cost and complexity of the transaction can be overcome i f a l l international organizations, developed countries and developing countries agree 152 to work out acceptable guidelines, d e f i n i t i o n s , forms, and Model Agreements. In addition, t r a i n i n g of developing countries 1 o f f i c e r s to negotiate and d r a f t countertrade agreements w i l l help the s i t u a t i o n . Fourth, the problem on subsidies, dumping and control over the private s e c t o r s 1 s r o l e i n countertrade should be resolved by the national law i n each country. F i f t h , the U.S. government's current p o l i c y of i n i t i a t i n g a review and assessment of the negative e f f e c t s of countertrade by various i n t e r n a t i o n a l organizations such as OECD, GATT, and 153 IMF may cause a prejudiced outcome of the studies. The writer i s doubtful of how r e l i a b l e these studies can be. As Townsend 154 stated i n the preface to h i s book: "Unfortunately, much of the material published on the subject (countertrade) has not been calculated to i n s p i r e businessmen to embark upon an i n i t i a l venture i n t h i s market. On the contrary a great deal of the material i s p o l i t i c a l l y biased, s e l f protective, cautionary, contradictory or even negative". I t i s the writer's opinion that an independent group i s 72 needed to study and assess the impact of countertrade, i t s d e f i n i t i o n s , forms and even the d r a f t i n g of Model Agreements to reduce the cost and time involved i n negotiation. F i n a l l y , Kostecki i n h i s 1987 a r t i c l e seeks to encourage an i n t e r n a t i o n a l i n i t i a t i v e of various actions aimed at improving debtor countries c r e d i t such as the coordination of domestic and trade p o l i c i e s for determining the supplies of a number of surplus primary commodities and r e s t r a i n i n g developed countries a p p l i c a t i o n of protective measures against developing 155 . . countries. These p o l i c i e s have never been achieved though there have been various e f f o r t s to overcome the problems noted. Kostecki went on to suggest that governments should i n i t i a t e various actions including the encouraging of a more active and entrepreneurial marketing strategy rather than r e l y i n g on countertrade, and the evaluating of the impact of surplus commodities and modified trade payments which encourage 156 countertrade. . The writer, however, i s of the opinion that these suggestions are impractical and cannot solve the problems encountered by the developing countries and t h e i r perceived need to encourage countertrade. As discussed above, countertrade w i l l continue to grow no matter how developed countries t r y to oppose i t . The reasons for the growth of countertrade can be seen from the advantages i t o f f e r s to a l l trading partners. More p a r t i c u l a r l y , the major 73 reasons f o r the growth of countertrade depend on the functions of countertrade which are: as a marketing t o o l , as a purchasing mechanism, and as a co-operation arrangement. Kostecki's Survey Report of 51 countries involved i n countertrade indicated that 70 (seventy) percent of countertrade functions as a marketing t o o l , with the objective being export promotion of manufactures or the marketing of surplus commodities. Only 18% of the countries used countertrade as purchasing mechanism and another 12% of 157 countertrade was functioning as co-operation arrangements. In l i g h t of the current state of disruption i n world trade and finance, the writer believes that countertrade should be encouraged, with some caution, both i n the government and private sectors. Countertrade must be c a r e f u l l y selected to s u i t the s p e c i f i c purposes or problems of each developing country. Moreover, i t must be emphasized that countertrade should be used as a means to encourage the economic development of developing 158 countries and to expand trade. The writer further believes that at present there i s a l o t of competition among firms from developed countries seeking to s e l l t h e i r products or win big i n d u s t r i a l projects i n developing countries. The developing countries, therefore, should take the opportunity i n t h i s "Buyer's market" to strengthen t h e i r bargaining power by i n s i s t i n g that t h e i r trading partner engage i n a "r e c i p r o c a l " trade arrangement such as countertrade. 74 Footnotes - Chapter Two 1. See discussion i n I. Outters-Jaeger, The Development Impact of Barter i n Developing Countries, (Paris: OECD, 1979) at 11. 2. G. Banks, "Economic and P o l i t i c s of Countertrade" (1983) 6 The World Economy, No. 2 159 at 179-180, footnote 11. 3. Outters-Jaeger, supra, note 1 at 11-2. See discussion of the countertrade p o l i c y i n Latin America which includes Argentina, B o l i v i a , B r a z i l , Chile, Columbia, Costa Rica, Dominican Republic, Ecuador, Honduras, Mexico, Panama, Uruguay and Venezuela, i n S.C. Carey & S.A. McLean, "The United States: Countertrade and Third World Trade" (1986) 2 0 J.W.T.L. No. 4 441 at 451-453, 456-473. 4. The reasons for the b i l a t e r a l balancing practice i n the forms of barter or b a r t e r - l i k e among Eastern bloc countries are mainly because of the distinguishing features of communist communities. I t includes: (1) The domestic p r i c e structure i s p o l i t i c a l l y and administratively determined; (2) The decision about what and how much to produce are made by central planners; (3) Foreign trade p o l i c y i s made by centeral planners under the f i v e years plan; (4) There are no d i r e c t linkage between the domestic and international countries (see Banks, supra. note 2 at 13-14). 5. Outters-Jaeger, supra, note l at 13-14. 6. See det a i l e d discussion i n OECD, East-West Trade: Recent Developments i n Countertrade, (Paris: OECD, 1981) at 11-17, 32-33. 7. OECD, Countertrade: Developing Country Practice, (Paris: OECD, 1985) at 11. 8. Ibid. See det a i l e d discussion at 14-19. 9. UNCTAD, Trade and Development Report 1986, (New York: United Nations, 1986) at 79. 10. OECD, supra, note 7 at 11. 11. Ibid, at 11, 12. 12. Ibid, at 12. 13. M. Kostecki, "Should One Countertrade?" (1987) 21 J.W.T.L. No. 2 7 at 8. 75 14. Ibid. See also Carey & McLean c i t e d Walsh's paper that "countertrade accounted for an estimated 25-3 0 percent of world trade i n 1984, compared with an estimated 2 percent i n 1964" (Carey & McLean, supra, note 3 at 443). 15. External A f f a i r s , Canada, Countertrade Primer For Canadian Exporters (Ottawa: Department of Supply and Services, October, 1985) at 2. 16. OECD, supra, note 6 at 9. 17. The Fi n a n c i a l Times of London, March 23, 1987. 18. See de t a i l e d discussion i n OECD, supra, note 6 at 13-14. 19. See det a i l e d discussion i n OECD, supra, note 7 at 11. 20. External A f f a i r s , Canada, supra. note 15 at 13, 25. See Country P r o f i l e s , U.K., Department of Trade and Industry, Countertrade: Some Guidance for Exporters (London, October, 1986) (No page l i s t e d ) . 21. United States International Trade Commission (USITC), Assessment of the E f f e c t of Barter and Countertrade Transaction on U.S. Industries, USITC Publication 1766 (Washington D.C.: USITC, October, 1985) at v i i . See also Country P r o f i l e s i n U.K. Department of Trade and Industry, supra, note 20. 22. UNCTAD, supra, note 9 at 76, and see J . Raj s k i , "Some Legal Aspects of International Compensation Trade" (1986) 35 I.C.L.Q 128 at 128-129. 23. OECD, supra, note 6 at 9. 24. OECD, supra, note 7 at 9. 25. P. Verzariu, Countertrade, Barter and Offsets (New York: McGraw H i l l Book, 1985) at 10. 26. Raj s k i , supra, note 22 at 128. 27. OECD, supra note 6 at 9. 28. UNCTAD, supra note 9 at 76. 29. External A f f a i r s Canada, supra, note 15 at 1. 30. U.K., Department of Trade and Industry, supra f note 20. 31. USITC, supra, note 21 at VII, footnote 1. 76 32. CM. Schmitthoff, Export Trade: The Law and Practice of International Trade 8th ed., (London: Stevens & Sons, 1986) at 137. 33. T.B. McVey, "Overview of the Commercial Practice of Countertrade", B.S Fisher & K.M. Harte eds, i n Barter i n the  World Economy. (New York: Praeger, 1985) 9 at 9. 34. Verzariu, supra, note 25 at 27. Verzariu took a broader view and used the word "compensatory arrangements (CAs) to include Barter, Countertrade, Evidence Account, B i l a t e r a l Clearing and Switch, B i l a t e r a l Trade Agreements or Protocols, Domestic Content Contract, Coproduction Licence, Investment Performance, Subcontracting (See d e t a i l s i n Verzariu, supra, note 25 at 25-41). 35. Kostecki, supra, note 13 at 7. 36. B. D. Townsend, The Financing of Countertrade (London: Butterworth, 1986) at 3. 37. GATT Secretariat Paper on Countertrade, CG 18/W/80 (No. 84-0599), (unpublished paper) at 4 and see G. Banks, supra, note 2 at 160. 38. External A f f a i r s Canada, supra. note 15 at 1. 39. Ibid., U.K. Department of Trade and Industry, supra note 20; USITC, supra note 31 at VII, footnote 1. 40. See d e f i n i t i o n of Compensatory Arrangement; see Verzariu, supra. note 25 at 23-24 and supra note 34. 41. UNCTAD, supra, note 9 at 76. 42. See USITC, supra, note 21 at VII, footnote 1. 43. GATT Secretariat Paper, supra. note 37 at 4-5. 44. OECD, supra, note 6 at 9-10. 45. Ibid, at 17-25. 46. UNCTAD, supra, note 9 at 76-77. 47. GATT Secretariat Paper, supra note 37 at 2-5; and see Banks, supra. note 2 at 160-162. 48. External A f f a i r s Canada, supra, note 15 at 1-2. 49. U.K. Department of Trade and Industry, supra, note 20. 77 50. USITC, supra, note 21 at 1-8. 51. Schmitthoff, supra, note 32 at 140-143. 52. McVey, supra, note 33 at 15-22. 53. Verzariu, supra, note 25 at 27. 54. L.G.B. Welt, Countertrade Business Practices For Today's World Market (New York: AMA Management B r i e f i n g , 1982) at 13-23. 55. Kostecki, supra, note 13 at 7. 56. Townsend, supra, note 3 6 at 8-19. 57. C. Guyot, "Countertrade Contracts i n International Business" (1986) 20 The Int• Lawyer 921 at 925. 58. H.H. Loeber, "Barter Trade, An Austrian View" i n L. L a f i l e ; Gevurtz, F.; and D., Campbell eds. Survey of International  Sales of Goods (Deventer Kluwer, 1986) 299 at 301-302. 59. Raj s k i , .supra note 2 2 at 13 0. 60. J.G. Castel; A.L.C. de Mestral; W.C. Graham; International Business Transactions and Economic Relations (Toronto: Edmond Montgomery Publication Limited, 1986) at 566-568. 61. The I n s t i t u t e of Soviet and Eastern European Studies, Options for Canadian Firms i n East-West Trade (Report) (Ottawa: Carleton University, 1978) at 61-65. 62. McVey, supra, note 33 at 16. 63. U.K. Department of Trade and Industry, supra, note 20. 64. Outters-Jaeger, supra, note 1 at 17. 65. Ibid, at 34; Townsend, supra. note 36 at 9. 66. OECD, supra, note 6 at 17-18; Townsend, supra. note 36 at 8. J.C. Grabow, Negotiating and Drafting Contracts i n International Barter and Countertrade Transaction (1984) 9 N.C.J. I n ' l L&Com Reg 255 at 270-271. 67. See d e t a i l e d discussion i n Outters-Jaeger, supra, note 1 at 11-16. 68. Guyot, supra. note 57 at 925. 69. Raj s k i , supra. note 22 at 130. 78 70. D.U. Vogt, "Barter of Agriculture Commodities Among Developing Countries", i n B.S. Fisher & K.M. Harter eds, i n Barter i n the World Economy, (New York: Praeger, 1985) 94 at 136. 71. Ibid, at 137, 146, 151; and External A f f a i r s , Canada, supra, note 15 at 30-31. 72. The Daily Trade News, June 30, 1987 (Thai Version), at 3. 73. Verzariu, supra, note 25 at 27. 74. Townsend, supra, note 36 at 11. 75. Guyot, supra, note 57 at 929-930. 76. UNCTAD, UNCTAD B u l l e t i n , No. 228, January, 1987, at 7. 77. See Townsend, supra, note 36 at 11-12; OECD, supra, note 23 at 19; Guyot, supra. note 57 at 930; USITC, supra, note 31 at 1. See D.N. Koschik, Structuring Barter and Countertrade Transactions, i n B.S. Fisher & K.M. Harte eds, i n Barter i n the World Economy. (New York: Praeger, 1985) 37 at 67. 78. Townsend, supra, note 36 at 12-14. The psychological countertrade i s not considered as a form of countertrade under t h i s thesis since i t lacks contractual obl i g a t i o n by the suppliers. 79. UNCTAD, supra, note 76 at 7. 80. External A f f a i r s , Canada, supra. note 15 at 1. 81. USITC, supra, note 21 at 2. 82. Ibid. 83. GATT Secretariat Paper, supra, note 37 at 3. 84. External A f f a i r s , Canada, supra, note 15 at 28. 85. Ibid, at 21. 86. Ibid, at 27. 87. Verzariu, supra, note 25 at 62. 88. The Bangkok Post. December 16, 1986. 89. The Daily Trade News, December 18, 1986, (Thai version). 79 90. OECD, supra, note 6 at 11; UNCTAD, supra. note 9 footnote 43. 91. McVey, supra. note 33, at 16. 92. USITC, supra, note 21 at 3. 93. Townsend, supra, note 36 at 9-10. 94. Ibid, at 10; OECD, supra, note 6 at 23; Guyot, supra, note 57 at 948-949; USITC, supra, note 21 at 30. 95. Banks, supra, note 2 at 162. 96. UNCTAD, supra, note 9 at 76. 97. USITC, supra, note 21 at 7. 98. Ibid, at 6; External A f f a i r s , Canada, supra. note 15 at 1-2; and see Verzariu, supra, note 25 at 44-45. 99. McVey, supra, note 33 at 17. 100.See U.K. Department of Trade and Industry, supra, note 20; and UNCTAD, supra. note 9 at 79. 101.Guyot, supra, note 57 at 945-947; USITC, supra. note 21 at 5; Townsend, supra. note 36 at 17-18. 102.See External A f f a i r s , Canada, supra, note 15 at 13, 25. 103. McVey, supra. note 33 at 11. 104. UNCTAD, supra, note 76 at 7. 105. External A f f a i r s , Canada, supra, note 15 at 1. 106. Townsend, supra, note 36 at 55-57. 107. Ibid, at 55. 108. Verzariu, supra, note 25 at 33; see discussion i n Outters-Jaeger, supra, note 1 at 38-47. 109. Verzariu, supra, note 25 at 33; UNCTAD, supra, note 76 at 7, 10; External A f f a i r s , Canada, supra note 19 at 2. 110. External A f f a i r s , Canada, supra, note 15 at 2. 111. Verzariu, supra note 25 at 33-35. 112.Ibid, at 31-32; USITC, supra, note 21 at 2. 80 113. USITC, supra. note 21 at 2. 114. Welt, supra. note 54 at 22. 115. USITC, supra. note 31 at 2. 116. Verzariu, supra. note 25 at 33. 117. Carey & McLean, supra, note 3 at 445. 118.See U.K. Department of Trade and Industry, supra, note 20; External A f f a i r s , Canada, supra. note 15 at 3. 119.OECD, supra, note 7 at 26. 120.Ibid, at 27. 121.Kostecki, supra, note 13 at 20. 122.See CM. Korth, The Promotion of Exports with Barter i n M.R. Czinkot ed., Export Promotion: The Public And Private Sector  Interaction (New York: Praeger Publishers, 1983) at 37-50; V. Terpstra, Internatinal Marketing, 3rd ed. (USA: The Dryden Press, 1983) at 484-515; F.R. Root, Entry Strategies for International Markets (Canada: Lexington Books, 1987) at 117-118. 123. UNCTAD, supra. note 76 at 10. 124. Terpstra, supra. note 122 at 484. 125.OECD, supra, note 7 at 14-15. 126.Ibid, at 18-19. 127.Ibid, at 31, and see Verzariu, supra, note 25 at 69, 178-182. 128.OECD, supra, note 22 at 17. 129.See Carls B.M., Economic Integration Among Developing Nations Law and Poli c y (New York: Praeger, 1986) at 130. 130.See Carey and McLean, supra. note 3 at 454. 131.UNCTAD, supra, note 76 at 10. 132.See generally External A f f a i r s , Canada, Promoting Canadian Exports: The Trading House Option (Ottawa: Department of Supply and Services November, 1984) at 31. 133.Carey & McLean, supra. note 3 at 449, and Terpstra, supra, note 123 at 515. 81 134.Carey & McLean, supra. note 3 at 449. 135.Ibid. 136.See OECD, supra, note 22 at 15. 137.See Korth, supra. note 122 at 46-48; and Townsend, supra, note 3 6 at 55-57. See also The Introducing of F l o r i d a State L e g i s l a t i o n which authorizes the exchange plan to deal with f i n a n c i a l products as well a hard to s e l l commodities and physical goods. The law w i l l persuade more i n s t i t u t i o n s and multinational companies to consider countertrade. Singapore also set up the center for countertrade (The Economist-Post Services, Too Much Barter i s Bad For You, The Bangkok Post, May 13, 1987) at 19. 138.Verzariu, supra. note 25 at 66. 139.See Carey and McLean, supra, note 3 at 44 6. 140.OECD, supra, note 7 at 24. 141.Ibid. at 26, 28. See B. F i t z g e r a l d , "Countertrade Reconsidered", Finance & Development June 1987 46 at 49. 142.Fitzgerald, supra. note 141 at 47. 143.OECD, supra, note 7 at 10. 144.Ibid, see Carey and McLean, supra. note 3 at 445, and see also Townsend, at 20, 21. 145.UNCTAD, supra. note 76 at 10. 146.Ibid.; Korth, supra. note 122 at 46. 147.OECD, supra, note 7 at 23-25. 148.Ibid, at 25. 149.See F i t z g e r a l d , supra, note 141 at 49. 150.UNCTAD, supra, note 76 at 11. 151.See A.J. Samet, The Future of the Most Favoured Nation P r i n c i p l e , i n M. I r i s h & E.F. Carasco eds, The Legal  Framework For Canada-United States Trade. (Canada: Carswell, 1987) 265 at 269, footnote 15, at 272-274. 152.See generally Carey and McLean, supra, note 3 at 456. See also F i t z g e r a l d , supra, note 141 at 49. 82 153. Carey & McLean, supra, note 3 at 446. See also IMF and World Bank p o l i c y i n Fit z g e r a l d , supra, note 141 at 46-49. 154. Townsend, supra, note 36 preface. 155. Kostecki, supra, note 13 at 18-19. 156.Ibid, at 18. 157.Ibid, at 9. 158.Fitzgerald, supra. note 141 at 49. 83 Chapter Three The Development of Countertrade Policy i n Canada and Thailand 3.1 Introduction In t h i s Chapter the writer w i l l outline the development of countertrade i n Canada and Thailand, as well as the government p o l i c y on Countertrade i n these two countries. Then, the prospect of countertrade transactions between Canada and Thailand w i l l be examined. 3.2 Development of Countertrade i n Canada and I t s Posit i o n Even though Canadian firms had been engaging i n countertrade transactions with developing countries and Eastern bloc countries over an extensive period, i t i s only recently that countertrade transactions have drawn much attention from the Canadian government. In 1984, there was a report prepared by the Trading House Task Force and submitted to the Minister of International Trade which provided a Canadian perspective on countertrade. This report recommended that the association of trading houses should play a r o l e i n disseminating information that could a s s i s t Canadian exporters faced with countertrade and that the government should provide basic advice and r e f e r r a l services to 84 exporters and co-operate with the trading house association to enable them to play a more e f f e c t i v e r o l e i n countertrade. 1 This report estimated that i n 1983 one b i l l i o n d o l l a r s , approximately 1.1 percent of Canadian exports, would be affected by countertrade and i f Canadian exports to the U.S. were excluded from consideration, countertrade would a f f e c t 5 (five) percent of 2 Canadian exports. The report suggested that countertrade should be encouraged to a f f e c t a much wider scope of Canadian exporters 3 of commodities and semi fabricated goods. In 1985, the Department of External A f f a i r s published a text e n t i t i l e d "Countertrade Primer For Canadian Exporters". This paper i s designed to provide a Canadian exporter with a basic knowledge and understanding of countertrade and to give some dir e c t i o n s on additional sources of assistance p r i o r to having to 4 deal with a countertrade demand. This text indicates that i n 1984, approximately 600 m i l l i o n d o l l a r s worth of Canadian exports, point f i v e percent (0.5%) of t o t a l Canadian exports, was 5 t i e d to some form of countertrade. The reasons why Canadian exports have been minimally affected by countertrade are that most Canadian goods are exported to the U.S. and OECD countries. Also, the major export products are food and raw material, while countertrade has involved mostly manufactured products and c a p i t a l projects. And, f i n a l l y , 85 Canadian export sales are most frequently sales between Canadian based foreign subsidiaries and t h e i r parent companies. The Canadian government's p o l i c y on countertrade i s s i m i l a r to that of other developed countries (OECD members): countertrade i s inconsistent with a m u l t i l a t e r a l p o l i c y and the government w i l l not introduce or encourage countertrade or w i l l not become d i r e c t l y involved i n countertrade deals. The major reasons are that: (1) countertrade i s a regressive trade practice which d i s t o r t s the m u l t i l a t e r a l flow of goods and services; (2) countertrade prejudices the export opportunities of small and medium-sized firms; (3) countertrade deals i n e f f i c i e n t l y with the economic and f i n a n c i a l constraints i t attempts to resolve; (4) countertrade manifests a regrettable trend to b i l a t e r a l i s m ; and (5) countertrade tends to remove trade from the purview of normal 7 GATT d i s c i p l i n e s through i t s lack of transparency. However, the Canadian government recognizes that private exporters p a r t i c u l a r l y i n the areas of transportation equipment, telecommunications, defence and other high technology products, resources and energy extraction projects, a g r i c u l t u r a l and for e s t r y equipment, and engineering and consulting services, w i l l face the demand for and engage i n countertrade i n one form or another. To ensure that the private sector remains competitive, the government should a s s i s t the private sector to deal with 86 countertrade requirements, although a l l the r e s p o n s i b i l i t i e s for Q entering into countertrade remain with the exporter. To f a c i l i t a t e Canadian exporters dealing with countertrade, the Department of External A f f a i r s established i n 1984 a Trading 9 House and Countertrade D i v i s i o n (TEH). This Division's function i s to strengthen the understanding and c a p a b i l i t y of Canadian exporters and ensure that they have access to appropriate countertrade i n t e l l i g e n c e , as well as knowledge of new developments i n t h i s f i e l d . " 1 " 0 3.3 Development of Countertrade i n Thailand and Its Position In November 1981 Thailand introduced an o f f i c i a l countertrade p o l i c y favouring the Barter Arrangement. The government department responsible was the Ministry of Agriculture and Co-operatives ("MAC"). MAC set up a sub-committee to supervise and approve Barter Arrangements involving Thai a g r i c u l t u r a l products. However, the value of Barter Arrangements during that time was low, thus the sub-committee was dissolved i n mid-1982. In 1985 a new National Countertrade Sub-Committee ("NCTT") was established by the government i n order to promote Thai products i n foreign markets. The NCTT, which works under the supervision of the Economic Ministers, i s empowered to supvervise and approve proposed countertrade transactions involving the government or state trading enterprises. NCTT consists of the 87 Minister of the Ministry of Commerce ("MOC"), who acts as the Chairman, the Permanent Secretary of the Ministry of Commerce, the Director General of the Department of Business Economics, and other representatives from the Ministry of Agriculture and Co-operatives, the Ministry of Finance, the Ministry of Communications, and the Bank of Thailand. Proposals for countertrade with the government or state trading enterprises are to be considered on a case-by-case basis by the NCTT. The NCTT i s also empowered to appoint working groups to study s p e c i f i c countertrade p r o j e c t s . 1 1 There was no e x p l i c i t p o l i c y d i r e c t i o n given by the NCTT u n t i l March, 1987, when the NCTT, with the approval from the Economic Ministers, proposed a p o l i c y with respect to government countertrade 12 transactions which can be summarized as follows: 1. I t i s the government's p o l i c y that countertrade transactions be regarded as a supplementary trading pattern. The purpose of the government's countertrade transactions are to: a. dispose of surplus domestic goods which cannot otherwise be marketing or whose pri c e i s dec l i n i n g ; b. penetrate new markets and expand the e x i s t i n g markets of Thai products; and 88 c. reduce current trade d e f i c i t s . 2. Countertrade requirements should be based primarily on the regular trade requirements of the Thai government with favourable trade terms for Thailand. 3. Any plan to purchase foreign products by government departments or state trading enterprises for a minimum value of 50 m i l l i o n baht (2.5 m i l l i o n Canadian dollars) must be submitted to the NCTT f o r study by October of each f i s c a l year. The plan should include any proposed countertrade from foreign suppliers. 4. The type of countertrade products are to be changed from time to time i n accordance with t h e i r s u i t a b i l i t y . Primary countertrade products should be those products facing export problems. Countertrade involving a g r i c u l t u r a l products or manufactured products should have as i t s goal the seeking of new markets. 5. The p r i c e of countertrade products i s to be subject to negotiation and should be the current world market pri c e . Foreign products should be of good q u a l i t y and competitive pr i c e . 6. Private sectors are to be allowed to f r e e l y engage i n countertrade. 89 The above guidelines also include the procedures that are to be complied with respecting the conclusion of agreements and terms of payment. Since the NCTT has set up i t s p o l i c y , there have been a number of countertrade proposals submitted for approval. For example, a Barter proposal involving a tower crane for t e x t i l e s and f i s h e r y products between Yugoslavia and the Port Authority of Thailand; a Counterpurchase Arrangement for medical equipment involving the purchase of Thai A g r i c u l t u r a l products, t e x t i l e s , minerals, rubber, and coffee, between the Ministry of Public Health and Hungary; a Compensation Arrangement offered by a Belgian company to set up an ammunition factory f o r 1,600 m i l l i o n baht (80 m i l l i o n Canadian d o l l a r s ) , the production of which would be bought by the Belgian company and exported to a t h i r d country; and a Counterpurchase Arrangement offered by the C a r g i l l Company to s e l l over a year 8,000 barrels a day of high speed d i e s e l o i l to the Petroleum Authority of Thailand ("PTT") with C a r g i l l 13 purchasing a g r i c u l t u r a l and mineral products. Presently, the Thai government's p o l i c y e x p l i c i t l y encourages countertrade as a t o o l to expand foreign markets. Most of the countertrade arrangements are i n the form of Barter or Counterpurchases of a g r i c u l t u r a l products and minerals. The annual expenditure by government i n the a c q u i s i t i o n of goods and services i s one of the most a t t r a c t i v e areas for foreign 90 suppliers to propose countertrade deals. As noted above Thai private firms are allowed to engage f r e e l y i n countertrade. However, at t h i s point there i s no service center for countertrade information. Recently, the Director General of the Business Economic Department, the Secretary of NCTT, expressed a need for a q u a l i f i e d person to examine and negotiate government countertrade arrangements. He suggested a permanent NCTT be established consisting of representatives from the Department of Public Prosecution and the J u r i d i c a l Council O f f i c e and representatives from concerned government agencies who would negotiate each deal 14 with foreign countries. I t i s i n t e r e s t i n g to note that i n June, 1987, the Export Development Committee ("EDC") was restructured. The Thai EDC consists of the Prime Minister or h i s Deputy as the Chairman of the Committee, the Minister of the Ministry of Commerce as Vice Chairman, the Ministers from the Ministry of Foreign A f f a i r s , Finance, Communications and Agriculture and Co-operatives. Other members of the Committee are the Permanent Secretary of the Ministry of Commerce, the Secretary General of the Board of Investment, the Secretary General of the O f f i c e of National Economic and S o c i a l Development Board, the Governor of the Bank of Thailand, the Director General of the Bureau of the Budget, 91 and the Director General of the Export Promotion Deparment who acts as the secretary to the Committee. The members also include representatives from the private sector including the Board of Thai Trade, the Thai I n d u s t r i a l Association, and the Thai Bank Association. The function of the EDC, among other things, i s to develop export development p o l i c y and encourage cooperation respecting export development p o l i c y between the public and private s e c t o r s . 1 5 Proposal of New Countertrade Policy i n Thailand A d e t a i l e d discussion of the countertrade p o l i c y of Thailand i s beyond the scope of t h i s t h e s i s . However, a few comments seem appropriate. Countertrade may be used as a t o o l to supplement the objectives of the Thai Sixth National Economic and Social Development Plan, which i s the main framework and p o l i c y for the development of the Thai economy. The Sixth Plan emphasizes increased e f f i c i e n c y and the a t t a i n i n g of higher q u a l i t y outputs i n order to ensure Thailand's international competitiveness. The Sixth Plan hopes to lessen the trade d e f i c i t and the current account d e f i c i t by increasing the income earned from exports, as well as using export growth to create jobs. Exports are to be encouraged by improving services, streamlining the government 92 bureaucracy to reduce investment costs, and by bui l d i n g up the 16 c a p a b i l i t y of exporters. Countertrade w i l l , undoubtedly, play an important r o l e i n achieving the objectives established i n the Sixth Plan. Concerning the Thai countertrade p o l i c y a number of comments can be made. F i r s t , the government should take into account the various forms of countertrade, p a r t i c u l a r l y the Compensation or Offset forms which can be u t i l i z e d to achieve economic development by inducing t r a n s f e r of technology, foreign investment or by penetrating new markets for manufactured products or high technology products. The Compensation Arrangement should be the major form of countertrade arrangement i n which the government should be engaged. Barter and Counterpurchase agreements should only be used i f the trade terms i n favour of the Thai government respecting p r i c e s and domestic supplies and the government must be assured that there w i l l be no disrupt of current export markets. Countertrade may be used by both government and private sectors to bargain with trading partners which have a 17 considerable trade surplus with Thailand. Second, i t i s the writer's opinion that the Thai government has too many committees and working groups responsible for inte r n a t i o n a l trade and finance. There i s the Export Development 93 Committee ("EDC"), the Government Procurement Board ("GPB"), the Foreign Trade Board ("FTB"), the National Countertrade Sub-Committee ("NCTT"), and the Committee i n charge of regulation of purchasing, contracting for work and engagement of consultant projects financed by External Loans ("CPC"). Duplication of roles r e f l e c t s an inconsistent p o l i c y . A l l relevant government and private sectors should j o i n t l y work out guidelines and a uniform p o l i c y on countertrade. The EDC seems to be the most appropriate organization to draw up the guidelines and study the impact of countertrade on the Thai economy. The NCTT should e x i s t as a sub-committee of the EDC. Other concerned committees, e s p e c i a l l y the Government Procurement Committees, the GPB and CPC, must work c l o s e l y with the NCTT i n order to ensure p o l i c y consistency. The l e g a l advisors from the Public Prosecutor and the O f f i c e of the J u r i d i c a l Council should also be included i n the NCTT i n order to a s s i s t i t i n negotiating terms and conditions with trading p a r t i e s . In addition, the NCTT should include representatives from the private sector. Third, private sector countertrade transaction should be encouraged and assisted by the government. The multinational trading firms owned and operated by Thai nationals could play an 18 important r o l e i n countertrade. These trading firms could act as importers, exporters or intermediaries f o r countertrade products. Since Thai private trading firms may lack countertrade expertise, j o i n t ventures between Thai trading firms and foreign 94 trading firms could be undertaken. Government or private trade associations such as the Board of Trade could form a study group or a committee to provide services and information to small and medium s i z e Thai importers and exporters respecting countertrade 19 opportunities with foreign firms. Fourth, the government should supervise and monitor private countertrade transactions to ensure that there are no i l l e g a l transactions such as those that overvalue goods fo r i l l i c i t t r a n s f e r or undervalue goods i n order to pay less duty. The NCTT should be n o t i f i e d about private sector countertrade arrangements, but approval procedures for private sector countertrade should be avoided. F i f t h , the government should provide c l e a r guidelines for countertrade transactions for both the public and private sectors, and prepare a model countertrade and framework agreement for major barter and counterpurchase arrangements which w i l l avoid time-consuming negotiating and d r a f t i n g . The l i s t of products for countertrade should be f l e x i b l e and i t should be revised and updated from time to time. F i n a l l y , a j o i n t working group composed of representatives from the private and government sectors with a mandate to study countertrade p o l i c y and i t s l e g a l implications i s needed. Regionally, Thailand should work with the other members of ASEAN 95 i n order to evaluate possible countertrade arrangements among ASEAN members and to learn from the previous experiences of the member countries, i n p a r t i c u l a r Indonesia. 3.4 Prospect of Countertrade Between Canada and Thailand Canada i s the most export dependent country i n the developed world with almost t h i r t y percent (30%) of i t s current production of goods and services exported with most destined for the United States. In 1985 trade with the United States accounted for seventy-eight percent (78%) of Canadian exports, while the Asia P a c i f i c region received only nine point two percent (9.2%). The major export products from Canada are fully-manufactured products, such as machinery, motor vehicles and electronics equipment. Processed or manufactured goods accounts forty-one point nine percent (41.9%) of foreign trade, while crude materials and f i s h products accounted for f i f t y - e i g h t point one 20 percent (58.1%) of the exports. Thailand's major exported products are commodity products such as r i c e , rubber, maize, tapioca products, sugar, fishery 21 . products, t i n , precious stones, integrated c i r c u i t s and t e x t i l e products. Between January-October, 1986, Thai exports to Canada were valued at 128.2 m i l l i o n Canadian d o l l a r s , and imported products from Canada were valued at 85.5 m i l l i o n . Previously, 22 Canada always had a trade surplus with Thailand. The products 96 exported to Canada are natural rubber, canned tuna, baby clams, 23 beans, and t e x t i l e products. Canada's d i r e c t investment i n Thailand increased from 48.6 m i l l i o n baht (2.43 m i l l i o n Canadian d o l l a r s ) , during 1971-1975, to 225.7 m i l l i o n baht (11.28 m i l l i o n Canadian dollars) i n 1981-1985. Canada's share for investment i n Thailand i s only 0.69% of t o t a l foreign investment, compared to thirty-two point twenty percent (32.20%) for U.S. investors, and twenty-seven point twenty-eight percent (27.28%) for Japanese i n v e s t o r s . 2 4 A recent paper prepared by Canadian and Thai o f f i c e r s suggested that with reference to the Sixth National Economic and So c i a l Development Plan, Canada should b u i l d long term economic linkages consistent with Thailand's Development Plan and Canada's c a p a b i l i t y and i n t e r e s t s . Such a strategy would include the establishment and maintenance of information on investment requirements, the establishment of i n s t i t u t i o n a l mechanisms and cooperative linkages i n both Thailand and Canada that support project development i n s p e c i f i c i n d u s t r i a l sectors, and the improving of the Canadian private sectors' c a p a b i l i t y with respect to the i d e n t i f i c a t i o n , preparation and implementation of v i a b l e projects i n Thailand. These strategies may a s s i s t Canada 25 to play an e f f e c t i v e r o l e i n Thailand's i n d u s t r i a l development. There are various trade and service sectors where Canadian exporters could expand t h e i r market shares i n Thailand, both i n 97 term of investment and t r a d i n g . These s e c t o r s would i n c l u d e f i n a n c e , petroleum and gas, mining, p u b l i c u t i l i t i e s s e r v i c e s , the a g r i c u l t u r a l and chemical i n d u s t r y , p h a r m a c e u t i c a l s , metal and machinery i n d u s t r i e s , e l e c t r o n i c s and t r a n s p o r t a t i o n e q u i p m e n t . 2 6 With the growth of c o u n t e r t r a d e p o l i c y i n T h a i l a n d , Canadian e x p o r t e r s cannot i g n o r e t h i s manner of t r a d i n g . The t r a d e of goods and s e r v i c e s from Canada should be proposed or pursued by Canadian e x p o r t e r s w i t h both the T h a i government and p r i v a t e s e c t o r s u t i l i z i n g Compensation and O f f s e t s arrangements. 3.5 C o n c l u s i o n Canada, as a developed country whose major exports are both manufactured and a g r i c u l t u r a l p r oducts, should encourage and support i t s p r i v a t e s e c t o r s t o study the p o s s i b l e markets i n T h a i l a n d , p a r t i c u l a r l y i n h i g h technology s e c t o r s such as a e r o n a u t i c s , communication equipment and w i t h i n the petroleum i n d u s t r y . However, s i n c e the c o s t and b e n e f i t of c o u n t e r t r a d e i s c o n t r o v e r s i a l , i t w i l l depend on p a r i t c u l a r needs of each country i n implementing the c o u n t e r t r a d e p o l i c y . T h a i l a n d , f o r example, may implement the c o u n t e r t r a d e p o l i c y i n o r d e r t o achieve i t s economic development. Canada, on the o t h e r hand, may implement i t s c o u n t e r t r a d e p o l i c y i n o r d e r t o expand the export market p a r t i c u l a r l y f o r c a p i t a l goods and n a t u r a l r e s o u r c e products. 98 B a s i c a l l y , the w r i t e r i s of the o p i n i o n t h a t d u r i n g the course of the economic development i n T h a i l a n d where the a c q u i s i t i o n o f c a p i t a l goods and f o r e i g n technology are r e q u i r e d , c o u n t e r t r a d e p o l i c y i n the form of Compensation and O f f s e t s s h o u l d be implemented. In the meantime, Canada r e q u i r e s t o expand t h e i r export market of c a p i t a l goods and technology. Both o b j e c t i v e s may be achieved by c o u n t e r t r a d e . Where c o u n t e r t r a d e t r a n s a c t i o n s are implemented, the problems o r p i t f a l l s t h a t may a r i s e should be c a r e f u l l y examined and immediate a c t i o n taken t o remedy such problems. For example, the f o l l o w i n g problems may a r i s e i n c o u n t e r t r a d e t r a n s a c t i o n s : 1. poor q u a l i t y c o u n t e r t r a d e p r o d u c t s . 2. missed d e l i v e r y schedules. 3. i n f l e x i b i l i t y o f c h o i c e of c o u n t e r t r a d e p r o d u c t s . 4. u n r e a l i s t i c p r i c e s a t t a c h e d t o imported p r o d u c t s , machinery, s e r v i c e s . 5. l a c k of a c l e a r p o l i c y from the government. 6. time wasted i n n e g o t i a t i n g and d r a f t i n g a c o u n t e r t r a d e agreement. 99 Footnotes - Chapter Three 1. External A f f a i r s , Canada, Promoting Canadian Exports: The Trading House Option (Canada: Department of Supply and Services, November, 1984) at 33. 2. Ibid, at 32. 3. Ibid. 4. External A f f a i r s , Canada, Countertrade Primer f o r Canadian Exprters (Canada: Department of Supply and Services, October, 1985) at 1. 5. Ibid, at 3. 6. Ibid, at 2. See also External A f f a i r s , Canada, supra, note 1 at 32. 7. External A f f a i r s , Canada, supra, note 4 at 3. 8. Ibid. 9. Ibid, at 6. 10. External A f f a i r s , Canada, Annual Report 1985/198 6 (Ottawa: Ministry of Supply and Services, 1986) at 17. 11. Siam Rath Weekly, A p r i l 12-18, 1987, No. 43, at 13-14. (Thai version). 12. Thai News Synopsis, A p r i l 11, 1987. 13. See Bangkok Post, May 18, 1987, June 10, 1987. 14. The Bangkok Post, May 18, 1987. 15. See d e t a i l s i n News Synopsis, July 1, 1987. 16. See de t a i l e d summary i n S. Unakul, Sixth Plan: Accent on Development, The Bangkok Post, September, 13, 1986 at 14, 18. 17. See generally i n i b i d , at 14. 18. See also D. Lamont, How Thailand Can Serve Trade Protectionism? Paper presented on Trade Protectionism: Are There Ways For Thailand's Economic Survival? (1986). 19. See generally i n Unakul, supra, note 16 at 14. 100 20. External A f f a i r s , Canada, Annual Report 1985/1986 (Ottawa: Ministry of Supply and Services, 1986) at 8. 21. Department of Economic Research, Bank of Thailand, Thailand: Economic Conditions i n 1986 and the Outlook for 1987, Special Supplement (Bangkok: Kurusapha, 1987) at 33. 22. The Bangkok Post, Thailand Gains i n Trade With Canada, January 7, 1987. 23. Ibid. 24. Business Development Department, The I n d u s t r i a l Finance Corporation of Thailand, (hereinafter c a l l e d "IFCT"), "Thai Canadian Investment" (Paper presented for "Thai Canadian Dialogue on Trade and Investment", Bangkok, Thailand, December 1, 1986) at 16. 25. See generally, G. Aboyani; B. Ninsanand; T. Narabhompipat, "Toward a Framework for Increased Thai-Canadian Economic Cooperation" (Paper at Thai Canadian Dialogue on Trade and Investment, Bangkok, Thailand, November 30-December 2, 1986) at 8-13. 26. See generally i n IFCT, supra. note 24 at 13-15. 101 PART II LEGAL IMPLICATIONS OF COUNTERTRADE UNDER GATT AND NATIONAL LAWS Chapter Four Legal Implications Under General Agreement on T a r i f f s and Trade 4.1 Introduction Despite of the growth of countertrade i n world trade, l i t t l e attention has been paid to the l e g a l implications of i t under the General Agreement on T a r i f f s and Trade (GATT), the most important int e r n a t i o n a l agreement regulating trade among nations. There are a few scholars writing on the subject. Most of these a r t i c l e s deal with the question of whether or not a mandatory-countertrade requirement imposed by a government w i l l v i o l a t e GATT. There i s no extensive research or study by GATT of t h i s subject, except for a paper prepared by the GATT Secretariat as a background note which cannot be taken as an o f f i c i a l i n t e r p r e t a t i o n of GATT. In t h i s t h esis, I s h a l l attempt to deal with some of the general l e g a l implications of countertrade under the major provisions of GATT as well as the GATT non - t a r i f f b a r r i e r codes. In order to do t h i s , I s h a l l address the following questions: 1. How GATT's provisions apply to the private or government sectors involved i n countertrade transactions. 102 2. Whether t r a d e i n s e r v i c e s as p a r t o f c o u n t e r t r a d e t r a n s a c t i o n s i s s u b j e c t t o the GATT p r o v i s i o n s . 3. Whether a mandatory c o u n t e r t r a d e requirement imposed by the government of a GATT c o n t r a c t i n g p a r t y v i o l a t e s the o b j e c t i v e s o f the GATT. 4. Whether advantages or b e n e f i t s t y p i c a l l y a s o c i a t e d w i t h c o u n t e r t r a d e requirements and p r o v i d e d by a GATT c o n t r a c t i n g p a r t y v i o l a t e o r are i n c o n s i s t e n t w i t h any major p r o v i s i o n s of the GATT or the n o n - t a r i f f b a r r i e r codes. I f so, what remedies are a v a i l a b l e . 5. What, i f any, are the exce p t i o n s t o GATT r u l e s which a l l o w a GATT c o n t r a c t i n g p a r t y t o i n t r o d u c e o r impose c o u n t e r t r a d e t r a n s a c t i o n s without v i o l a t i n g GATT p r o v i s i o n s ? 6. Whether e x i s t i n g GATT r u l e s , as w e l l as the n o n - t a r i i f b a r r i e r codes, govern a l l the l e g a l i m p l i c a t i o n s a r i s i n g from c o u n t e r t r a d e p r a c t i c e . To accomplish t h i s g o a l , the w r i t e r w i l l summarize the major GATT p r o v i s i o n s which r e l a t e t o c o u n t e r t r a d e p r a c t i c e , and subsequently examine the e f f e c t o f the major p r o v i s i o n s on c o u n t e r t r a d e t r a n s a c t i o n s . However, due t o l a c k o f precedents or 103 r u l i n g s by GATT Panels, the discussion i n t h i s thesis i s more "abstract" than "concrete", although i n some circumstances hypothetical cases w i l l be used for the purpose of discussion. In t h i s chapter the discussion of l e g a l implications under GATT w i l l be divided into four parts. The f i r s t part w i l l provide an overview of GATT's objective and i t s p r i n c i p a l obligations and a discussion of some s p e c i f i c problems that may r i s e i n the application of GATT to countertrade transactions. The second part w i l l examine the l e g a l implications of the major p r i n c i p l e s of GATT. In addition miscellaneous provisions under GATT and i t s m u l t i l a t e r a l agreement w i l l be b r i e f l y reviewed. The t h i r d part w i l l discuss the exception p r i n c i p l e s where countertrade transactions may be implemented without incompatible to GATT. F i n a l l y , the concluding part w i l l t r y to f i n d the solutio n to some unresolved problems. 4.2 Overview of GATT and Its Applications This part w i l l be sub-divided into s i x topics i n order to address some s p e c i f i c l e g a l issues under GATT that may ar i s e when GATT i s c a l l e d into application. To begin with the writer w i l l provide the general GATT objective and i t s p r i n c i p a l obligations and subsequently examine s p e c i f i c l e g a l problems with respect to app l i c a t i o n of GATT and i t s Codes. 104 4.2.1 GATT Objectives and P r i n c i p a l Obligations The General Agreement on T a r i f f s and Trade (GATT) i s the most important international agreement regulating trade among nations. GATT's basic objective i s to l i b e r a l i z e world trade and place i t on a secure basis, thereby contributing to economic growth and development and the welfare of the world's people. 1 The p r i n c i p a l obligations which GATT imposes upon each contracting party are: (1) to accord most favoured nation (MFN) treatment to other pa r t i e s with respect to most aspects of trade regulation; (2) to observe the maximum l e v e l of t a r i f f s set out i n GATT's schedule of concessions; (3) to l i m i t or abstain from the use of a number of n o n - t a r i f f b a r r i e r s ; (4) to make use of s p e c i a l procedures for resolving disputes; and (5) to trade on a m u l t i l a t e r a l rather 2 than a b i l a t e r a l basis. 4.2.2 Application of the GATT Rules to the Private Sector  Involved i n Countertrade Transactions B a s i c a l l y , the GATT rules apply only to actions or measures taken by contracting p a r t i e s . I t only obligates governments and only through the intermediary of the government does i t apply to 3 . . . c i t i z e n s . I f a countertrade transaction i s imposed upon or introduced by the private sector, or i f the transactions are v o l u n t a r i l y entered into by the private sector, such transactions 4 w i l l not f a l l under the GATT rules. I t may be noted that as a 105 proposition of international law t h i s opinion may not be correct. Technically a state i s responsible for a l l actions taken by ind i v i d u a l s or companies registered within i t s borders. A private party who i s injured by an action of a government where that action i s inconsistent with the GATT rules, may only seek r e l i e f under the GATT by making a p e t i t i o n to i t s own national government requesting i t to pursue the matter i n 5 accordance with the GATT framework. Countertrade practice among private sectors/actors where there i s assistance from t h e i r government (e.g. i n the form of c r e d i t f a c i l i t i e s or advantages or benefits with respect to tax or quota), may v i o l a t e or be incompatible with GATT obligations and w i l l allow the other contracting p a r t i e s to seek a r e l i e f under GATT rules. In summary, GATT rules do not d i r e c t l y apply to the countertrade transaction between private sectors unless the governments are involved or opt to intervene to protect t h e i r own i n t e r e s t . 4.2.3 Application of the GATT Rules to Government Sector  Involvement i n Countertrade Transactions There are a number of importing countries which e x p l i c i t l y or i m p l i c i t l y impose mandatory countertrade requirements against exporting countries. So far, only Romania and Indonesia have 106 l e g i s l a t i o n that imposes countertrade requirements for almost a l l imports, including items that f a l l into the categories of p r i o r i t y imports and for government projects. In some circumstances the government may o f f e r advantages or benefits to a private sector or state trading enterprise which engages i n countertrade transactions and t h i s may constitute a v i o l a t i o n of GATT rules. The majority of l e g a l opinion holds that mandatory countertrade requirement imposed by a government i s inconsistent with the GATT objectives, as well as various major p r i n c i p l e s of the GATT. 4.2.4 Trade i n Services Which Relate to Countertrade and the  GATT Rules Some countertrade transactions involve trade i n services such as the construction of a plant and the tran s f e r technology i n compensation or o f f s e t arrangments. Currently, these service requirements are not subject to GATT provisions since the GATT 7 has no app l i c a t i o n to trade i n services. However, there are a number of agreements developed during the Tokyo Round of M u l t i -l a t e r a l Trade Negotiations (MTN) dealing with n o n - t a r i f f and other aspects of services which present some scope for expansion. Those agreements are: The Agreement on Government Procurement, which includes i n i t s scope services i n c i d e n t a l to the supply of products i f the value of these i n c i d e n t a l services do not exceed that of the product themselves, but not the 107 services per se; The Subsidies Code, which contains an outright p r o h i b i t i o n on export subsidies and incorporates an i l l u s t r a t i v e l i s t containing a number of practices that could r e l a t e to service e x p o r t ; 1 0 The Agreement on Technical B a r r i e r to Trade; The Agreement on Import Licensing Procedures; The Customs Valuation Code; and The Agreement on Trade i n C i v i l A i r c r a f t . 1 1 4.2.5 Government-Mandated Countertrade Requirement and the  GATT Objectives A government mandated countertrade requirement includes s p e c i f i c laws, regulations and p o l i c i e s on countertrade transactions which aim to: (1) r e s t r i c t the products e l i g i b l e for counter exports, (2) l i m i t the market i n which countertrade export products may be resold, (3) r e s t r a i n imports of products not countertraded, and (4) specify the acceptable form of 12 countertrade. Walsh has said that government mandated counter-trade tends to d i s t o r t world trade and create tensions between those p a r t i e s p a r t i c i p a t i n g i n a mandated countertrade 13 arrangement and those not p a r t i c i p a t i n g i n such an arrangement. As stated above, the major GATT p r i n c i p l e s and objective are: to l i b e r a l i z e world trade with the aim of eliminating discriminatory national p o l i c i e s , to encourage m u l t i l a t e r a l arrangements, to encourage t a r i f f concessions, to l i m i t non-t a r i f f b a r r i e r s , and to make use of sp e c i a l procedures to resolve 108 disputes. The preamble to the GATT states that the various economic objectives (including the expansion of production and exchange of goods) are to be achieved by the contracting parties entering into r e c i p r o c a l and mutually advantageous arrangements 15 consistent with the GATT objective and p r i n c i p l e s . Roessler c l a s s i f i e d the major l e g a l p r i n c i p l e s under GATT as non-16 discrimination, open markets ( i . e . free trade) and f a i r trade. As government mandated countertrade requirements may encourage the trading parties to enter into b i l a t e r a l arrangements and t h i s tends to l i m i t the trade flow and to d i s t o r t world trade, i t may be concluded that even though such government mandated countertrade i s not necessarily i n v i o l a t i o n of the l e t t e r of GATT, i t may be inconsistent with the GATT 17 objectives. One may argue that the government mandated countertrade requirement i s i n fact aimed at expanding the production of goods and that countertrade practices are not what the drafters of GATT anticipated at the time of dr a f t i n g . However, the GATT 18 Secretariat working paper has concluded that: "... Countertrade ... i s not contrary to GATT or to any of the codes supplementary to i t . However, depending on the circumstances of the p a r t i c u l a r case, governmental measures that require, stimulate or take the form of countertrade, or that to react countertrade, can be inconsistent with obligations under General Agreement or the codes...". 109 I t i s the writer's opinion that the c r i t e r i a to consider i n deciding whether a countertrade transaction v i o l a t e s GATT's objectives i s found i n the provisions of the GATT read i n conjunction with the preamble rather than from the preamble alone. As Professor Jackson has commented, the objectives of GATT are some times inconsistent with each other and there i s no 19 established hierarchy of objectives. He also suggests that c e r t a i n clauses of GATT do not r e f l e c t the currently accepted pr a c t i c e and therefore, the inter p r e t a t i o n and application of 20 GATT obligations must be approached with considerable caution. Thus, an examination of the major GATT p r i n c i p l e s by using the GATT rules and in t e r p r e t a t i v e notes, preparatory work, practice and precedent, other i n t e r p r e t a t i v e p r i n c i p l e s and p o l i c y w i l l be 21 required p r i o r to concluding whether a government mandated countertrade v i o l a t e s the GATT. 4.2.6 The Application of the Codes Resulting From M u l t i - l a t e r a l Trade Negotiations to Non Signatory Members  of GATT In examining the l e g a l implications of countertrade under the GATT, i t i s necessary to discuss the m u l t i l a t e r a l codes on non-t a r i f f b a r r i e r s which operates within the GATT framework. These codes arose from the need for GATT to reach beyond t a r i f f regulations i n order to continue to encourage trade l i b e r a l i z a t i o n . The codes thay may be relevant to countertrade 110 t r a n s a c t i o n s a r e : (1) the S u b s i d i e s and C o u n t e r v a i l i n g D u t i e s Code; (2) the Custom V a l u a t i o n Codes; (3) the Code on Government Procurement; (4) the Agreement on T e c h n i c a l B a r r i e r s t o Trade; (5) the Agreement on Import L i c e n s i n g Procedures; and (6) the Agreement on Trade i n C i v i l A i r c r a f t . Whether these codes apply t o a GATT c o n t r a c t i n g p a r t y t h a t i s a no n - s i g n a t o r y t o the codes 22 i s c o n t r o v e r s i a l . The r e a l i s s u e o f whether a l l the codes ( r e s u l t i n g from the MTN i n Tokyo) and t h e i r o b l i g a t i o n s should be extended on an u n c o n d i t i o n a l MFN b a s i s t o a l l e x i s t i n g GATT members i s not w i t h i n the scope of t h i s t h e s i s . The w r i t e r , however, w i l l p r e s e n t the d i f f e r i n g views on the i s s u e s i n c e i t p r o v i d e s some i n s i g h t i n t o the o p e r a t i o n o f the GATT and how the GATT system may d e a l w i t h a d i f f i c u l t , new problem. P r o f e s s o r Jackson comments on the a p p l i c a t i o n o f the codes i n h i s 1969 t e x t t h a t : "... s p e c i f i c a p p l i c a b i l i t y o f any one of them t o any GATT p a r t y c o u l d depend on acceptance, o r l a c k of o b j e c t i o n , by t h a t p a r t y . Some r u l e s might be so s i g n i f i c a n t t h a t acceptance would remain a c o n d i t i o n e n t r y i n t o GATT. O f f e r s might have l e s s e r importance and acceptance would be s u b j e c t t o s p e c i f i c n e g o t i a t i o n s , w i t h mention i n a p a r t y ' s Schedule of those r u i f s (kY number) t h a t were accepted or r e j e c t e d . " He f u r t h e r suggests t h a t the caveat as t o the code's ( A n t i Dumping Code, 1967) a p p l i c a b i l i t y i n any case i n v o l v i n g GATT 24 p a r t i e s who are not members of the codes must be remembered. In the t e x t , he does not g i v e any d e f i n i t e answer t o the q u e s t i o n o f I l l the code's a p p l i c a b i l i t y to non-signatories. There i s opinion which supports the veiw that the codes should bind only a country which signs the codes because the codes e s t a b l i s h the p r i n c i p l e of a "conditional MFN" where the codes' benefits are available only to codes' signatories and the codes are not an i n t e g r a l part of GATT, nor do they amend the 25 GATT. Samet has noted that the following s i x codes contain "conditional MFN" elements: Customs Valuation, Government Procurement, Import Licensing, Technical Barriers, Subsidies, and 2 6 Countervailing Measures and Anti-dumping. Hufbauer & Schoff suggest that the strongest argument against the "conditional MFN" approach i s that such an approach might lead to the fragmentation of the world trading system and to the r e g i o n a l i z a t i o n of 27 p o l i t i c a l a l l i a n c e s . However, one may argue that i t i s questionable whether the codes represent a "conditional MFN". There i s a decision of contracting p a r t i e s of GATT i n November, 1979, which states that the " e x i s t i n g r i g h t s " and benefits of GATT members, under A r t i c l e I of the GATT, which had not become part i e s to the n o n - t a r i f f b a r r i e r agreement (the code) were not affected by those 2 8 agreements. Based on the GATT parties decision i n 1979, Professor Jackson i n h i s 1983 a r t i c l e , and McGovern, concurred 29 that the codes' benefits must be extended to non-signatories. 112 I t should be noted that there was a case f i l e d by the Indian Government against the U.S. government on October 29, 1980 claiming the U.S. government's application of the denial of injury c r i t e r i o n to non-signatories of the Subsidies Code was a contravention of A r t i c l e I of GATT. The dispute panel was terminated, however, when both countries reached an agreement. This issue arose again i n 1982 and was referred to the Subsidies 30 Committee. This writer agrees with the opinion of Professor Jackson and McGovern that the MTN Codes should apply t h e i r benefits or the most favourable terms to non-signatory members because the unconditional MFN should p r e v a i l since the provisions of the Codes are operating under the GATT framework. I t should also be noted that the objective of the Codes, such as the Subsidy Code, the Anti-dumping Code, the Custom Valuation Code, are to inter p r e t the provisions of the GATT i n order to provide greater uniformity and certainty i n the implementation of the GATT. In addition, the non-reciprocity r u l e i s one of the major objectives 31 of GATT that grant benefits to developing countries. 113 4.3 Legal Implications of Countertrade Under the Major P r i n c i p l e s  of GATT 4.3.1 Introduction In t h i s part, the writer w i l l discuss the general rules of the GATT, namely the Most-Favoured Nation ("MFN") p r i n c i p l e , the National Treatment Obligation, and the Non-Tariff Barrier P r i n c i p l e s , as well as the l e g a l implications of the countertrade transaction under these rules. 4.3.2 Most-Favoured Nation (MFN) P r i n c i p l e A. Overview The MFN or the non-discrimination p r i n c i p l e between contracting p a r t i e s i s to be found i n several provisions i n the GATT and the Codes concluded during the MTN Round. The most important MFN p r i n c i p l e i s provided i n A r t i c l e I of GATT. This A r t i c l e obliges a member country to extend the "unconditional MFN p r i n c i p l e " i n t a r i f f and other trading p o l i c y areas to a l l contracting p a r t i e s . Under the p r i n c i p l e , i f more favourable treatment i s granted to any one country, i t must also be extended 32 . at once to a l l members of the GATT. This MFN p r i n c i p l e covers 33 four areas of a c t i v i t y : (1) Custom duties and charges of any kind imposed on or i n connection with the importation or 114 exportation of goods or imposed on an international transfer of payment for imports or exports; (2) the method of levying such duties and charges; (3) a l l rules on the f o r m a l i t i e s i n connection with the importation and exportation of goods; and (4) i n t e r n a l taxes and regulations. The MFN p r i n c i p l e should apply to measures taken against unf a i r trade practices (such as countervailing or anti-dumping duties) i f such u n f a i r trade practices are c a r r i e d out by other countries and they met the 34 requirement provided for i n these provisions. There are, 3 5 however, exceptions to the MFN p r i n c i p l e : (1) the H i s t o r i c a l Preference Exceptions (Arts. 1:2, 3); (2) the Customs Unions or Free Trade Areas (Art. XXIV); (3) the Balance of Payment Exception (Art. XIV); (4) the General Waiver Granting GSP to developing countries; (5) the Individual Countries Waiver to enable them to give p r e f e r e n t i a l t a r i f f treatment to p a r t i c u a l r countries; (6) Special arrangements (MFA); and (7) Certain provision i n the Codes such as i n the Subsidies and Countervailing Code which contain elements of conditional MFN treatment. B. Legal Implications With respect to countertrade transactions, there are two questions to be considered under the MFN p r i n c i p l e . F i r s t l y , whether government mandated countertrade i s inconsistent with t h i s p r i n c i p l e . Secondly, whether the benefits or advantages 115 associated with countertrade respecting custom duties and various relaxation of import and export l i c e n s i n g procedures granted by the government contracting party i s inconsistent with the MFN p r i n c i p l e . As to government mandated countertrade, Romania and Indonesia are, so f a r , the only two GATT members that have e x p l i c i t l e g i s l a t i o n f o r the mandatory countertrade requirement, but contracting p a r t i e s have not yet made any complaint to the GATT respecting t h i s l e g i s l a t i o n being a v i o l a t i o n of the MFN. I f any GATT member were to make a complaint, Romania and Indonesia might argue the developing country exception, the balance of payment 3 6 exception, or the government procurement exception i n order to sustain t h e i r l e g i s l a t e d government mandated countertrade practices. One may argue that a mandated countertrade requirement should be considered as "rules and for m a l i t i e s i n the importation and exportation" under A r t i c l e I of GATT. Therefore, i t w i l l apply to a l l foreign exporting countries on a non-discriminatory basis, with the r e s u l t that such government mandated countertrade 37 requirements would not v i o l a t e the MFN p r i n c i p l e . This arguement, however, may be challenged on the ground that the government mandated countertrade condition on the import of foreign products constitutes a b i l a t e r a l arrangement and i s inconsistent with the GATT objective as i m p l i c i t l y provided i n 116 A r t i c l e I of p r e s e r v i n g the m u l t i l a t e r a l c h a r a c t e r o f the GATT 3 8 system. I t i s the w r i t e r ' s o p i n i o n t h a t A r t i c l e I does not e x p l i c i t l y p r o h i b i t the i m p o s i t i o n of a government mandated c o u n t e r t r a d e requirement which i s imposed on a n o n - d i s c r i m i n a t o r y b a s i s . C o n s i s t e n t w i t h the GATT preamble the c o u n t e r t r a d e requirement may be used as a t o o l t o expand the market of both c o n t r a c t i n g p a r t i e s and t o open up markets f o r s u r p l u s 39 . . pro d u c t s . In a d d i t i o n , v o l u n t a r y consensual agreements i n the form o f f r e e t r a d e d e a l s share s i m i l a r c h a r a c t e r i s t i c s of " r e c i p r o c i t y " under c o u n t e r t r a d e . Thus, t h e r e i s no reason t o say t h a t a government mandated c o u n t e r t r a d e requirement implemented on a n o n - d i s c r i m i n a t o r y b a s i s i s i n c o n s i s t e n t with the MFN p r i n c i p l e . With r e s p e c t t o advantages or b e n e f i t s granted by the imp o r t i n g country t o f o r e i g n s u p p l i e r s i n a c o u n t e r t r a d e t r a n s a c t i o n , the g r a n t i n g o f such b e n e f i t s o r advantages a s s o c i a t e d w i t h c o u n t e r t r a d e may v i o l a t e the MFN p r i n c i p l e . These advantages or b e n e f i t s may be granted i n v a r i o u s forms such as custom d u t i e s , l i c e n s i n g requirements, quota r e l a x a t i o n , and f o r e i g n exchange a l l o c a t i o n s o n l y t o the c o u n t e r t r a d e import. A r g e n t i n a , B r a z i l , I n d i a , and Korea g i v e s p e c i a l s t a t u s t o c o u n t e r t r a d e r s r e s p e c t i n g import l i c e n s e a p p l i c a t i o n s thus having t h e i r a p p r o v a l a c c e l e r a t e d . B r a z i l g i v e s a s p e c i a l s t a t u s t o c o u n t e r t r a d e p r o d u c t s by l i f i t i n g import quotas and embargoes t h a t may e x i s t on such products. A r g e n t i n a w i l l a l l o c a t e f o r e i g n 117 exchange f o r countertrade imports. There i s a GATT decision i n a case where Hungary granted t a r i f f reduction to Poland, Romania, and Czechoslovakia because those countries had entered into co-operation contracts. In the case, the GATT Secretariat ruled that the t a r i f f reduction granted by Hungary appeared to imply conditional MFN treatment and, therefore, was compatible with the 41 GATT. I t can be concluded that benefits or advantages granted to s p e c i f i c contracting parties engage i n countertrade transactions i s inconsistent with the MFN p r i n c i p l e because such benefits apply "c o n d i t i o n a l l y " only to the s p e c i f i c contracting 42 p a r t i e s . However, i f one of the exceptions to be discussed l a t e r i n t h i s thesis i s met, then i t may be permissible to provide such benefits or advantages to s p e c i f i c parties without v i o l a t i o n of the MFN p r i n c i p l e . In summary, a government mandated countertrade requirement i s consistent with the MFN p r i n c i p l e provided that such a requirement does not discriminate against other contracting p a r t i e s . However, with c e r t a i n exceptions, the benefits or advantages granted to a country which engages i n countertrade i n the form of t a r i f f reduction, l i c e n s i n g requirement or transfer of fund w i l l be i n v i o l a t i o n of the MFN p r i n c i p l e . 118 4.3.3 National Treatment Obligation A. Introduction The national treatment obli g a t i o n under GATT means that imported goods are to be accorded the same treatment as goods of l o c a l o r i g i n with respect to domestic matters such as taxation and regulation. This o b l i g a t i o n i s d i f f e r e n t from the MFN p r i n c i p l e i n the sense that the MFN p r i n c i p l e only requires a government to t r e a t a l l foreign goods equally, although domestic 43 products might be favoured. The major p r i n c i p l e of national treatment o b l i g a t i o n i s provided i n A r t i c l e III of the GATT. A r t i c l e 111:1:5 pro h i b i t s the GATT contracting p a r t i e s from using i n t e r n a l taxes or other forms of regulation (not t a r i f f or other border measures) to discriminate against imported goods. This p r i n c i p l e i s also found i n other A r t i c l e s such as A r t i c l e IV i n r e l a t i o n to cinema films and A r t i c l e XVI regarding subsidies. Most of A r t i c l e III i s an elaboration of the national treatment obligation, with three paragraphs dealing s p e c i f i c a l l y with mixing regulations ( A r t i c l e 111:5-7), one on pr i c e control ( A r t i c l e 111:9), and a f i n a l paragraph leaving cinematograph films to be governed by A r t i c l e IV ( A r t i c l e 111:10). There are e x p l i c i t exceptions to t h i s o b l i g a t i o n for production subsidies ( A r t i c l e III:8(b)), government purchases ( A r t i c l e 111(a)), and ce r t a i n mixing requirements enforced on s p e c i f i e d dates i n 1934, 119 and 1948 ( A r t i c l e 111:6). B. Legal Implications There are two questions to be examined with respect to countertrade transactions and the national treatment obligation: (1) Whether the countertrade requirement, p a r t i c u l a r l y o f f s e t arrangements which require an exporting country to buy domestic products or ensure domestic content i n preference to the export products, v i o l a t e s the national treatment p r i n c i p l e ; and (2) Whether the c r e d i t f a c i l i t i e s provided to an importer to buy domestic products i n order to comply with a countertrade agreement v i o l a t e s the national treatment obli g a t i o n . In examining the domestic purchasing requirement, the following GATT panel decisions are relevant. In one case the European Economic Community required domestic importers and producers of animal feeds i n member states to purchase s p e c i f i e d quantities of dry milk f o r use i n such feeds. The GATT panel ruled that t h i s requirement was i n v i o l a t i o n of 45 A r t i c l e 111:4 since i t was an int e r n a l quantitative regulation. Another case was where the Canadian Government required United States' investors to sign an undertaking under the Foreign 120 Investment Review Act (FIRA) to purchase goods of Canadian o r i g i n i n preference to imported goods i n s p e c i f i c amounts and proportions, or to purchase goods from Canadian sources (hereinafter referred to as the FIRA case). In t h i s case the GATT Panel held that "the imported products are c l e a r l y treated less favourable than domestic products and.such requirements are therefore not consistent with A r t i c l e I I I : 4 " . The Panel further ruled that the said purchase undertaking was not i n v i o l a t i o n of A r t i c l e 111:5 where the issue dealt with i s the existence of i n t e r n a l quantitative regulations r e l a t i n g to the mixture, processing or use of product (irrespective of whether these are purchased or obtained by other means). The undertaking was not 46 categorized as an i n t e r n a l quantitative regulation. Looking at the GATT decision i n the FIRA case i t can be concluded that, with c e r t a i n exceptions, a countertrade requirement which requires exporting countries to buy or use domestic products i n preference to exported products v i o l a t e s the national treatment o b l i g a t i o n of A r t i c l e III:4 since such a requirement treats the products of the exporting country i n a d i f f e r e n t manner from the l i k e products of the importing country. In addition, i f the importing country establishes a countertrade requirement that producers use, mix or process domestic products i n a s p e c i f i e d amount or proportion, t h i s w i l l be i n v i o l a t i o n of the national treatment p r i n c i p l e under A r t i c l e III:5 since i t 47 w i l l constitute a quantitative regulation. 121 With respect to the second s i t u a t i o n where some importing countries stimulate countertrade transactions by granting special c r e d i t f a c i l i t i e s to the private sector to purchase domestic products i n order to f u l f i l l the countertrade obligation, such a prac t i c e also v i o l a t e s the national treatment obli g a t i o n under 48 . . . A r t i c l e 111:4. However, i f such a practice involves government procurement, i t may be permissible under the exception as provided i n A r t i c l e 111:8. 4.3.4 Non-Tariff B a r r i e r P r i n c i p l e s 4.3.4.1 Introduction The n o n - t a r i f f b a r r i e r p r i n c i p l e s i n the GATT are found i n the provisions on quantitative r e s t r i c t i o n s ( A r t i c l e XI-XIV), Subsidies and Countervailing Duties ( A r t i c l e XVI), Anti-Dumping Duties ( A r t i c l e VI), State Trading ( A r t i c l e XVII), and within the Government Procurement Code. The m u l t i l a t e r a l codes concluded during the Tokyo Round are also extremely important. The app l i c a t i o n of the Codes i s one of the most controversial issues within the GATT framework. The writer i s of the opinion that some of the Codes are to be considered as inte r p r e t a t i v e instruments of the GATT A r t i c l e s , and that under the unconditional MFN p r i n c i p l e the benefits and advantages derived from the ap p l i c a t i o n of the Codes should be applied to non-signatory members. 122 4.3.4.2 Quantitative R e s t r i c t i o n Obligation A. Introduction The following four A r t i c l e s of GATT contain the central obligations regarding quantitative r e s t r i c t i o n s : (1) A r t i c l e XI: prohibits the use of quotas, (with c e r t a i n exceptions); (2) A r t i c l e XII: an exception to A r t i c l e XI for balance of payment reasons; (3) A r t i c l e XIII: i n case exceptions are u t i l i z e d and quota applied, they must be applied "non-discriminatorily"; and (4) A r t i c l e XIV: exceptions to A r t i c l e XIII i n certa i n balance of payment cases. A r t i c l e XI contains s p e c i f i c exceptions to the quantitative r e s t r i c t i o n o b l i g a t i o n : (1) export r e s t r i c t i o n s that r e l i e v e food shortages ( A r t i c l e XI:2(a)); (2) r e s t r i c t i o n s necessary for the app l i c a t i o n of standards for grading or c l a s s i f i c a t i o n ( A r t i c l e XI:2(b)); and (3) import r e s t r i c t i o n s on any a g r i c u l t u r a l or . . . 49 fis h e r y products under ce r t a i n s p e c i f i c circumstances. 123 B. Legal Implications The following questions w i l l be examined i n t h i s part: (1) Whether a government mandated countertrade requirement v i o l a t e s A r t i c l e XI. (2) Whether the countertrade r e s t r i c t i o n s established through a quota or import l i c e n s i n g framework i s consistent with A r t i c l e XI. (3) Whether, under circumstances where the countertrade requirement i s allowed to be imposed, i t must be applied on a non-discriminatory basis. There are c o n f l i c t i n g views on whether the government mandated countertrade requirement v i o l a t e s A r t i c l e XI. One view i s that the government mandated countertrade requirement i s one form of trade r e s t r i c t i o n and i s included as an "other measure" apart from quota r e s t r i c t i o n s i n A r t i c l e XI and therefore i s 50 prohibited. The other view i s that the government mandated countertrade requirement i s not a trade r e s t r i c t i o n but i s a tool to expand the importing market. A government mandated countertrade r e s t r i c t i o n that has no consequence on the importing or exporting of goods w i l l not come under the purview of A r t i c l e 124 XI. However, i f a government mandated countertrade transaction has an e f f e c t on the import or export of goods through the use of a quota or import license then the transaction may v i o l a t e A r t i c l e XI:I. I t i s i n t e r e s t i n g to note that i n the FIRA case, the United States claimed that Canada was i n v i o l a t i o n of A r t i c l e XI because purchase undertaking which required U.S. investors to buy domestic products i n preference to export products also operated as a r e s t r i c t i o n on the importation of products into Canada. But the GATT Panel took the view that such a purchase undertaking did not prevent the importation of goods and therefore was not 52 inconsistent with A r t i c l e XI. With respect to the question of whether countertrade r e s t r i c t i o n s established through a quota or import l i c e n s i n g framework i s inconsistent with A r t i c l e XI, the concern i s that some contracting p a r t i e s may es t a b l i s h the requirement that: (l) the import license for c e r t a i n products w i l l only be issued i f i t i s exchanged for an export sale of a c e r t a i n value from the 53 importing countries; (2) import quotas and embargoes are l i f t e d 54 for countertrade imports; or (3) the contracting parties adopt the p o l i c y of withholding or slowing down the approval of import 55 licenses f o r the products from the exporting countries. A l l le g a l scholars who have written about the GATT and countertrade and the GATT Secretariat Paper share the view that such 125 countertrade practices constitute a trade r e s t r i c t i o n and, 56 therefore, v i o l a t e A r t i c l e XI:1. The writer agrees with the above opinion but takes the view that mandatory countertrade alone w i l l not v i o l a t e A r t i c l e XI unless there i s a form of trade r e s t r i c t i o n established as part of the countertrade prac t i c e . I f a contracting party i s permitted to e s t a b l i s h a quota, import license or other trade r e s t r i c t i v e measure i n a countertrade transaction by r e l y i n g on one of the exceptions provided i n the GATT, namely the balance of payments or developing countries exception, the exception should apply to a l l contracting p a r t i e s on a non-discriminatory basis as provided for i n A r t i c l e XIII. For example, importing countries cannot choose to apply quota or import or export license rules i n countertrade practices with only some exporting countries. Generally, under A r t i c l e XIII, importing countries may impose countertrade requirements as r e s t r i c t i o n s on the importation of products provided that such r e s t r i c t i o n s are non-, . 5 7 discriminatory. This comment may be supported by analogy with the GATT Panel's 1979 decision i n the France v. Honcr Koncf case. In t h i s case, the GATT Panel ruled that non-quota r e s t r i c t i o n s withholding or slowing down the approval of imports only of Hong Kong products v i o l a t e d A r t i c l e XI and A r t i c l e X I I I . 5 8 I t must be noted that i f the r e s t r i c t i o n s w i l l u n f a i r l y 126 r e d i s t r i b u t e trade among contracting parties because some of the contracting p a r t i e s are better equipped to deal with countertrade, then the r e s t r i c t i o n may be discriminatory unless the importing country takes some measures to o f f s e t the 59 r e d i s t r i b u t i v e e f f e c t of the countertrade requirement. Under A r t i c l e XIV, the importing country i s allowed to impose a quota or import license through countertrade requirements on a discriminatory basis on the grounds of balance of payment exception or developing country exception. However, such countertrade requirements must have an "equivalent e f f e c t " to c e r t a i n payment r e s t r i c t i o n s which are permitted under the A r t i c l e of Agreement of the International Monetary Fund ("IMF Agreement"). This r i g h t of an importing country to apply countertrade r e s t r i c t i o n s on a discriminatory basis w i l l depend on the r i g h t to introduce b i l a t e r a l payment arrangements under the IMF Agreement. IMF set out i t s p o l i c y with respect to b i l a t e r a l arrangements and the use of the countertrade arrangements t h u s : 6 0 "The Fund's p o l i c y of not approving the maintenance of b i l a t e r a l payments agreements and of encouraging t h e i r termination i n the context of A r t i c l e IV consultations has contributed to a decline i n the use of b i l a t e r a l payments arrangements. The approach set out i n Executive Board Decision No. 955 (59/45), adopted on October 23, 1959, remains appropriate; that i s , that (a) there i s no j u s t i f i c a i t o n on balance of payments grounds for discrimination by members whose current receipts are l a r g e l y i n externally convertible currencies, (b) where such discriminatory r e s t r i c t i o n s have long been maintained, a reasonable amount of time may be needed to 127 eliminate them, but t h i s time should be short, (c) i n the case of payments r e l a t i o n s with countries having c e n t r a l l y planned economies i n which l i m i t a t i o n s ex i s t on c o n v e r t i b i l i t y , the Fund would be prepared to consider whether balance of payments considerations would j u s t i f y the maintenance of some degree of discrimination. The number of members continuing to maintain b i l a t e r a l payments arrangements at present suggests that the p o l i c y i n (b) should continue to be implemented". 4.3.4.3 Subsidies and Countervailing; R e s t r i c t i o n s A. Introduction There are two provisions, A r t i c l e XVI and A r t i c l e VI, i n the GATT that r e l a t e to the r e s t r i c t i o n on subsidization of goods and to the a p p l i c a t i o n of countervailing duties. Export subsidies fo r non-primary products are prohibited, ( A r t i c l e XVI:4) but export subsidies for products are permissible subject to c e r t a i n conditions ( A r t i c l e XIV, 2:3). The imposition of a countervailing duty may be taken by the importing country against subsidized products where they are causing or threatening material injury to the domestic industry ( A r t i c l e s VI:3 and 6). However, the c r i t e r i o n for imposing a countervailing duty under A r t i c l e VI are not relevant to A r t i c l e XVI. Due to the ineffectiveness of the GATT i n regulating the use of subsidies or i n c o n t r o l l i n g the countervailing duty laws of the contracting p a r t i e s , a new code c a l l e d the Code on Subsidies and Countervailing Duties or the Agreement on Interpretation and 128 Application of A r t i c l e s VI, XVI, XXIII of the General Agreement on T a r i f f s and Trade (The Subsidies Code) was completed during the 1979 Tokyo Round. The Subsides Code restates the pr o h i b i t i o n on export subsidies for manufactured and s i m i l a r products found i n A r t i c l e XVI of the GATT and adds minerals to the l i s t of products not to receive export subsidies. Developing countries, however, are permitted under t h i s Code to grant export subsidies to a l l industries, although they may face countervailing duties i n many of t h e i r export markets i f they engage i n such 6 1 subsidization. The Subsidies Code has an i l l u s t r a t i v e l i s t of the export subsidy measures which are prohibited under the GATT, 6 2 which includes: (1) Direct Subsidies; (2) Currency Incentives; (3) Transport Subsidies; (4) P r e f e r e n t i a l Supply of Goods or Services; (5) Reduction of Direct Tax L i a b i l i t y ; (6) Exemption or Remission of Indirect Taxes; (7) Remission or Drawback of Import Charges Subsidies; (8) Export Credit Guarantees and Insurances; and (9) Export Credits. The Subsidies Code requires a finding of material i n j u r y from the subsidization before countervailing duties may be imposed ( A r t i c l e 16 of the Subsidies Code). This Code as e a r l i e r discussed should apply to non-signatory members. B. Legal Implications A countertrade transaction may give r i s e to questions under A r t i c l e VI, XVI and the Subsidies Code: 129 (1) W i l l a government mandated c o u n t e r t r a d e requirement c o n s t i t u t e a subs i d y o r export subsidy under the GATT and i t s Code? (2) What type o f advantages or b e n e f i t s p r o v i d e d by a government t o an importer i n a c o u n t e r t r a d e arrangement w i l l c o n s t i t u t e an export s u b s i d y and w i l l v i o l a t e A r t i c l e XVI and the S u b s i d i e s Code? (3) What i s the b a s i c p r i n c i p l e f o r imposing c o u n t e r v a i l i n g d u t i e s on c o u n t e r t r a d e products? With r e s p e c t t o the f i r s t q u e s t i o n , t h e r e are two d i f f e r e n t o p i n i o n s whether a government mandated c o u n t e r t r a d e requirement c o n s i t u t e s a s u b s i d y o r an export subsidy. The f i r s t o p i n i o n i s t h a t a mandated c o u n t e r t r a d e requirement i s a measurable economic advantage g i v e n by the government t o a domestic importer and i s 6 3 d i s c r i m i n a t o r y a g a i n s t o t h e r domestic i m p o r t e r s . Based on the view t h a t A r t i c l e XVI governs o n l y s u b s i d i e s t h a t operate t o 64 i n c r e a s e e x p o r t s o r reduce imports, the government mandated c o u n t e r t r a d e requirement w i l l c o n s t i t u t e a "sub s i d y " and w i l l be s u b j e c t t o n o t i f i c a t i o n t o the o t h e r c o n t r a c t i n g p a r t i e s as p r o v i d e d i n A r t i c l e XVI:1, p a r t A, and A r t i c l e I I of the S u b s i d i e s Code. The o t h e r o p i n i o n i s t h a t a mandated c o u n t e r t r a d e requirement 130 imposed by an importing country i s not a measurable economic advantage and w i l l not discriminate against other groups of domestic enterprises. I t i s important to remember that i t i s d i f f i c u l t to quantify the consequences or advantages of government mandated countertrade. I t i s the writer's opinion that the purposes of A r t i c l e XVI and the Subsidies Code are to regulate subsidies and to pr o h i b i t export subsidies. The subsidies must have the consequence that an importer w i l l be able to s e l l t h e i r products at a lower than normal market value i n order to compete with other contracting p a r t i e s . I f there are benefits associated with a countertrade requirement, then i t should be measurable i n terms of monetary value or benefit i n kind. Therefore, a mandated countertrade requirement alone does not constitute a subsidy or an export subsidy. As to the second question, whether a countertrade practice which consitutes an export subsidy for non-primary products w i l l be inconsistent with A r t i c l e XVI:3 of the GATT and A r t i c l e 9 of the Subsidies Code, the i l l u s t r a t i v e l i s t of export subsidies i s provided i n the Annex to the Code. Export subsidies for primary products are permissible subject to c e r t a i n conditions ( A r t i c l e XVI:3 and A r t i c l e 10 of the Subsidies Code). Primary products are defined a s : 6 5 131 "any product of farm, forest or fishery, i n i t s natural form or which has undergone such processing as i t s customarily required to prepare i t f o r marketing i n substantial volume of international trade". To determine what type of export subsidies under countertrade pr a c t i c e are prohibited a hypothetical case study w i l l be discussed: Case Study No. 1: Type of export subsidy The Canadian Government passes l e g i s l a t i o n to the e f f e c t that a private importer w i l l be able to negotiate a countertrade deal with an exporting country to buy a Canadian product (non-primary product) of a value equal to the import product or more and w i l l be able to s e l l t h i s product to governments at a p r i c e higher than that charged to other domestic customers. Moreover, the Canadian Government may provide the following advantages or benefits to these private importers: currency retention schemes or any s i m i l a r practices which involve a bonus on export; p r e f e r e n t i a l supplies of services or goods; export guarantees or an insurance program; and export c r e d i t s . I t i s assumed that Canadian subsidization i s causing a material injury to the domestic industry of the importing country. The questions to the examined i s whether the types of advantages or benefits provided by the Canadian Government constitutes an "export subsidy". 132 Discussion There i s no doubt that the benefits or advantages provided by the Canadian Government to t h e i r importers who engage i n a countertrade practice as mentioned above w i l l be considered as export subsidies. The benefit that the Canadian Government w i l l buy the non-primary products from the importer at a higher price as a condition for t h e i r export performance f a l l s under the i l l u s t r a t i v e l i s t of export subsidies i n the Annex to the Subsidies Code. Thus, the provision by a government of d i r e c t subsidies to a firm contingent upon export performance i s inconsistent with A r t i c l e 9 of the Subsidies Code. If the Canadian Government grants a more favourable exchange rate for exports t h i s also consitutes an export subsidy as noted i n the Annex i l l u s t r a t i v e l i s t of export subsidies which provides that "Currency retention schemes or any s i m i l a r practice which involve 67 a bonus for export" i s a subsidy. Apart from the two i l l u s t r a t i v e l i s t s demonstrated i n the case study above, the following provisions i n the I l l u s t r a t i o n of Export Subsidies under the Subsidies Code should be taken into consideration: 11 (d) The delivery by governments or t h e i r agencies of imported or domestic products or services for use i n the production of exported goods, on terms or conditions more favourable than for delivery of l i k e or d i r e c t l y 133 competitive products or services for use i n the prodution of goods for domestic consumption, i f (in the case of products) such terms or conditions are more favourable than those commercially avai l a b l e on world markets to t h e i r exporters. (j) The provisions by governments (or special i n s t i t u t i o n s controlled by governments) of export c r e d i t guarantee or insurance programmes, of insurance or guarantee programmes against increases i n the costs of exported products and of exchange r i s k programmes, at premium rates, which are manifestly inadequate to cover the long-term operating costs and losses of the programmes. (k) The grant by governments (or special i n s t i t u t i o n s controlled by and/or acting under the authority of governments) of export c r e d i t s at rates below those which they a c t u a l l y have to pay for the funds so employed (or would have to pay i f they borrowed on international c a p i t a l markets i n order to obtain funds of the same maturity and denominated i n the same currency as the export c r e d i t ) , or the payment by them of a l l or part of the costs incurred by exporters or f i n a n c i a l i n s t i t u t i o n s i n obtaining c r e d i t s , insofar as they are used to secure a material advantage i n the f i e l d of export c r e d i t terms. Provided, however, that i f a signatory i s a party to an international undertaking on o f f i c i a l export c r e d i t s to which at le a s t twelve o r i g i n a l signatories to t h i s Agreement are par t i e s as of January 1, 1979 (or a successor undertaking which has been adopted by those o r i g i n a l s i g n a t o r i e s ) , or i f i n p r a c t i c e a signatory applies the i n t e r e s t rates provisions of the relevant undertaking, an export c r e d i t p ractice which i s i n conformity with those provisions s h a l l not be considered an export subsidy prohibited by t h i s Agreement. (1) Any other charge on the public account c o n s t i t u t i n g an export subsidy i n the sense of A r t i c l e XVI of the General Agreement". I t i s a controversial issue whether the i l l u s t r a t i v e l i s t under the Subsidies Code w i l l be the only c r i t e r i a used to determine an export subsidy question. The EEC views that the i l l u s t r a t i v e l i s t must be conclusive and the rules of the Annex 134 should not be l e f t to the d i s c r e t i o n of signatory governments. The GATT takes the view that a practice that does not meet the i l l u s t r a t i v e l i s t c r i t e r i a might s t i l l be considered as a 69 subsidy. The l a t t e r view i s supported by the GATT working 70 party. I t i s not within the scope of t h i s paper to discuss t h i s issue i n d e t a i l . The imposition of countervailing duties i s to take place only i f a subsidy causes or threatens material injury to a domestic industry. I f the material injury t e s t i s met, the countervailing duty l e v i e d must not be i n excess of an estimated amount of the subsidy granted by the foreign government ( A r t i c l e VI:3, and A r t i c l e 4 of the Subsidies Code). A r t i c l e VI:6(a) r e s t r i c t s the imposition of an anti-dumping duty or countervailing duty unless there has been a determination that the e f f e c t of the export subsidization i s to cause or threaten material injury to an established domestic industry or to materially retard the establishment of a domestic industry (see also A r t i c l e 6 of the Subsidies Code). The c r i t e r i a used to determine the "material i n j u r y " and the method of determining the c o u t e r v a i l i n g duty i s beyond the scope of t h i s t h e s i s . However, i t should be noted that the injury decision i s based on factual information only. The factors which can cause injury to a domestic industry are the volumes and prices of the countertrade products. The material i n j u r y determination i s complex and requires an assessment on a case by case basis of a l l the factors a f f e c t i n g the domestic 135 industry. • . . , . . 72 I t i s i n t e r e s t i n g to note Leibman's opinion that: "... to the extent countertrade i s not expressly mentioned i n the i l l u s t r a t i v e l i s t s , i t w i l l be d i f f i c u l t to obtain any consensus as to i t s impermissibility, nor w i l l i t be easy to prove i t s p r e j u d i c a l e f f e c t s i n order to impose counterveiling duties". The writer disagrees with Liebman's opinion. I t i s the writer's opinion that though countertrade i s not expressly included i n the i l l u s t r a t i v e l i s t , i f a grant of benefits or advantages has been e x p l i c i t l y or i m p l i c i t l y made to an importer, t h i s should be s u f f i c i e n t to f u l f i l l the c r i t e r i a found i n the i l l u s t r a t i v e l i s t . However, the writer agrees with Liebman's opinion that i t may be d i f f i c u l t to prove i t s p r e j u d i c a l e f f e c t s or material injury and thus impose countervailing duties unless the p r a c t i c e engaged i n i s a "permanent trade pra c t i c e " . In conclusion, a government mandated countertrade requirement alone w i l l not constitute a subsidy or an export subsidy. However, the benefits or advantages associated with countertrade requirements that f a l l under the i l l u s t r a t i v e l i s t of export subsidies, an Annex to the Subsidies Code, w i l l constitute an "export subsidy". I f material injury takes place, a countervailing duty may be imposed. There may be some d i f f i c u l t i e s i n determining "material injury" and imposing a 136 countervailing duty i n countertrade practice since the countertrade w i l l generally be on an ad hoc or temporary basis rather than on a permanent basis. 4.3.4.4 Anti-Dumping A. Introduction Dumping i s defined as the case where products are sold i n a 73 foreign market at a lower p r i c e than i n the domestic market. But dumping i t s e l f does not give r i s e to a problem under GATT, i t 74 must combine with an "injur y " to a contracting party. I t has been suggested that the reasons for dumping are the maintenance of domestic pr i c e s i n the country of o r i g i n through the disposing or exporting of stock surplus and the elimination of competition i n the importing country, thereby esta b l i s h i n g or maintaining a 75 market share. A r t i c l e VI of the GATT governs the use of anti-dumping duties and i s designed to d i s c i p l i n e the use of anti-dumping duties by 7 6 importing countries. I t permits an importing country to impose an anti-dumping duty i f the import product i s sold at less than i t s "normal value" as defined i n the A r t i c l e . The anti-dumping duty may be imposed only i f the dumped import i s causing or threatening "material injury" i n the importing country or retarding the establishment of an industry ( A r t i c l e VI:1). The 137 amount of the extra duty that may be imposed cannot be greater than the margin of dumping ( A r t i c l e VI:2). I t must be noted that no product i s to be subjected to both anti-dumping and countervailing duties simultaneously ( A r t i c l e VI:5). Due to the vagueness and imprecision regarding the c r i t e r i a to be used to define injurious dumping and the procedures to be followed i n levying anti-dumping duties, an Anti-Dumping Code was adopted i n the mid 1960's by a group of GATT members. This Code was revised i n 1979. I t i s also c a l l e d the Agreement on Implementation of the General Agreement on T a r i f f s and Trade (the "ADC Code"). This Code i s broadly consistent with i t s predecessor and with 77 A r t i c l e VI and w i l l be discussed simultaneously with A r t i c l e VI of the GATT. B. Legal Implications The GATT does not p r o h i b i t dumping nor does i t oblige the government to prevent dumping, but A r t i c l e VI and the ADC Code give contracting par t i e s the r i g h t to levy anti-dumping duties i f dumping causes or threatens material injury. The c r u c i a l question i n an alleged dumping s i t u a t i o n i s what constitutes the normal value of the product since dumping occurs only i f the goods i s preced below t h i s value. Hence, the writer w i l l b r i e f l y discuss the method of determining the export p r i c e or normal value of products involved i n a countertrade and the relationship t h i s has with dumping. 138 I f the export p r i c e of countertrade products being sold to an importer i s not lower than the pri c e sold by the exporter i n his country, no anti-dumping issue w i l l a r i s e . In t h i s s i t u a t i o n , the exporter w i l l incorporate the anticipated cost that the importer may have to pay into the p r i c e of the countertrade product. The costs are: the cost of disposing of the countertrade product and the discount to be given to the trading house or international broker. However, the export prices of some countertrade products, p a r t i c u l a r l y where the products are commodities or primary products involved i n a Barter, Counterpurchase or Switch Trading arrangement, may be lower than the domestic p r i c e since these products are often a g r i c u l t u r a l surpluses or low qu a l i t y products. In t h i s circumstance, the exporter of countertrade products w i l l normally give a large discount or s e l l the products at a loss i n order to dispose of them or to maintain or expand t h e i r market shares. I f the private sector or government i n the importing country can es t a b l i s h "material in j u r y " r e s u l t i n g from such dumping, a n t i -dumping duties can be imposed. The anti-dumping duties are the difference between the export p r i c e and the normal value. The national laws of GATT member countries respecting the establishment of anti-dumping duties must be consistent with A r t i c l e VI and the ADC Code. As t h i s thesis w i l l b r i e f l y examine the method of determining 139 the export p r i c e and the normal value of a countertrade product, the examination based on the following case studies seems appropriate. Case Study No. 2: Dumping i n Counterpurchase Arrangements A Canadian company entered into a counterpurchase agreement with a Thai company. Under the counterpurchase agreement, the Canadian company agreed to buy r i c e from the Thai company at the pr i c e of 80C$ per ton. The p r i c e of r i c e on the itnernational market at that time was 100C$ per ton. Part of the r i c e was imported into Canada and other part was to be resold to a trading house at the p r i c e of 60C$ per ton and that trading house was to s e l l the r i c e to purchasers i n the U.S. at the p r i c e of 60C$ per ton. I t was assumed that the importation of Thai r i c e , both into Canada and the USA caused or threatened material injury to Canadian and US domestic products. Discussion In the above facts, the normal value of the r i c e w i l l be 100C$ per ton ( A r t i c l e VI:la of the GATT, A r t i c l e 2(1) of the ADC Code). I f there i s no such p r i c e , a comparison p r i c e of the product or a l i k e product when exported to the t h i r d country w i l l be used ( A r t i c l e VI(b) of the GATT, A r t i c l e 2(8) of the ADC Code). Since the export p r i c e to USA would be 60C$ per ton, the 140 Canadian and US governments would be able to impose anti-dumping duties at the rate of 20C$ per ton for the r i c e imported to Canada, and 40C$ per ton for the r i c e imported to the U.S. market. Case Study No. 3: Dumping Computation Arrangements A Canadian company entered into a compensation arrangement with a Thai company to produce toys. Under the compensation arrangment the Canadian company was to transfer i t s technology and s e l l i t s equipment to the Thai company and agreed to buy the toys produced by the Thai company using the technology and equipment. The pr i c e of the toy products to be sold to the Canadian company was to be lower than the normal value since the Thai company was an associated company of the Canadian company. These toys were not to be sold domestically or to any other countries. Again i t was assumed that the lower p r i c e of the toys cause or threaten material injury to the Canadian toy industry. Discussion In t h i s case i t i s assumed that the normal p r i c e of the toy products was not available because there was no sale of l i k e products i n Thailand and that there i s no comparable product exported to a t h i r d country. The anti-dumping duties, however, may be determined from the cost of production i n Thailand, plus a 141 reasonable amount for administrative, s e l l i n g , and other costs, plus a p r o f i t ( A r t i c l e 2:4 of the ADC). On the other hand, A r t i c l e 2:5 of the ADC provides that: "In case where there i s no export p r i c e or whether i t appears to the authorities concerned that the export p r i c e i s unreliable because of association or a compenatory arrangement between the exporter and the importer or a t h i r d party, the export p r i c e may be construted on the basis of the p r i c e at which the imported products are f i r s t resold to an independent buyer, or i f the products are not resold to an independent buyer, or not resold i n the condition as imported or on such reasonable basis as the authorities may determine". The normal value and the export p r i c e must be a f a i r comparison based on the same l e v e l of trade, differences i n the conditional terms of sale, and differences a f f e c t i n g price comparability ( A r t i c l e 2:6 of the ADC). I t i s c l e a r from the facts described above that the Canadian government which i s a signatory to the ADC, would determine the normal value of the product on a "reasonable basis" under t h e i r own national law which i s to be i n accordance with the guideline set out i n A r t i c l e 2:5 and 2:6 of the ADC. From the above two cases, i t i s questionable whether a Canadian importer would argue that the lower p r i c e of the countertrade product i s due to the anticipated cost or allowance that may a r i s e i n disposal of the countertrade product, t h i s cost would include transportation and the commission given to the 142 trading house or the sale conditions associated with countertrade requirements. I t i s the writer's opinion that the government should take t h i s c r i t e r i a into consideration i n determining the normal value or export p r i c e as provided i n A r t i c l e 2(6) of the 7 8 ADC and A r t i c l e VI:1 of the GATT. What should be categorized as a cost for an adjustment of the export p r i c e and normal value i n a countertrade transaction requires further study. To sum up, the imposition of an anti-dumping duty on countertrade products i s possible i f two requirements are met: (1) the export p r i c e of a countertrade product i s lower than the normal value (domestic p r i c e ) ; and (2) the dumping causes or threatens material injury to the industry i n the importing country. However, the method of determining the normal value or export p r i c e of the goods must take the nature of countertrade transactions into consideration so that the determination w i l l be f a i r and reasonable. In case of a temporary or an ad hoc countertrade transaction, i t may be d i f f i c u l t to e s t a b l i s h the fa c t necessary to meet the material injury t e s t . 143 4.3.4.5 State Trading Enterprise A. Introduction State trading enterprises can be used as a n o n - t a r i f f b a r r i e r to r e s t r i c t the import of goods. The State Trading Enterprises provision under A r t i c l e XVII i s aimed at c o n t r o l l i n g such practices by contracting p a r t i e s . This provision applies not only to "State Trading Enterprises" but to any firm which has been granted an exclusive r i g h t or p r i v i l e g e by i t s government. According to A r t i c l e XVII:1(a), state trading enterprises s h a l l , i n t h e i r purchasing or s e l l i n g involving e i t h e r imports or exports, act i n a manner consistent with the MFN p r i n c i p l e which GATT prescribes f o r government measures a f f e c t i n g imports and exports by private traders. This o b l i g a t i o n i s understood to require state trading enterprises to make t h e i r purchase and sales s o l e l y i n accordance with commercial considerations. I t has been suggested that state trading enterprises are only obliged to comply with the MFN p r i n c i p l e but not the National Treatment obligation, therefore a state trading enterprise i s e n t i t l e d to tr e a t imported goods d i f f e r e n t from domestic 79 . . products. Note that the MFN p r i n c i p l e under A r t i c l e XVII:1 i s not applicable to imports for government consumption ( A r t i c l e XVII:2). 144 The following questions w i l l be examined i n t h i s part: (1) Whether a government mandated countertrade requirement established through a state trading enterprise or a private enterprise which has been granted a p r i v i l e g e or monopoly ri g h t v i o l a t e s A r t i c l e XVIII:1. (2) Whether the above countertrade requirement for a l l exporting countries constitutes an "import r e s t r i c t i o n " under A r t i c l e XI. (3) Whether the above countertrade requirement v i o l a t e s A r t i c l e 11:4 with respect to l i m i t s on t a r i f f concessions. (4) Whether the export performance requirement for state trading enterprises or private companies imposed by a government v i o l a t e s A r t i c l e XVII:1(c) regarding the l i m i t a t i o n on government intervention. With regard to a government mandated countertrade established through a state trading enterprise involving some s p e c i f i c exporting countries, such a practice w i l l be inconsistent with A r t i c l e XVI:1 since i t applies to s p e c i f i c exporting countries on 8 0 a discriminatory basis. However, i f the imported product i s for government consumption, no problem arises ( A r t i c l e XVIII:2). 145 With respect to the second question, the i n t e r p r e t a t i v e note associated with A r t i c l e XI, XII, XIII, XIV and XVIII of GATT states that the term "import r e s t r i c t i o n s " and "export r e s t r i c t i o n s " include r e s t r i c t i o n s made e f f e c t i v e through state trading operations. A government mandated countertrade requirement on an import monopoly has the same r e s t r i c t i v e e f f e c t as the issuing of import licenses conditional upon countertrade. Therefore, subject to ce r t a i n exceptions i n A r t i c l e XI:2, such a requirement i n a countertrade arrangement i s inconsistent with A r t i c l e X I : 1 . 8 1 With respect to t a r i f f concessions, A r t i c l e 11:4 of the GATT provides that a monopoly for the importation of a product by a state trading enterprise or a private enterprise s h a l l not operate so as to afford a protection i n excess of the amount of protection provided i n the t a r i f f schedule. Gadbaw views that t h i s provision could be used against countertrade requirements imposed v i a an import monopoly that has been established either 82 formally or informally. The imposition of an export performance requirement for a state trading enterprise or a private enterprise i n a countertrade transactions i s not incompatible with A r t i c l e XVII(c). The GATT Panel i n the FIRA case found that A r t i c l e XVII i s not applicable to export performance requirements because there i s no provision i n the GATT which forbids requirements to 146 s e l l goods i n foreign markets i n preference to s e l l i n g i n the 8 3 domestic market. F i n a l l y , decision of a state trading enterprise to grant permission to import as part of a countertrade arrangement i s consistent with A r t i c l e XVII:1:2 i f the decision i s made i n accordance with "commercial considerations". Commercial considerations, according to the i n t e r p r e t a t i v e note to A r t i c l e XVII:1(b), includes a " t i e d loan". One writer takes the view that a countertrade requirement shares s i m i l a r c h a r a c t e r i s t i c s to a " t i e d loan", so that the importation of goods which depends on a countertrade requirement should also be regarded as a "commercial consideration" and therefore, w i l l not be 84 inconsistent with A r t i c l e XVII. This view, however, may be attacked on the ground that a "commercial consideration" may not be intended to include the countertrade requirement and countertrade i s not a customary business practice as provided i n A r t i c l e XVII:1(b). Even though there i s no precedent, the writer agrees with Liebman's view that a state trading enterprise or the private sector should take into account the countertrade requirement as a "commercial consideration" i n granting the importation r i g h t to export products provided that such a countertrade r e s t r i c t i o n applies to a l l exporting countries on a non-discriminatory b a s i s . 8 5 In summary, with the exception of government procurement, a 147 countertrade requirement which establishes a p r i v i l e g e for a state trading enterprise or a private firm may be inconsistent with the following three provisions of the GATT: A r t i c l e XVI:1, i f i t i s applicable on a discriminatory basis; A r t i c l e XI, i f i t involves a quantitative r e s t r i c t i o n ; and A r t i c l e VI:2, i f the countertrade requirement involves o f f e r i n g t a r i f f protection i n excess of the t a r i f f schedule. However, i f a state trading enterprise merely takes the countertrade requirement into consideration when importing the product, the countertrade requirement may not be i n v i o l a t i o n of A r t i c l e XVI. I t i s suggested that i n the future, the i n t e r p r e t a t i v e l i s t to the A r t i c l e should include the countertrade practice as a "commercial consideration". 4.3.4.6 Government Procurement Code The government procurement rules i n the GATT are an exemption from the national treatment obli g a t i o n ( A r t i c l e III:8(a)) and from the state trading enterprise non-discriminatory rules ( A r t i c l e XVII:2). There was an Agreement on Government Procurement (the "AGP") concluded at the MTN i n 1980. The AGP has been accepted by the USA, Canada, the EEC and about ten other countries. The aim of the AGP i s to ensure increased i n t e r n a t i o n a l competition and to encourage more e f f e c t i v e use of public resources. The AGP lays down the p r i n c i p l e of non-discrimination and of national treatment for products from other 148 countries that are parties to the AGP respecting l e g i s l a t i o n procedures and practices regarding government procurement. The AGP covers only government procurement contracts of a value not le s s than 150,000 Special Drawing Right units ("SDR"). The AGP applies to a l l products purchased by the e n t i t i e s covered, as well as the services that are a n c i l l a r y to the supply of products when t h e i r value i s less than that of product concerned. I t also 8 6 includes tendering procedures. Unlike the Subsidies Code and the Anti-Dumping Code, the AGP obligation only applies to the signatory members to the Agreement. However, i f a signatory country were to pass l e g i s l a t i o n inconsistent with the AGP and the law was applied discrimina-torily against a non-signatory member, the non-signatory could claim that such treatment was inconsistent with A r t i c l e I, the MFN P r i n c i p l e . There are provisions under the AGP which give more favouable treatment to developing countries. Moreover, the AGP allows exemptions from c e r t a i n obligations under the Agreement and f o r a temporary 87 exemption from the national treatment ru l e . B. Legal Implication I f a country which i s a member of the AGP, l i k e Canada, imposes a countertrade requirement (in various forms) for the purchase of products for government use, such a requirement may be incompatible with the AGP but not incompatible with the national treatment obligation under A r t i c l e III of the GATT. To 149 examine the l e g a l implications of t h i s , a hypothetical case study i s presented. Case Study No. 4 The Canadian Government imposes an o f f s e t arrangement involving a government contract to b u i l d a plant valued at one m i l l i o n Canadian d o l l a r s . The requirement s t i p u l a t e s that the award w i l l be given to the firm which o f f e r s the best o f f s e t procurement ( i . e . use of Canadian materials or l o c a l employment). Discussion This p a r t i c u l a r o f f s e t arrangement that requires an exporter to ensure a c e r t a i n Canadian content i s not i n v i o l a t i o n of the national treatment obli g a t i o n i n A r t i c l e XII of the GATT because 88 i t involves government procurement ( A r t i c l e III:8(A)). However, such a requirement may be i n v i o l a t i o n of A r t i c l e 111:1 respecting national treatment and non-discrimination unless i t applies on a non-discriminatory basis. Moreover, the p o l i c y that the award w i l l be given to a firm which o f f e r s the best o f f s e t requirement may be i n v i o l a t i o n to A r t i c l e V:14(h) of the AGP. According to A r t i c l e V:14(h), the contracting party i s normally to r e f r a i n from awarding contracts "on the condition that the supplier provides o f f s e t procurement opportunities or s i m i l a r conditions". I t further states that i n the l i m i t e d number of 150 cases where such r e q u i s i t e s are part of a contract, the parties concerned " s h a l l l i m i t the o f f s e t to a reasonable proportion 8 9 within the contract value". A developing country may be able to require a cer t a i n domestic content, o f f s e t procurement, or transfer of technology 90 as a c r i t e r i a for an award of a contract. Liebman comments that the AGP w i l l not be applicable to developing country procurements made i n furtherance of a countertrade requirement which i s s i m i l a r to " t i e d a i d " . 9 1 I t i s i n t e r e s t i n g to note that A r t i c l e V:14(h) of the AGP only deals expressly with the o f f s e t arrangement. However, the other forms of countertrade, such as counterpurchase or Barter, may also be covered by the AGP. The writer thinks that the AGP w i l l r a r e l y apply to a countertrade requirement unless countertrade becomes widely practiced by developed countries which have signed the AGP. 4.3.4.7 Customs Valuation One major problem i n countertrade transactions i s the customs valuation of countertrade products. Previously, customs valuation under GATT was based on the "actual value method". "Actual value" was defined under A r t i c l e VII(b) of GATT as: 151 ""Actual value" should be the p r i c e at which, at a time and place determined by the l e g i s l a t i o n of the country of importation, such or l i k e merchandise i s sold or offered for sale i n the ordinary course of trade under f u l l y competitive conditions ...". A r t i c l e VII and i t s int e r p r e t a t i v e note provide useful guidelines for the permissible applications of a broad d e f i n i t i o n of "actual value", but i t permits the importing country to determine the time and place of valuation. This d i s c r e t i o n given to GATT contracting parties creates two major problems for the importers. F i r s t , there i s l i t t l e uniformity among the methods used by d i f f e r e n t contracting parties and as a consequence, the same nominal t a r i f f rate may r e s u l t i n e n t i r e l y d i f f e r e n t e f f e c t s i n various countries. Second, some contracting p a r t i e s employ a method which i n f l a t e the value of c e r t a i n products above t h e i r actual value. Thus, A r t i c l e VII proved i n e f f e c t i v e i n dealing 92 with the methods. The Customs Valuation Agreemnet ("the CVA") or the Agreement on Implementation of A r t i c l e VII of the General 93 Agreement on T a r i f f s and Trade was drafted to achieve the GATT objectives that goods should be assessed at i t s actual value and i n a reasonably manner. Part I of the CVA accomplishes the GATT objective by, i n e f f e c t , eliminating the d i s c r e t i o n granted the GATT contracting p a r t i e s under A r t i c l e VII to sel e c t the valuation method. Instead, contracting p a r t i e s r a t i f y i n g the CVA are bound to adopt the customs valuation method contained i n Part I. The CVA contains s i x al t e r n a t i v e valuation methods incorporating broad methods of the customs valuation: the 152 transaction valuation ( A r t i c l e s deductive valuation ( A r t i c l e valuation ( A r t i c l e A), and the means value method) ( A r t i c l e 7 w i l l apply i n sequential order. 1, 2, 3 of the CVA) 9 4, the 5 of the CVA), the computed derived valuation (or resonable 95 of the CVA). These alternatives The transaction value i s defined i n A r t i c l e 1 of the CVA as "the p r i c e a c t u a l l y paid or payable for the goods when sold for export to the country of importation". The p r i c e a c t u a l l y paid or payable i s the t o t a l payment made or to be made by the buyer 9 6 to or for the benefit of the s e l l e r f o r the imported products. There are four exceptions when the transaction value w i l l be applicable to imported goods: (1) where r e s t r i c t i o n s s u b s t a n t i a l l y a f f e c t i n g the value of the goods e x i s t on the 97 d i s p o s i t i o n or used of the goods; (2) where the sale or price i s subject to some conditions or considerations for which a value 9 8 cannot be determined; (3) where some "part of the proceeds of any subsequent resale, disposal or use of goods by the buyer w i l l 9 9 accrue d i r e c t l y or i n d i r e c t l y to the s e l l e r ; and (4) where the buyer and the s e l l e r are r e l a t e d . 1 0 0 An importing country cannot apply the transaction value method as provided i n A r t i c l e I of the CVA to a countertrade transaction because the sale or pr i c e i s subject to some conditions or c o n s i d e r a t i o n . 1 0 1 I f countertrade i s transacted i n a pure barter form without s p e c i f i c a t i o n s of monetary term, i t i s 153 not considered as a "sale" and the transaction value method w i l l not be a p p l i c a b l e . 1 0 2 I f customs valuation cannot be made under A r t i c l e 1 of the CVA, the customs value s h a l l be the transaction value of i d e n t i c a l goods sold for export to the same country at or about the same time ( A r t i c l e 2 of the CVA). And i f the customs valuation cannot be made under A r t i c l e s 1 or 2, A r t i c l e 3 of the CVA w i l l apply. A r t i c l e 3 of the CVA i s i d e n t i c a l to A r t i c l e 2 except that A r t i c l e 3 computes "the transaction value" of s i m i l a r goods to the goods being valued. I t must be noted that the customs valuation method under A r t i c l e s 2 and 3 of the CVA w i l l be used only i f a transaction value of appropriately s i m i l a r or i d e n t i c a l goods can be discovered. To use A r t i c l e 2 or 3, the imports to be compared must be s i m i l a r i n several important aspects. They must be produced i n and imported to the same country at about the same time. Goods may be compared i f sold i n d i f f e r e n t quantities and at d i f f e r e n t "commercial l e v e l s " as long as an appropriate adjustment can be made on the basis of demonstrated evidence which c l e a r l y establishes a reasonable and 103 accurate adjustment. I f a suitable comparable import transactions cannot be found, then A r t i c l e 2 or 3 of the CVA w i l l not apply. I t i s questionable whether A r t i c l e 2 or 3 of the CVA would apply to countertrade transactions. The writer i s of the opinion 154 that the transaction value method as provided i n A r t i c l e s 2 or 3 of the CVA w i l l not apply to countertrade transactions. Support for the writer's opinion i s as follows: (1) the transaction value of i d e n t i c a l or s i m i l a r goods under A r t i c l e s 2 and 3 cannot be used i f the transaction i s subject to some conditions; and (2) the comparable import of i d e n t i c a l or s i m i l a r goods to countertrade products i s not possible i n several important . . 104 respects namely, the commercial l e v e l and quantities. There are two opinions of the Technical Committee on Custom Valuation with respect to Barter and Compensation which support the proposition that the "transaction value" i s not applicable i n a 105 countertrade transaction. Therefore, the determining method for the value of product i n a countertrade transaction w i l l be based on one of three methods: the deductive value method, the computed value method, or the derived value method. The writer w i l l b r i e f l y discuss these three methods. Under the deductive method, the value of the goods w i l l be based on the p r i c e at which the imported goods or s i m i l a r products are sold i n the country of importation: (a) at the time of imporation or (b) at the e a r l i e s t date a f t e r importation of the products i n question and i n any event within ninety days, or (c) a f t e r further processing. In each case, the comparison i s to be based on the unit p r i c e of the greatest aggregated quantity s o l d . 1 0 6 155 I t should be noted that a discount given to a trading house or a t h i r d party i n disposing or s e l l i n g of countertrade products should be included i n the value adjustment based on the cost of production. The computed value of products i s the sum of: (a) the cost or value of materials, the f a b r i c a t i o n , or processing employed i n t h e i r production; (b) a reasonable p r o f i t and general expenses equal to those ususally r e f l e c t e d i n the sale of goods of the same class or kind; and (c) the cost or value of a l l other expenses appropriate to the valuation bases, either c . i . f . or f.o.b., which the importing country adopts. This computed value method w i l l generally be l i m i t e d to those cases where the buyer and s e l l e r are related and the manufacturer i s prepared to provide the necessary information and to allow for 107 v e r i f i c a t i o n . I f neither of these two methods are applicable, the value may be determined by any derived method or reasonable means consistent with provisions of the Code and the GATT using av a i l a b l e data e s p e c i a l l y previous valuations ( A r t i c l e 7 of the C V A). 1 0 8 I t i s the writer's opinion that the deductive value may be the most appropriate for the Barter and Counterpurchase arrangement since i t o f f e r s more alter n a t i v e s and i s more 156 f l e x i b l e . The computed value may be appropriate for a compensation or buy back arrangement because i n such an arrangement, the importer and the exporter normally are related or associated with each other. I t i s also easy to obtain the necessary information and v e r i f i c a t i o n . 4.3.5 Miscellaneous Provisions Under the GATT and the  M u l t i l a t e r a l Codes 4.3.5.1 Introduction There are a number of other provisions i n the GATT and Codes that may give r i s e to l e g a l implications f o r a countertrade transaction. This part w i l l be a general overview of how countertrade transacton may be effected by these miscellaneous provisions. 4.3.5.2 T a r i f f Concession ( A r t i c l e II of the GATT) T a r i f f concessions as provided i n A r t i c l e II are a commitment by a GATT contracting party to levy no more than a stated t a r i f f on a p a r t i c u l a r item and the contracting party must apply those agreed t a r i f f concessions equally to l i k e products of a l l contracting p a r t i e s under the MFN p r i n c i p l e ( A r t i c l e II:1(a) of the GATT). Gadbaw has suggested that since a countertrade requirement gives a t a r i f f concession to a party which agrees 157 with the countertrade terms, t h i s w i l l be i n v i o l a t i o n of t h i s A r t i c l e unless the contracting parties include the countertrade 109 requirement as a condition i n i t s GATT schedule. Gadbow i s also of the view that the countertrade requirement imposed by a contracting party through an import monopoly that has been established e i t h e r formally or informally through the granting of a t a r i f f preference v i o l a t e s A r t i c l e 11:4. 1 1 0 4.3.5.3 N u l l i f i c a t i o n and Impairment ( A r t i c l e XXIII) Where a contracting party imposes a mandatory countertrade practice that may v i o l a t e or be inconsistent with GATT p r i n c i p l e s , any other contracting party of the GATT may challenge the p r a c t i c e by u t i l i z i n g A r t i c l e XXIII. Under t h i s A r t i c l e , when a contracting party f e e l s that i t s benefit i s being n u l l i f i e d or impaired or the objectives of the GATT are being impeded, the party may request a consultation among the contracting p a r t i e s to investigate and make appropriate recommendations respecting the s i t u a t i o n . I f the circumstances are serious enough, the contracting p a r t i e s may authorize a s p e c i f i c form of r e t a l i a t i o n such as suspending the application of concessions or other obligations under the GATT to any other contracting party. Any government measure v i o l a t i n g a GATT provision constitutes a prima f a c i e n u l l i f i c a t i o n or impairment of a GATT benefit. Once an infringement i s shown, the burden of proof s h i f t s to the offending government to prove that 158 n u l l i f i c a t i o n or impairment of a GATT benefit has not occured. Another implication of A r t i c l e XXIII of the GATT i s that when a benefit accruing from a t a r i f f concession i s n u l l i f i e d or impaired as a r e s u l t of the application of any measure (e.g. a countertrade requirement), whether or not there i s a c o n f l i c t with a provision of the GATT ( A r t i c l e XXIII:1(b) of the GATT), a contracting party may bring a complaint against a contracting party f o r corrective or compensatory action. The t a r i f f concession of a contracting party i s considered n u l l i f i e d or 112 impaired i f the following two conditions are met: 1. a measure was introduced a f t e r the t a r i f f negotiations which upsets the competitive relationship between the products concerned; and 2. the measure could not have been reasonably anticipated at the tune the t a r i f f concession was negotiated. 4.3.5.4 Exchange Arrangement I t i s questionable whether countertrade transactions, p a r t i c u l a r l y the Advance Purchase, Switch Trading and Evidence Accounts, which are aimed at l i m i t i n g the a v a i l a b i l i t y or use of foreign exchange v i o l a t e the GATT. Government exchange measures may include a r e s t r i c t i o n on the method of payment for goods and the need f o r a l i c e n s i n g requirement for exchange control purposes. For example, i n some b i l a t e r a l agreements, payment for goods w i l l only be made through the cl e a r i n g account between the 159 two countries. In general, countertrade transactions which p r o h i b i t import or export through "other measures other than duties/taxes or other charges" ( A r t i c l e XV:4 of the GATT) are i n v i o l a t i o n of A r t i c l e XI. Where exchange measures are i n compliance with the Agreement of International Monetary Fund (IMF), the measures are 113 permissible ( A r t i c l e XV:9 of the GATT). There i s no answer to the question whether an exchange action permitted under the IMF may be contrary to the purposes of the GATT. The relat i o n s h i p between IMF and GATT needs more detailed s t u d y . 1 1 4 4.3.5.5 Protocol of Accession In some s p e c i f i c cases the GATT protocol of accession requires a signatory to increase i t s imports - from market economies i n proportion to the increase i n i t s t o t a l imports as set f o r t h i n i t s national plan. Where countertrade has been used to increase imports from market economies, t h i s w i l l be i n v i o l a t i o n of the protocol of accession. Thus fa r , only Romania 115 i s subject to t h i s condition. 160 4.3.5.6 Other M u l t i l a t e r a l Trade Agreements Apart from the m u l t i l a t e r a l codes discussed above, ( the Anti-dumping Code, Subsides and Coutervailing Code, Custom Valuation Code and Government Procurement Code) there are a number of m u l t i l a t e r a l agreements which are not an i n t e r g r a l part of, nor do they amend, the GATT. Some of the agreements do, however, operate within the GATT framework, but are binding only upon t h e i r signatories. These agreements are: (1) The Agreement on Technical Barriers to Trade (also known as the Standards Code). This Agreement aims to ensure that laws passed by contracting p a r t i e s i n regard to health, safety and a tech n i c a l requirements of products do not act to r e s t r i c t imports unnecessarily. The code i s also aimed at the development of common standards on an international plane and the adoption of 1 "L 6 these standard by national governments. (2) The Agreement on Import Licensing Procedures. This Agreement lays down a number of rules to be followed i n the administration of an import l i c e n s i n g system. These rules are designated to reduce any unnecessary r e s t r i c t i o n s a r i s i n g from 117 the operation of these systems. (3) The Commodity Agreements concluded with respect to trade i n c e r t a i n primary products and resources. The purpose of 161 commodity arrangements i s to provide a reasonable and regular income fo r those countries (usually developing countries) whose economics are heavily dependent on exports of the primary product. Examples of these Agreements are: the Wheat Trade Convention of 1970, the International Sugar Agreement of 1977, the International Cocoa Agreement of 1980, the International Coffee Agreement of 1983, the International Dairy Arrangement of 1979, the Arrangement regarding Bovine Meat of 1979, the International Natural Rubber Agreement of 1979, the International Tin Agreement of 1981, and the International Tropical Timber Agreement of 1983. These agreements are not operating within the l i f t GATT context, as they f a l l mainly with the scope of UNCTAD. (4) The International regulations on the trade i n I n d u s t r i a l Sectors. The following trade sectors are subject to r e s t r a i n t arrangements (mainly on a quota basis) through m u l t i l a t e r a l or b i l a t e r a l arrangements and thus may impact upon countertrade p r a c t i c e : s t e e l products, a i r c r a f t , t e x t i l e s , footwear, and 119 e l e c t r o n i c s . These agreements and arrangements may be effected by a countertrade transaction, but a discussion of the legal implications w i l l not be undertaken. 162 4.3.6 Exception P r i n c i p l e s 4.3.6.1 Introdcution There are a number of provisions i n the GATT that permit contracting p a r t i e s to engage i n countertrade transactions, eit h e r by the imposition of government mandated countertrade or by granting benefits or advantages to a concerned party, without v i o l a t i n g the GATT p r i n c i p l e s . 4.3.6.2 Waiver Clause ( A r t i c l e XXV:5) The waiver clause ( A r t i c l e XXV:5) i s the broadest exception to the p r i n c i p l e s of the GATT. One writer suggests that the waiver clause i s one of the most important p r a c t i c a l 120 considerations i n challenging countertrade under the GATT. A r t i c l e XXV:5 provides that: "In exceptional circumstance not elsewhere provided fo r i n t h i s Agreement, the contracting party may waive an obl i g a t i o n imposed upon a contracting party, by the Agreement, provided that any such decision s h a l l be approved by a two-thirds majority of the votes cast and that such majority must compromise more than h a l f of the contracting p a r t i e s . The contracting p a r t i e s may also by such a vote: (1) define c e r t a i n categories applied for waiver of obligation, and (2) prescribed such c r i t e r i a as may be necessary for the application of the paragraph. 163 4.3.6.3 The Escape Clause ( A r t i c l e XIX) The Escape Clause as provided i n A r t i c l e XIX allows a country to impose temporary import r e s t r i c t i o n s , including t a r i f f s , despite the obligations of the GATT and the binding GATT schedules. The c r i t e r i a for i t s invocation can be summarized as 121 f o l l o w s : ± z x (a) There must be an increased quantity of imports; (b) The increased imports must be a r e s u l t of (caused by both) (1) unforeseen developments and (2) the e f f e c t of a GATT obli g a t i o n ; and (c) The increased imports must cause serious injury or threaten serious injury to a domestic industry. Both developed and developing countries may invoke t h i s A r t i c l e i n order to u t i l i z e countertrade practices for s p e c i f i c products provided they can e s t a b l i s h the fact that the increased imports cause serious injury or threaten serious injury to a domestic industry. However, a countertrade measure adopted by the invoking country must not discriminate against other 122 contracting p a r t i e s . 164 4.3.6.4 Balance of Payments Provision ( A r t i c l e s XII  XIV) As discussed above, the imposition of a mandatory countertrade requirement may be regarded as a quantitative r e s t r i c t i o n under A r t i c l e XI of the GATT. However, i f such a countertrade measure i s imposed for balance of payment purposes as provided f o r i n A r t i c l e s XII and XIV, the countertrade measure i s permissible. The use of t h i s exception does not require GATT's approval, thus t h i s A r t i c l e i s the most p r a c t i c a l one to 123 be use. Using A r t i c l e XII a contracting party may r e s t r i c t the quantity or value of imports (e.g. by means of mandatory countertrade) i n order to safeguard i t s external f i n a n c i a l p o s i t i o n , or to protect i t s balance of payments under A r t i c l e XIII:1, or to ensure a l e v e l of reserves adequate for the implementation of i t s programme of economic development ( A r t i c l e XVIII:9). R e s t r i c t i o n s must not exceed those necessary to f o r e s t a l l the imminent threat of or actual serious decline of monetary reserves or, where reserves are very low, r e s t r i c t i o n s may be used to achieve a reasonable rate of increase i n the reserves. Due regard must be paid to sp e c i a l factors which may be a f f e c t i n g reserves or the need for reserves and as conditions 124 improve the r e s t r i c t i o n s must be progressively relaxed. In applying a quantitative r e s t r i c t i o n (countertrade requirement measure), a contracting party: (a) must avoid 165 unnecessary damage to the commercial or economic in t e r e s t s of other p a r t i e s ; (b) must not prevent unreasonably the import of goods i n minimum commercial quantities i f t h e i r exclusion would impair regular channels of trade; and (c) must not prevent the importation of commercial samples or (d) must comply with patent, trademark, copyright or s i m i l a r procedures ( A r t i c l e XI:3(c), A r t i c l e XVIII:10 of the GATT). Rest r i c t i o n s may be imposed i n such a way as to give p r i o r i t y to the importation of those products which are es s e n t i a l ( A r t i c l e XII:3(b), A r t i c l e XVIII:10 of the GATT). 4.3.6.5 Exceptions for Developing Countries Most countertrade requirements are imposed by developing countries. Developing countries are given s p e c i a l r i g h t s i n regard to balance of payment measures and safeguard actions i n A r t i c l e XVIII. Section A, C, and D of A r t i c l e XVIII provides developing countries with opportunities for taking safeguard action appropriate to t h e i r p a r t i c u l a r needs. In practice, these provisions are r a r e l y invoked reliance being placed instead on other provisions of the GATT such as A r t i c l e s XII, XVIII:B, XIX, 125 . . . . . XXVIII. Though t h i s p r i n c i p l e i s r a r e l y used i t i s s p e c i f i c a l l y designed for developing countries. This A r t i c l e provides a wide degree of f l e x i b i l i t y for the use of protection devices (including the countertrade requirement) to a s s i s t developing industries. The contracting pa r t i e s must meet one of 166 two c r i t e r i o n i n order to impose the protective measures without being i n v i o l a t i o n of the GATT. These c r i t e r i o n are: (1) The contracting party has a low standard of l i v i n g , or (2) The contracting party i s i n an early stage of development. The contracting party which meets the f i r s t c r i t e r i o n has the ri g h t to u t i l i z e Sections A, B, and C of A r t i c l e XVII. The contracting party which meets the second c r i t e r i o n has recourse only to Section D of A r t i c l e XVIII. The contracting party which meets both c r i t e r i o n has the option to choose. Section A of A r t i c l e XVIII i s related to the t a r i f f negotiations i n that a f t e r a l l the prerequisites have been met, a country can r a i s e t a r i f f s even when the t a r i f f i s bound i n the schedules. Section B of A r t i c l e XVII rel a t e s to balance of payment r e s t r i c i t o n s . I t i s recognized that i n practice, developing countries use quantitative r e s t r i c t i o n s extensively, r e l y i n g on the balance of payment exception. Section C of A r t i c l e XVIII authorizes quantitative r e s t r i c t i o n s to a l l e v i a t e balance of payment problems through the promotion or the establishment of a p a r t i c u l a r industry. Section D of A r t i c l e XVIII authorizes the GATT contracting parties to extend the benefits of Section C to developing countries which no longer 167 12 6 automatically q u a l i f y for the benefits of the a r t i c l e . Since most countertrade practices are i n i t i a t e d by developing countries, t h i s i s one of the reasons why no p e t i t i o n has been made through the GATT to consider i t s non-compliance. However, i f one of the contracting parties were to challenge that a countertrade transaction imposed by a contracting country was inconsistent with the GATT, the developing countries exception might be invoked. Liebman comments that: "... an LDC (developing country) can usually obtain more e a s i l y than otherwise a waiver f o r a quota or sur-charge based on balance of payment d i f f i c u l t i e s . . . " . 4.3.6.6 Custom Unions and Free Trade Area ( A r t i c l e  XXIV) A r t i c l e XXIV of the GATT provides for an exception to the MFN p r i n c i p l e , not only for members of f u l l - f l e d g e d custom unions and free trade areas, but also for countries that conclude "interim agreements" designed to lead to the formation of custom unions or free trade areas. Thus far, there are no pure custom unions or free trade areas, as most regional trade arrangements have been 128 i n the form of an interim agreement. Any contracting party deciding to enter a customs union, free trade area or an interim agreement, i s obligated under A r t i c l e XXIV:7 to n o t i f y the GATT contracting pa r t i e s and furnish 168 information about the arrangement. In practice, with exception to the European Economic Community (EEC), other regional groupings have not r e a l l y met the d e f i n i t i o n of a customs union or a free trade area, thus i t could be argued they should not be e l i g i b l e f or an exception. Nevertheless, these regional groupings have been taking advantage of the A r t i c l e XXIV exception, without formal action or r e t a l i a t i o n from GATT 130 members. How t h i s GATT exception operates i s complex and i s 131 beyond the scope of t h i s t h e s i s . However, i f the contracting countries are e l i g i b l e for exceptions under t h i s A r t i c l e , the countertrade transaction among t h e i r members w i l l be permitted and w i l l not be i n v i o l a t i o n of the GATT. 4.3.6.7 General Welfare and National Security  Exceptions ( A r t i c l e s XX, XXI) A r t i c l e XX i s deceptively simple i n providing a general exemption from GATT obligations i n an enumerated series of situa t i o n s that generally have to do with government regulation to protect public morals, human, animal or plant l i f e , or health 132 and so f o r t h . A r t i c l e XXI establishes an exception to a l l GATT 133 obligations i n the case of national security needs. Liebman comments that these two exceptions should not apply to a countertrade requirement. The writer, however, takes the view that the national security exceptions may be invoked i n 169 cases i n v o l v i n g an o f f s e t arrangement f o r defence equipment. T h i s e x c e p t i o n i s s i m i l a r t o the e x c e p t i o n p r o v i s i o n i n the Agreement on Government Procurement ("the AGP"). The w r i t e r agrees w i t h Liebman t h a t the g e n e r a l w e l f a r e e x c e p t i o n s are not l i k e l y t o be invoked i n a c o u n t e r t r a d e t r a n s a c t i o n . In summary, the waiver c l a u s e , the escape c l a u s e , the balance of payment e x c e p t i o n , and the d e v e l o p i n g c o u n t r i e s e x c e p t i o n are more r e l e v a n t t o the c o u n t e r t r a d e t r a n s a c t i o n than the other e x c e p t i o n s . However, t h e balance of payment e x c e p t i o n and the d e v e l o p i n g c o u n t r i e s e x c e p t i o n are the most p r a c t i c a l ones i n d e a l i n g w i t h c o u n t e r t r a d e s i n c e they may be invoked without s e e k i n g the appr o v a l o f the oth e r c o n t r a c t i n g p a r t i e s . 4.4 C o n c l u s i o n From the above examination the w r i t e r conclude t h a t c o u n t e r t r a d e requirements, as w e l l as the b e n e f i t s o r advantages granted by the c o n t r a c t i n g p a r t i e s o f GATT e i t h e r t o p r i v a t e or t o s t a t e t r a d i n g e n t e r p r i s e s , may be i n v i o l a t i o n o f the p r o v i s i o n s o f the GATT or i t s Codes. The mandated c o u n t e r t r a d e requirement may be i n c o n s i s t e n t w i t h the major GATT p r o v i s i o n s , n o t a b l y the MFN p r i n c i p l e ; the N a t i o n a l Treatment o b l i g a t i o n ; and the q u a n t i t a t i v e r e s t r i c t i o n o b l i g a t i o n . The b e n e f i t s or advantages gr a n t e d by a government, e i t h e r t o the p r i v a t e s e c t o r or t o s t a t e t r a d i n g e n t e r p r i s e s , may a l s o v i o l a t e the GATT, the 170 Subsidies and Countervailing Codes and the Government Procurement Code. In addition, when countertrade transactions are involved, l e g a l implications may ar i s e under the Custom Valuation Code, the T a r i f f Concessions, and the N u l l i f i c a t i o n and Impairment provisions. A GATT Secretariat Paper concluded that: "... the rules of the General Agreement and of the Codes r e l a t i n g to the use of r e s t r i c t i v e import measures and export subsidies appear to be s u f f i c i e n t l y broad to cover also those cases i n which protection or export subsidization r e s u l t s from_a requirement or inducement to engage i n countertrade". The writer, however, disagrees with the above statement. The current GATT rules and i t s Codes do not f a c i l i t a t e a uniform i n t e r p r e t a t i o n of those p r i n c i p l e s . For example, the basic question on whether countertrade measures are consistent with GATT objectives remains uncertain. One may regard countertade as a "trade r e s t r i c t i o n " and therefore countertrade practices w i l l be i n v i o l a t i o n of the GATT objectives and of the GATT provisions. This view may be argued on the ground that the trade r e s t r i c t i o n provision under GATT must be s t r i c t l y construed. However, i f the countertrade requirement i s not covered by the GATT e x p l i c i t y as a trade r e s t r i c t i o n , i t may not be i n v i o l a t i o n 135 of the GATT. So t h i s can be added that countertrade should be acceptable since i t can be used to overcome trade b a r r i e r s and to maintain and increase market shares. Given the uncertainty of views respecting the advantages and 171 disadvantages of countertrade as discussed i n Chapter two, when the l e g a l implications under GATT arises, i t i s impossible to provide a uniformed l e g a l i n t e r p r e t a t i o n of the GATT. The GATT and i t s Codes were prepared at a time when countertrade did not play an important r o l e i n world trade. But the s i t u a t i o n has changed. The writer suggests that the GATT should appoint a Panel to study the economic impact of countertrade, as well as i t s l e g a l implications under the GATT and i t s Codes. The studies done by the OECD and UNCTAD on the countertrade issue do not deal with the possible l e g a l implications under the GATT. The structure of the study by previous GATT Secretariat may be followed, but a det a i l e d explanation and analysis of the legal issues should be undertaken. I t may also be advisable to have a j o i n t study with the IMF since most of the countertrade practices deal with balance of payment problems and international payment. The hew round of M u l t i l a t e r a l Trade Negotiations (the Uruguay Round) which commenced i n 1986 seems to ignore the subject of countertrade. The writer suggests that the Uruguay Round should include countertrade as a subject of negotiation as part of i t s dicussions on t a r i f f s , n o n - t a r i f f measures, GATT provisions, Safeguards, MTN Agreements and Arrangements, subsidies and 13 6 countervailing duties, etc. The negotiations on trade i n 137 services should also deal with the countertrade transaction since i t involves services i n compensation and o f f s e t arrangements. 172 Footnotes - Chapter Four 1. J.G. C a s t e l : A.L.C. de M e s t r a l ; W.C. Graham, I n t e r n a t i o n a l Business T r a n s a c t i o n s And Economic R e l a t i o n s , (Canada: Edmond Montgomery P u b l i c a t i o n L i m i t e d , 1986) a t 44. 2. E. McGovern, I n t e r n a t i o n a l Trade R e g u l a t i o n : GATT, The U n i t e d S t a t e s and the European Communities, (England: E x e t e r G l o b e f i e l d Press, 1986) a t 4. See a l s o J.H. Jackson, World Trade and the Law of GATT (USA: The B o b - M e r i l l Company Inc., 1969) a t 54. 3. See Jackson, supra, note 2 a t 187. 4. See a l s o R.M. Gadbaw, "The I m p l i c a t i o n of Countertrade Under the General Agreements on T a r i f f s and Trade", i n B.S. F i s h e r ; K.M. Harte (eds.) B a r t e r i n the World Economy (New York: Praeger, 1985) 254 a t 256. F. R o e s s l e r , Countertrade and the GATT L e g a l System (1985) 19 J.W.T.L. No. 6, 604 a t 605. D. Z a r i n , Countertrade and the Law (1984) 18 Geo Wash J . , I n t ' l L&Econ 241 a t 241. 5. See Jackson, supra, note 2 a t 187-188. See a l s o GATT, Report o f the Panel of Canada A d m i n i s t r a t i o n of the F o r e i g n Investment Review Act, L 15504, J u l y 25, 1983, para 5.6. 6. See E x t e r n a l A f f a i r s , Canada, Countertrade Primer f o r Canadian E x p o r t e r s (Ottawa: Department of Supply and S e r v i c e s , October, 1985) a t 2, 121. Romania has O f f i c i a l Decree No. 276 of J u l y 25, 1979 a l o n g w i t h investment law (see a l s o G. Vogt and H. Nowak, "Countertade and P r a c t i c e i n E a s t e r n Europe", i n B.S. F i s h e r , K.M. Harte eds, B a r t e r i n  the World Econmy, (New York: Praeger, 1985) a t 90. 7. R.K. Paterson, Canadian R e g u l a t i o n of I n t e r n a t i o n a l Trade and Investment, (Canada: C a r s w e l l , 1986) a t 305. 8. I b i d . See d e t a i l e d d i s c u s s i o n i n S.F. Benz, Trade L i b e r a l i z a t i o n and the G l o b a l S e r v i c e Economy, 19 J.W.T.L. 1985, No. 2 95 a t 113-119. 9. A r t i c l e 1 ( 1 ) ( a ) , GATT B.I.S.D. 26th Supplement (1980) a t 33. 10. Paterson, supra, note 7 a t 307. 11. I b i d , a t 308. 12. J . I . Walsh, The E f f e c t on T h i r d C o u n t r i e s of Mandated Countertrade (1985) 19 J.W.T.L., No. 6. 592 a t 592. 173 13. Ibid. 14. Supra, note 2. 15. See McGovern, supra f note 2 at 12. 16. Ibid, at 13, footnote 27. 17. Zarin, supra. note 4 at 242-243. 18. GATT Secretariat paper on Countertrade and the General Agreement on T a r i f f s and Trade Doc CG 18/W/80 No. 84-0599, at 29 (unpublished paper). 19. Jackson, supra. note 2 at 26. 20. See i b i d , at 19-20. 21. See i b i d , at 19-26. 22. See generally i n A.J. Samet," The Future of the Most-Favoured Nation P r i n c i p l e " , i n M. I r i s h and E.F. Carasco eds, The Legal Framework for Canada-United States Trade, (Canada: Carswell, 1987) 265 at 267-275, and see also G.C. Hufbauer, J.H. Erb and H.P. Stan, "The GATT Codes and the Unconditional Most-Favoured Nation P r i n c i p l e (1980), 12 Law Poli c y I n t ' l Bus 59 at 59-93. See G.C. Hufbauer, J . J . Schoff, Trading for Growth; The Next Round of Trade Negotiations (Washington, D.C.: I n s t i t u t e for International Economic (1985) at 19-22. 23. Jackson, supra, note 2 at 198. 24. Ibid, at 413. 25. F. Stone, Canada: The GATT and the International Trade System (Canada: The I n s t i t u t e for Research on Public Policy, 1984) at 186. See also detailed discussion i n D.M. McRae, J.C. Thomas, "The Development of the Most-Favoured Nation P r i n c i p l e : Treaties of Friendship, Navigation and Commercial and the GATT", i n M. I r i s h , E.F. Carasco, (eds.) The Legal  Framework for Canada-United States Trade. (Canada: Carswell, 1987) 225 at 243, footnote 76. 26. Samet, supra, note 22 at 267. 27. Hufbauer; Schoff, supra, note 22 at 21. 28. See McGovern, supra. note 2 at 257, footnote 47, which re f e r s to GATT's decision B.I.S.D. 26th Supplement 201 (1980) at 201; McRae, Thomas, supra. note 25 at 264, footnote 77. 174 29. Ibid, at 257, and McRae, Thomas, supra, note 25 at 244, footnote 78 ref e r s to John H. Jackson's a r t i c l e on "GATT Machinery and the Tokyo Round Agreements", i n William R. Cline ed., Trade Policy i n the 1980's (Washington: I n s t i t u t e of International Economics, 1983) at 159, 174. 30. See McRae, Thomas, supra, note 25 at 244, footnotes 80-81. 31. See the preamble provided i n the Subsidies Code, Anti-dumping Law and Custom Valuation Code, and see Jackson, supra, note 2 at 26 and 786. 32. Stone, supra, note 25 at 30-31. 33. Art. I, I I , 111:2:4 of GATT. 34. McGovern, supra, note 2 at 256-257. 35. Stone, supra note 25 at 30-31. 36. Zarin, supra. note 4 at 241-242. 37. See Gadbaw, supra. note 4 at 259; H.M. Liebman, "Comment: GATT and Countertrade Requirements" (1984) 18 J.W.T.L. No. 4. 252 at 253. 38. Gadbaw, supra, note 4, at 259; Jackson, supra, note 2 at 56. 39. See McGovern, supra. note 2 at 12, and GATT preamble. 40. Walsh, supra, note 12 at 599. 41. B.I.S.D. 20th Supplement (1974) at 536. 42. See also GATT Secretariat Paper, supra. note 18 at 16. 43. See Jackson, supra, note 2 at 273. 44. Ibid, at 287. 45. B.I.S.D. 25th Supplement (1979) at 49 para 4.6; see also McGovern, supra note 2 at 251. 46. See B.I.S.D. 30th Supplement (1984) at 159-162. See also Paterson, supra. note 7 at 305, at 11-12. In t h i s case, the United States also accused Canada of v i o l a t i n g A r t i c l e XI, with respect to quantitative r e s t r i c t i o n but the Panel rejected such claim. See also V. Verdun, "Are Governmentally Imposed Countertrade Requirement V i o l a t i o n s of the GATT" (1985) 11 The Yale Journal of I n t ' l Law No. 1. 191 at 209-210. 175 47. See Gadbaw, supra, note 4 at 260; see also McGovern, supra f note 2 at 249-252. 48. See Jackson, supra, note 2 at 287, footnote 9. 49. See Jackson, supra, note 2 at 308-316. 50. See de t a i l e d discussion i n Verdun, supra, note 15 at 211-213. 51. Ibid, at 212-213. See also McGovern, supra, note 3 at 187. 52. See also GATT, Report of the Panel of Canada Administration of the Foreign Investment Review Act, L 15504 (GATT Report on Panel) July 25, 1983, and B.I.S.D., supra. note 46 at 162-163. 53. Verdun, supra, note 46 at 211. See Walsh, supra, note 2 at 599. 54. Gadbaw, supra, note 4 at 2 61. 55. See generally GATT Panel Discussion on French R e s t r i c t i o n on Hong Kong Products (hereinafter c a l l e d France v. Honor Kong  case; B.I.S.D. 30, supplement 129 (1984) at 129-140. See also Verdun, supra. note 46 at 208. 56. See GATT Secretariat Paper, supra. note 18 at 17; and F. Roessler, supra. note 4, J.W.T.L. No. 6 at 605. Gadbaw, supra, note 4 at 266; Verdun, supra. note 46 at 211-212. 57. See Gatt Secretariat Paper, supra, note 18; and Roessler, supra. note 56 at 605, footnote 4, and see detailed discussion of the application of the p r i n c i p l e i n Jackson, supra, note 7 at 322-327. 58. GATT Panel's Decision i n Verdun, supra. note 46 at 208. 59. GATT Secretariat Paper, supra, note 11 at 17. 60. Ibid, at 20-21. 61. Paterson, supra, note 7 at 14. Please note that a few developing countries such as B r a z i l , Uruguay, Korea, Egypt, and Pakistan have accepted the Codes. 62. See de t a i l e d discussion i n J.F. Beseler, A.N. Williams, A n t i -Dumping and Anti-Subsidy Law, The European Communites (London: Sweet Maxwell, 1986) at 118. 63. This view should be based on the d e f i n i t i o n of subsidey given by two authors and the purpose of A r t i c l e XVI. Jackson defines subsidy as " I t i s broadest d e f i n i t i o n a subsidy could 176 embrace numerous domestic s o c i a l program as well as d i r e c t payment for export promotion" (J.H. Jackson, "The General Agreement on T a r i f f s and Trade", i n W.S. Surrey; D. Wallace, (eds.) A Lawyer's Guide to International Business  Transactions, 2nd ed. Part 1 (U.S.A.: The American Law In s t i t u t e , 1977) 37 at 55. McGovern, based on GATT practice, defines i t as "... A subsidy i s a measurable economic advantage afforded to an enterprise by or at the d i r e c t i o n of government, without adequate recompense, and i n a way which discriminates against other enterprises or economic a c t i v i t i e s i n the same country". (McGovern, supra, note 2 at 312) . 64. Jackson, supra, note 2 at 383. 65. Interpretative note to A r t i c l e XVI, Section B and note of A r t i c l e 9 of the Subsidies Code. 66. GATT Secretariat Paper, supra. note 8 at 23; and Roessler, supra. note 55 at 610. 67. Beseler, William, supra. note 62 at 130. 68. Ibid, at 129. 69. Ibid. 70. Jackson, supra, note 2 at 384. 71. See generally i n Beseler, William, supra, note 32 at 143-168. 72. Liebman, supra, note 37 at 256. 73. Paterson, supra. note 7 at 15. 74. Jackson, supra, note 2 at 414. 75. Beseler and William, supra, note 62 at 44. 76. Stone, supra f note 25 at 36. 77. Paterson, supra. note 7 at 15-16. 78. The major consideration i s the difference i n conditions and terms of sale. I t s h a l l include transport, insurance handling and a n c i l l a r y cost, packing, guarantee warranties, tech n i c a l assistance and servicing, commission and salemen's s a l a r i e s , c r e d i t terms, overhead and research development costs, advertising cost and l e v e l of trade. See detailed discussion i n Beseler, Williams, supra, note 62 at 100-107. 177 79. See Jackson, supra, note 2 at 346-347; GATT, Report on Panel, supra. note 52 at 18; Roessler, supra, note 4 at 606. 80. See also Roessler, supra, note 4 at 606; Liebman, supra, note 37 at 257, and GATT Report on Panel, supra, note 52 at 10-11, 18. 81. Liebman, supra, note 37 at 257. 82. Gadbaw, supra. note 4 at 259. 83. GATT, Report on Panel, supra, note 52 at 19. See also Roessler, supra. note 4 at 609. 84. Liebman, supra, note 37 at 259. 85. See also Jackson, supra, note 2 at 53; McGovern, supra f note 2 at 205. 86. Castel; de Mestral; Graham, supra. note 1 at 113-114. 87. Ibid. 88. GATT Secretariat Paper, supra, note 18 at 21. 89. Ibid, at 22. 90. Ibid, and Interpretative note of A r t i c l e V:14(h) of the AGP. 91. Liebman, supra. note 37 at 257-258; Interpretative note of A r t i c l e 1:1(a) of GATT. 92. See L.B. Behrendt, "Technical Analysis of the Customs Valustion Agreement" (1980) 12 Law & Pol'y I n t ' l Bus No. 1, 159 at 161-162. 93. The CVA, and see B.I.S.D. 26th Supplement (1980) at 116-153. 94. Behrendt, supra. note 92, see detailed discussion at 164. 95. Ibid, at 164. 96. The CVA, Interpretative notes of A r t i c l e 1 of the CVA, supra, note 93 at 135. 97. Ibid. A r t i c l e l : l ( a ) . 98. Ibid. A r t i c l e l : l ( b ) . 99. Ibid. A r t i c l e l : l ( c ) . 100.Ibid. A r t i c l e l : l ( d ) . 178 101.Ibid. A r t i c l e l : l ( b ) and see example i n the Interpretative note of A r t i c l e l : l ( b ) at 135-136. 102. GATT, Secretariat Paper, supra. note 18 at 24. 103. The CVA, A r t i c l e 2:1(b); 3:1(b). 104.Ibid, i n t e r p r e t a t i v e note, A r t i c l e s 2 and 3 at 138. 105.GATT Secretariat Paper, supra, note 18 at 24-25. 106.See McGovern, supra, note 2 at 159. See also the CVA, supra. note 93, A r t i c l e 5, and Interpretative note at 120-121, 139-141. 107.See McGovern, supra, note 2 at 160, and see generally the CVA, supra, note 93, A r t i c l e 6 (1) and the inte r p r e t a t i v e notes at 121, 141-142. 108.See McGovern, supra. note 2 at 160, the CVA, A r t i c l e 7 and the i n t e r p r e t a t i v e notes at 122, 142-143. 109.Gadbaw, supra, note 4 at 259. 110.Ibid. 111.Ibid, at 258. 112.GATT Secretariat Paper, supra. note 18 at 28, and Roessler, supra, note 4 at 612, footnote 18. 113.See also Ibid. GATT Secretariat Paper at 27; Roessler, supra, note 4 at 611; McGovern, supra, note 2 at 225. McGovern, supra n. 2, at 225. 114.See GATT Secretariat Paper, supra, note 8 at 28. 115.Liebman, supra, note 37 at 257. 116.See Paterson, surpa, note 7 at 15; Stone, supra, note 25 at 186. 117.Stone, supra, note 25 at 186. 118.See d e t a i l e d discussion i n McGovern, supra. note 2 on Commodity Arrangements, Chapter 15, at 461-493. 119.Ibid. Chapter 16 at 494-533. 120.Liebman, supra, note 39 at 261. 179 121.Jackson, supra. note 2 at 557. 122.See also McGovern, supra, note 2 at 292. 123. Jackson, supra, note 2 at 639. 124. McGovern, supra, note 2 at 285. 125.Ibid, at 273, 295. 126.See de t a i l e d discussion i n Jackson, supra, note 2 at 650-656, and McGovern, supra. note 2 at 295-296. 127.Liebman, supra. note 39 at 259. 128.Stone, supra, note 25 at 21-28. 129. Jackson, supra. note 2 at 585. 130. Jackson, supra. note 63 at 68. 131.See de t a i l e d discussion i n Jackson, supra, note 2, Chapter 24. 132.See d e t a i l e d discussion i n i b i d . Chapter 28, and Jackson, supra. note 63 at 71. 133. Liebman, supra. note 39 at 260. 134. GATT S e c r e t r i a t Paper, supra, note 18 at 29. 135.See Liebman, supra, note 37 at 260. 136.GATT Draft M i n i s t e r i a l Declaration on the Uruguay Round, 2 0 September 20, 1986 (MIN 86/W/19), at 9-15. 137.Ibid, at 19-20. 180 Chapter Five Legal Implications Under National Laws: Canadian Law 5.1 Introduction Similar to t r a d i t i o n a l international trade transactions, a countertrade transaction gives r i s e to l e g a l implications at the i n t e r n a t i o n a l and national l e v e l . National law that may have an impact on countertrade transactions can be divided into two parts. The f i r s t part i s the l e g a l implications that a r i s e under private law. The second part i s the Regulatorty law aspect. Legal implications under private law includes the contract law governing international sale and service transactions. I t i s necessary to be aware of international conventions providing for the u n i f i c a t i o n of international contract terms and the establishment of Model laws and procedures, 1 but a discussion of t h i s i s beyond t h i s t h e s i s . The writer intends to discuss c o n f l i c t of laws regarding the choice of law clause, the state immunity rule, and the problem of enforcement of foreign a r b i t r a l awards. 2 As to Regulatory law, the writer w i l l emphasize how these laws e f f e c t the countertrade transaction by looking at Customs Laws, the Income Tax Act, and the Export and Import Permits Act. Then, the thesis w i l l turn to the remedial regulatory laws that 181 might allow the private or government sector to remedy an unfair trade p r a c t i c e s i t u a t i o n . The most important remedial laws are the Special Import Measures Act which deals with dumping and subsidization, and the Competition Act which deals with trade r e s t r i c t i o n s . Laws that might be used as a t o o l to promote countertrade and administer countertrade transactions, such as the Investment Canada Act, the Export Development Act, and the Department of Supply and Services Act, w i l l also be discussed. Canada i s a federal state with l e g i s l a t i v e power d i s t r i b u t e d between the federal government and the ten p r o v i n c i a l 3 governments. As a federal state, the extent of the federal l e g i s l a t i v e power and the p r o v i n c i a l l e g i s l a t i v e power i s a debatable and controversial i s s u e . 4 Therefore, the writer w i l l b r i e f l y examine the impact of the c o n s t i t u t i o n a l law of Canada on countertrade transactions. 5.2 Canadian Constitution and Trade Laws A. Overview The Federal authority to enact l e g i s l a t i o n dealing with int e r n a t i o n a l trade i s supported by two provisions within section 91 of the Constitution Act of 1867. (the section which indicates the areas of federal j u r i s d i c t i o n ) and also Canadian common law. 5 These bases of federal authority are: 182 1. the trade and commerce power, Section 91(2); 2. the taxation power, Section 91(3); and 3. the treaty-marking power a r i s i n g from common law p r i n c i p l e s . The provinces, however, are not devoid of authority regarding in t e r n a t i o n a l trade issues p a r t i c u l a r l y given the scope of section 92(13) of the Constitution Act which gives a province j u r i s d i c t i o n over "property and c i v i l r i g h t s " i n the province. Therefore, private law aspects of trade, and the international conventions which deal with private law aspects of trade, f a l l 7 within the p r o v i n c i a l j u r i s d i c t i o n . The province, with certain r e s t r i c t i o n s , i s also empowered to regulate trade law with respect to the following matters: 1. Direct taxation within the province (Section 92(2); 2. Natural resources, including taxation of the export of g natural resource products (S. 92A); and 3. Government procurement, which might provide export opportunities for the private s e c t o r . 1 0 P r o v i n c i a l l e g i s l a t i o n that d i r e c t l y a f f e c t s international trade has been ruled by Canadian courts to be i n v a l i d . Only where the impact on international trade i s i n c i d e n t a l has the 183 court upheld p r o v i n c i a l l e g i s l a t i o n that may deal with i n t e r n a t i o n a l t r a d e . 1 1 S i m i l a r l y , federal l e g i s l a t i o n which attempts to regulate i n t r a - p r o v i n c i a l trade has been declared to 12 be i n v a l i d . However, with the exception of natural resource products, i f the purpose of federal l e g i s l a t i o n i s to market products outside the province or to regulate the i n t e r p r o v i n c i a l and export trade of products, federal l e g i s l a t i o n has been upheld 13 by the Supreme Court of Canada. The major problem i s determining which j u r i s d i c t i o n (federal or provincial) can deal with the various l e g a l aspects of a countertrade agreement such as the promotion, enforcement, and regulation of the agreement. The short answer i s that both the federal authority and the p r o v i n c i a l authority have j u r i s d i c t i o n over d i f f e r e n t aspects of a countertrade arrangement. B. Legal Implications The discussion of the l e g a l implications of Canadian Constitution law w i l l be based on the assumption that the federal government or the p r o v i n c i a l governments would wish to implement regulatory l e g i s l a t i o n respecting the promotion and control of countertrade transactions between Canada and foreign trading p a r t i e s . I f the l e g i s l a t i o n i s regarded as e f f e c t i n g only i n t r a -p r o v i n c i a l or l o c a l matters, the p r o v i n c i a l goverment i s empowered to enact the regulatory law. Conversely, i f 184 l e g i s l a t i o n i s regarded as an i n t e r - p r o v i n c i a l or international matter, the federal government i s empowered to enact such regulatory law. The Supreme Court of Canada's decisions respecting what i s an i n t r a - p r o v i n c i a l or l o c a l matter and what i s to be considered as i n t e r - p r o v i n c i a l or international matter i s of assistance. 14 . . . . F a i r l e y suggests the following c r i t e r i o n given by Chief 15 J u s t i c e Laskm and Ju s t i c e Dickson i n McDonald v. Vapour Canada w i l l a s s i s t i n deciding whether a piece of l e g i s l a t i o n deals with l o c a l or national matters. L e g i s l a t i o n may be considered to be na t i o n a l l y or i n t e r n a t i o n a l l y oriented i f : 1. there i s a national regulatory scheme; 2. there i s ongoing supervision of such a scheme by a federal regulatory agency; 3. the l e g i s l a t i o n i s concerned with trade i n general, rather than with an aspect of a p a r t i c u l a r business; 4. the province j o i n t l y or sever a l l y would be c o n s t i t u t i o n a l l y incapable of passing such an enactment; and 5. the f a i l u r e to include one or more provinces or l o c a l i t i e s would jeopardize the successful operation of the l e g i s l a t i o n i n 185 other parts of the country. Whether l e g i s l a t i o n f a l l s under the federal l e g i s l a t i o n power or the p r o v i n c i a l l e g i s l a t i o n power i s to be determined from the primary objective of the l e g i s l a t i o n and the provisions contained therein. In general, i f regulatory laws purport to control and f a c i l i t a t e countertrade transaction between Canadian firms and foreign p a r t i e s and have provisions requiring import and export permits n o t i f i c a t i o n of the deal to be submitted to an agency set up under the l e g i s l a t i o n s , and provisions for the granting of sp e c i a l services or incentives to Canadian exporters i n countertrade transactions, then i t i s the writer's opinion that the federal government i s empowered to enact such l e g i s l a t i o n pursuant to section 91(2), because the purpose of the l e g i s l a t i o n i s to deal with international t r a d e . 1 6 However, a province may be able to enact a law promoting or c o n t r o l l i n g the export of natural resources i n a countertrade transaction u t i l i z i n g Section 92A. Section 92A gives the provinces control over the i n t e r - p r o v i n c i a l export of t h e i r natural resources provided that they do not discriminate with regard to p r i c e or supply within the country. The federal powers i n t h i s area are preserved by Section 92A(3), thus what exists i s a subject that comes under concurrent j u r i s d i c t i o n . Also related to natural resources i s Section 92A(4) which allows the province to tax natural resources by any mode or system including d i r e c t 186 taxes. This newly acquired power over non-renewable natural resources may r e s u l t i n a s i g n i f i c a n t change i n the p o s i t i o n of 17 the provinces i n t h i s area of international trade. I t i s the writer's opinion that i f a province enacts a law designed to promote or l i m i t the export of natural products i n a countertrade transaction, t h i s law would come under Section 92A. Professor Paterson has suggested that the provinces have a l i m i t e d but independent economic power to conclude international contracts and provide inf r a s t r u c t u r e for the private sector's 18 action on the international plane. Thus i t might be implied that the province should be able to provide administrative guidelines to f a c i l i t a t e countertrade transactions between Canadian exporters i n the province and foreign p a r t i e s . C. Conclusion The d i s t r i b u t i o n of federal and p r o v i n c i a l governments l e g i s l a t i v e power under the Canadian c o n s t i t u t i o n i s a controversial issue and a l l the discussion above i s open to challenge by a l l concerned parties i n a countertrade transaction. The writer thinks that neither the federal government nor the p r o v i n c i a l government w i l l attempt i n the short run to regulate aspects of countertrade. However, with the growth of countertrade the question of l e g i s l a t i o n power to regulate the countertrade transaction w i l l become increasingly important. 187 5.3 Private Law Aspects 5.3.1 Introduction As private law comes under the j u r i s d i c t i o n of each province, i t i s the writer's intention to take a broad perspective of the common law on c o n f l i c t of laws with respect to choice - of law clauses and the question of the enforcement of foreign a r b i t r a l awards i n Canada. Separate treatment w i l l be given the Sovereign  Immunity Act and Crown Proceeding Act. 5.3.2 C o n f l i c t of Laws: Choice of Law A. Overview In Canada, for c o n f l i c t of laws purpose, there are thirteen law d i s t r i c t s , ten provinces, two t e r r i t o r i e s and the federal system with respect to matters within federal l e g i s l a t i v e competence. C o n f l i c t of law p r i n c i p l e s i n the common law provinces are s i m i l a r though not i d e n t i c a l . However, there are s i g n i f i c a n t differences between the common law rules and the 19 c i v i l code rules of Quebec. This part, however, w i l l discuss only the common law rules. Some Canadian statutes provide a general choice of law rule 188 which must be applied when determining the proper law. Other statues have a l i m i t e d a p p l i c a t ion and provide only choice of law rules for contractual issues s p e c i f i c a l l y covered by them, but leave unaffected the determination of the proper law i n r e l a t i o n 20 to issues outside the purview of the statue. Generally, the proper law of contract may be determined in. 21 one of three ways: 1. by being expressly selected by the p a r t i e s ; 2. by being infe r r e d from the circumstances; or 3. by j u d i c i a l determination of which j u r i s d i c t i o n has the clo s e s t and most r e a l connection to the transaction. Professor Castel has summarized c o n f l i c t of law rules as 22 follows: "... Canadian courts adopted the proper law doctrine... as the system of law by which the parties intended the contract to be governed, or, where the intention i s neither expressed nor to be infe r r e d from the circumstance, the system of law with which the transaction has i t s closest and most r e a l connection". I t must be noted that the proper law of contract w i l l apply only to a dispute between private parties and does not involve the enforcement of regulatory laws. The proper law of contract 189 rules, however, are subject to the l i m i t a t i o n of the lex f o r i 23 regarding matters of procedure and public p o l i c y . B. Legal Implications Countertrade transactions involving Canadian trading parties r a i s e the following questions about the e n f o r c i b i l i t y of countertrade agreements under Canadian C o n f l i c t of Law Rules: 1. What i s the c o n f l i c t of law rules for choosing the proper law of a countertrade agreement? 2. What i s the Canadian court's approach to a choice of law clause where the law chosen has no connection to the transaction? 3. What c r i t e r i a w i l l a Canadian court use i n applying foreign law? F i r s t , under Canadian c o n f l i c t of law rules the parties can expressly agree on the governing law i n the Framework Agreement, Primary Sale or Services Agreement, and the Countertrade Agreement. In case the pa r t i e s f a i l to agree on the governing law, the court must determine the proper law by ascertaining the j u r i s d i c t i o n with which the transaction has i t s c l o s e s t and most 190 r e a l connection. J u r i s d i c t i o n s that would be considered are: the place of contracting, the place of performance, the residence of the p a r t i e s , the nature and subject matter of contract, and the 24 l o c a t i o n of the subject matter. Generally, i n a countertrade transaction the choice of law i s agreed upon. The se l e c t i o n must be bona f i d e and there must be no reason f o r avoiding the chosen system on the grounds of public , . 25 po l i c y . The second question i s what w i l l be the Canadian courts reaction i f the part i e s purport to expressly s e l e c t a proper law of contract with which the transaction has no connection. For example, i n a countertrade transaction between a Thai firm and a Canadian firm where the part i e s agree to English law as the proper law of contract what w i l l the Canadian courts do? 2 6 Professor Castel i s of the opinion that the law of a p a r t i c u l a r province i n Canada may be selected to govern a contract even when that province i s unconnected to the transaction. This i s the rule that came from the leading English case, V i t a Food Product 27 Inc. v. Unus Shipping. However, Canadian courts are free to s t r i k e down a choice of law clause which i s unconnected with a transaction. I t i s uncertain whether the part i e s can agree that d i f f e r e n t contractual issues may be governed by d i f f e r e n t laws. For 191 example, could the parties i n a countertrade transaction agree that the formation and the v a l i d i t y of the countertrade contract be governed by the law of the importing country (Thailand) and the performance of the countertrade agreement be governed by one of the provinces, e.g. B r i t i s h Columbia. Professor Castel takes the view that the p a r t i e s to a countertrade agreement can choose a d i f f e r e n t proper law of contract for d i f f e r e n t contractual 28 issues. I f t h i s i s correct the p a r t i e s to a countertrade agreement would be e n t i t l e d to s e l e c t a d i f f e r e n t proper law to govern the d i f f e r e n t countertrade agreements, namely the Framework Agreement, the Primary Sale or Services Agreement, and the Countertrade Agreement. However, the p a r t i e s normally w i l l not choose a d i f f e r e n t proper law for the various agreements since to do so would create more complexity. As to the t h i r d question on the a p p l i c a t i o n of foreign law as a proper law of contract, a Canadian court w i l l not enforce foreign penalty or revenue laws, a foreign law that i s contrary to the forum's stringent public p o l i c y respecting public or moral in t e r e s t such as Canada's conception of e s s e n t i a l j u s t i c e and 29 morality, and a foreign law that involves the enforcement of 3 0 . regulatory law . Professor Castel takes the view that public p o l i c y must connote more than l o c a l p o l i c y respecting i n t e r n a l a f f a i r s . 3 1 He further states t h a t : 3 2 " I f foreign law i s to be refused any e f f e c t on public p o l i c y grounds i t must at l e a s t v i o l a t e some 192 fundamental p r i n c i p l e s of j u s t i c e , some prevalent conception of good morals or some deep-rooted t r a d i t i o n of the forum. ... In the common law pra c t i c e of Canada very seldom has public p o l i c y been invoked i n the court with the success". The Canadian court's use of public p o l i c y issue i n dealing with foreign law i s more l i b e r a l than that of the Thai court 3 3 which tends to extensively use the domestic public p o l i c y t e s t . In Canada, foreign law i s a question of fac t which must be s p e c i f i c a l l y pleaded by the party r e l y i n g upon i t , and i t must be 34 proved to the court by properly q u a l i f i e d witness. I f a foreign law i s not proved, the law i s assumed to be the same as the lex f o r i . 3 5 C. Conclusion Canadian c o n f l i c t of law rules i n the common law provinces with respect to the proper law of contract and the application of foreign law to an agreement are very s i m i l a r to the Thai C o n f l i c t 3 6 of Law Act. The proper law rules apply only to the dispute under the agreement, and not to the enforcement of regulatory l e g i s l a t i o n . There are, however, two unsettled problems: (1) the question of the choice of law where the chosen law has no connection to the transaction, and (2) the public p o l i c y t e s t to be used by Thai and Canadian 193 courts when such a ground i s invoked. The p a r t i e s involved i n a countertrade transaction should examine the e n f o r c e a b i l i t y of the countertrade agreement p r i o r to agreeing to a choice of law clause. A Thai party must also note that since Canada i s a federal state and many of the leg a l aspects of private agreements are governed by p r o v i n c i a l laws, the choice of law clause must be to a Canadian province. 5.3.3 State Immunity Act and Crown Proceeding; Act A. Overview The State Immunity Act of Canada which entered into force on 37 . July 15, 1982 introduced and confirmed f a r reaching exceptions to the p r i n c i p l e that a foreign state i s immune from j u r i s d i c t i o n i n a Canadian court. The Act applies to a foreign state which i s defined as a sovereign state or any p o l i t i c a l sub-division of the foreign state acting i n a public capacity. This Act affirms the rule that immunity i s to apply notwithstanding the f a i l u r e of the state to take any step i n the proceedings. The Act sets out instances where immunity i s to be denied. The exceptions from 3 8 immunity include: commercial a c t i v i t y , death and property 39 . . 40 . . 41 damages, maritime law, and concerning property i n Canada. A 42 foreign state may waive i t s immunity from execution and attachment. 194 B. Legal Implications Since most countertrade transactions w i l l be entered into between government and government, government and private enterprises or state trading enterprises, the questions to be examined under t h i s Act are: 1. Whether the government or state enterprise of the importing country are sueable i n a Canadian court. 2. And i f so, can the property of the foreign government or state enterprise located i n Canada be subject to execution? As to the f i r s t question, the foreign state, which includes a department or agency, i s immune from Canadian court j u r i s d i c t i o n except where e x p l i c i t c r i t e r i a have been met or the foreign state has waived i t s immunity. The Act does not attempt to pr e c i s e l y define the major exception to immunity which i s where the state i s involved i n a "commercial a c t i v i t y " . The emphasis i n the d e f i n i t i o n of t h i s term i s on the nature of the a c t i v i t y rather than the purpose. 4 3 The "commercial a c t i v i t y " exception constitutes the r e s t r i c t i v e theory of sovereign immunity as opposed to the absolute theory of sovereign immunity where a state i s immune 195 from being sued regardless of the a c t i v i t y . The need for the r e s t r i c t i v e theory arose from the increasing willingness of states to enter into commercial or other private law transactions with i n d i v i d u a l s . Canadian courts have adopted the r e s t r i c t i v e 44 view of sovereign immunity. For example, i n the Lorach Transport case, the Federal Court of Appeal held that the State of Iran was the owner of the b i l l of lading and of the cargo. It s agreement with D. Inc. and the contract of affreightment were ordinary, commercial, private law transaction hence, Iran 45 could not claim a sovereign immunity. In Zodiak I n t ' l Product 46 Inc. v. P o l i s h People's Republic, the contract i n question, which the p l a i n t i f f alleged had been breached by the defendant (the P o l i s h People's Republic), granted to the p l a i n t i f f e x c l u s i v e l y d i s t r i b u t i o n r i g h t s i n Canada fo r a l l motion pictures produced by or leased to the defendant. The Quebec Court of Appeal held that the contract was a purely commercial transaction and was not an act of state and the defendant could not claim sovereign immunity. I t i s the writer's opinion that i f a countertrade transaction i s entered into between a Canadian firm and a department of a foreign state or state trading enterprise, the transaction w i l l constitute a "commercial a c t i v i t y " and the foreign e n t i t y would 47 be sueable i n a Canadian court. In addition, i f the foreign e n t i t y waives i t s immunity by 196 written agreement or otherwise as provided i n the Act, the foreign e n t i t y i s suable i n a Canadian court. Regarding the execution against the property of foreign state, the Act grants general immunity from execution and attachment of the property of a foreign state, subject to c e r t a i n exceptions. These exceptions include the case whereby the department has e i t h e r e x p l i c i t l y or by implication waived i t s immunity or where the property i s used or i s intended to be used 49 for a commercial a c t i v i t y . Where a countertrade agreement i s between a foreign party and eith e r a federal or p r o v i n c i a l government department ("the Crown"), and the foreign party wants to sue the Crown for breach of contract, the foreign party i s required to proceed i f the party i s the federal department i n accordance with the 50 Proceedings Against Crown Act. I f the party i s a p r o v i n c i a l government department, the foreign party has to proceed i n accordance with the Crown Proceeding Acts of each province, such 51 as the Crown Proceeding Act of B r i t i s h Columbia. The e f f e c t of these acts, subject to the exclusion of s p e c i f i c performance and injunctions as possible remedies, i s to place the Crown i n almost the same p o s i t i o n as any other corporation or i n d i v i d u a l when i t 52 comes to the making and enforcing of contracts. 197 C. Conclusion In p r a c t i c e , countertrade agreements between foreign states or t h e i r departments w i l l provide for a waiver of immunity. Therefore, the foreign state or i t s department which enters into a countertrade transaction with a Canadian firm w i l l be sueable and i t s property located i n Canada subject to execution. When a foreign party wants to sue the Crown of the federal government, the proceedings against the Proceedings Against Crown Act w i l l apply. For the p r o v i n c i a l government, the Crown Proceeding Act of each province w i l l apply. 5.3.4 Dispute Resolution: International A r b i t r a t i o n A. Overview In international agreements dispute resolution through int e r n a t i o n a l a r b i t r a t i o n i s recommended i n order to eliminate 53 uncertainty respecting c o n f l i c t i n g j u r i s d i c t i o n . The most important m u l t i l a t e r a l conventions on foreign or i n t e r n a t i o n a l a r b i t r a t i o n are the Convention on the Recognition and Enforcement of Foreign A r b i t r a l Awards (New York, 1958) ("the 54 New York Convention") and the Model A r b i t r a t i o n Law drafted by United Nations Commission on International Trade Law ("UNCITRAL") 55 ("the Model Law"). Canada, both at the federal and p r o v i n c i a l 198 l e v e l , has acceded to and adopted the New York Convention and the Model Law. In May, 1986, the federal government enacted the 56 United Nations Foreign A r b i t r a l Awards Convention Act, and the 57 Commercial A r b i t r a t i o n Act. The Commercial A r b i t r a t i o n Act applies to a l i m i t e d range of both commercial and c i v i l matters pr Q that come within the federal j u r i s d i c t i o n . Canada's accession to the New York Convention has the e f f e c t of making an award rendered i n Canada ( i . e . B r i t i s h Columbia) r e a d i l y recognized and enforceable i n the courts of contracting p a r t i e s to the New York Convention and t h e i r foreign a r b i t r a l awards w i l l be recognized and enforced i n Canada. Each province has to adopt the conventions as p r o v i n c i a l law. For example, B r i t i s h Columbia has adopted the New York Convention 59 as the Foreign A r b i t r a l Award Act ("the FAA Act") which r e s t r i c t s the application of the New York Convention to "commercial agreements". B r i t i s h Columbia adopted the Model Law, with some amendments, as the International Commercial A r b i t r a t i o n  Act (the "ICA A c t " ) 6 0 primarily to give l e g i s l a t i v e support to t h e i r newly created Center of International Commercial A r b i t r a t i o n . 199 B. Legal Implications As discussed e a r l i e r , the examination of the legal implications of enforcement of foreign or international a r b i t r a l awards w i l l be based on B r i t i s h Columbia law. The party who wishes to enforce a foreign a r b i t r a l award i n other provinces i s required to examine the law of that province. However, i n the common law provinces the major p r i n c i p l e s are s i m i l a r . In B r i t i s h Columbia, which has adopted both the New York Convention and the Model Law, i f a dispute arises from a countertrade agreement the p a r t i e s w i l l have the a l t e r n a t i v e i n most cases of being able to choose to proceed to enforce an award through the FAA Act or the ICA A c t . 6 1 Generally, the ICA Act supplements and a s s i s t s i n i n t e r p r e t i n g the FAA Act. For example, the d e f i n i t i o n of " i n t e r n a t i o n a l " i n Section 1(3) of the ICA Act w i l l a s s i s t the B r i t i s h Columbia Supreme Court i n i n t e r p r e t i n g what a "foreign a r b i t r a l award" i s and what constitutes a "non-domestic award" under Schedule 1 of the FAA  Act or the d e f i n i t i o n of commercial a r b i t r a t i o n . Section 3(6) of the ICA Act w i l l a s s i s t i n the i n t e r p r e t a t i o n of commercial reservations under Section 3 of the FAA Act. I f there i s a c o n f l i c t between the FAA Act and the ICA Act, or other acts, the FAA Act i s to p r e v a i l . However, i t i s u n l i k e l y that there w i l l be any c o n f l i c t between the ICA Act and the FAA Act because the ICA Act i s simpler and a more f l e x i b l e mechanism for the 200 enforcement of an a r b i t r a l award and the two are designed to work together. There i s no doubt that disputes a r i s i n g from a countertrade transaction between a Thai party and a Canadian partner w i l l come 62 under the purview of the ICA Act. In addition, an a r b i t r a l award made i n connection with a countertrade transaction rendered outside Canada, or inside Canada but regard as a non-domestic 6 3 award, w i l l be come under the purview of the FAA Act. I t should be noted that where a foreign a r b i t r a l award cannot be enforced under either the FAA Act or the ICA Act. the award may s t i l l be enforced i n Canada i n accordance with rules that existed p r i o r to the implementation of the new l e g i s l a t i o n . The p r i o r rules provided that awards could be enforced as a contract 64 under common law r u l e or under Part 2 of the Court Order Enforcement Act by taking an action to enforce the foreign 65 judgment under Section 30(1) of t h i s Act. The l a t t e r a l t e r n a t i v e applies only to awards made i n the Federal Republic of Germany, Austria and two A u s t r a l i a States. The enforcement of foreign or international a r b i t r a l awards i n Canada, such as i n B r i t i s h Columbia, o f f e r s more alternatives and c e r t a i n t y for the parties i n a countertrade transaction. The adoption of the Model Law as dometic law which f a c i l i t a t e d the establishment of the International A r b i t r a l Center i n Canada 201 might also make the Center an a t t r a c t i v e choice f o r a r b i t r a t i o n . C. Conclusion The enactment of l e g i s l a t i o n to recognize and f a c i l i t a t e the enforcement of foreign or international a r b i t r a l awards i n Canada, both at governmental and p r o v i n c i a l l e v e l s , assures the par t i e s i n countertrade agreements that the enforcement of foreign or international awards which meet a l l conditions w i l l be more c e r t a i n and predictable. 5.4 Regulatory Law Aspects 5.4.1 Introduction The discussion of the enforcement and the application of regulatory law that e f f e c t s countertrade transactions i s necessary because the courts w i l l ignore the proper law of the contract chosen by the part i e s when dealing with the regulatory 6 6 law. The purposes of regulatory laws are to control private business transactions and implement government p o l i c y . A foreign firm that engages i n a countertrade transaction with a Canadian firm i n Canada i s subject to t h i s regulatory law. In examining the regulatory law that may e f f e c t a 202 countertrade transaction, the writer w i l l focus on s p e c i f i c issues a r i s i n g from the application of such l e g i s l a t i o n both to the private and government sectors, as well as the impact of such l e g i s l a t i o n on the countertrade p o l i c y of Canada. The writer w i l l sub-divide the law into 3 categories on the basis of the purpose of the law: the Income Tax Act, and the Export and Import  Permits Act; remedial regulatory laws, which include the Special  Import and Export Measures Act and the Competition Act; and Promotion and Administrative Regulatory Laws, such as the Investment Canada Act, the Export Development Act, and the Department of Supply and Services Act. 5.4.2 F i s c a l and Regulatory Control Laws 5.4.2.1 Introduction For the purposes of discussion, the writer w i l l c l a s s i f y F i s c a l laws mean Customs laws, which includes the Customs Act, 1986, the Customs T a r i f f Act, and the Income Tax Act. Regulatory Control law w i l l include the Export and Import Permit Act. As to the F i s c a l laws, the writer w i l l l i m i t the discussion to the following: 1. Questions concerning customs valuation and the surtax; and 203 2. Questions on tax l i a b i l i t y of non-residents carrying on business with a Canadian company and the method of valuing the income from goods or services i n countertrade transactions under the Income Tax Act. With respect to the Export and Import Permit Act, the writer w i l l h i g h l i g h t the relevant provisions that p a r t i e s involved i n a countertrade transaction should review and comply with. 5.4.2.2 Customs Laws A. Overview The major p r i n c i p l e s of Canadian Customs laws are found i n 67 two pieces of l e g i s l a t i o n . F i r s t , the Customs Act. 1986 which provides a d e t a i l e d framework for the administration and the determination of value for duty, as well as providing for various 6 8 exemptions from duty. Second, the Customs T a r i f f Act. which provides f o r the levy and c o l l e c t i o n of import duty on goods and for the imposition, by Cabinet, of surtaxes. These laws are administered by the Department of National Revenue. In discussing the l e g a l implications, the precedents or rulings on the GATT Customs Valuation Code and the United States Custom law may be of assistance since Canada, as a signatory member of the GATT Customs Valuation Code, has adopted the Customs Valuation method from that code and amended i t s Custom Act concerning 204 valuation f o r duty purposes to bring i t into l i n e with that of 69 . the United States Custom law. There i s a Duties R e l i e f Act that provides f o r drawbacks, reductions, refunds and remission of duties, other than the export drawbacks provided i n the Customs 70 Act, which the part i e s should take into account. I t i s beyond 70 the scope of t h i s thesis to discuss t h i s t o p i c . B. Legal Implications I. Customs Valuation Method Following the amendment of the Customs Act i n 1986, the customs valuation of the goods imported to Canada are divided 71 72 into s i x methods. They are: (1) the transaction value method; 73 (2) the transaction value of i d e n t i c a l goods; (3) the 74 transaction value of s i m i l a r goods; (4) the deductive value of 75 7 6 the goods; (5) the computed value of goods; and (6) the 77 residual method. As there i s no r u l i n g or precedent under the new Canadian Customs Act. 1986, on the determination of value of goods involved i n countertrade transactions, the writer w i l l b r i e f l y examine these s i x methods and subsequently discuss t h e i r possible a p p l i c a b i l i t y to countertrade transactions. Transaction value i s the f i r s t and most important method that 205 the Department of National Revenue may use i n determining the 7 8 value of goods or products for custom duty purposes. The transaction value i s based on the sale p r i c e of the goods or products that are exported to Canada provided the following . . 79 conditions are met. 1. There are no r e s t r i c t i o n s respecting the d i s p o s i t i o n or use of the goods by the purchaser (other than s p e c i f i e d r e s t r i c t i o n s , such as those imposed by law). 2. The sale or the p r i c e paid i s not subject to conditions i n respect of which a value cannot be determined. 3. The p r i c e of the goods includes the proceeds of any subsequent resale which w i l l accrue to the vendor. 4. The purchaser and vendor are unrelated, or i f related, the r e l a t i o n s h i p does not influence the p r i c e paid. Section 48 also s p e c i f i e s elements which can be added or deducted from the p r i c e p a i d . 8 0 Where the transaction value method cannot be used, the f i r s t a l t e r n a t i v e i s the transaction value of i d e n t i c a l goods. A major change here i s that such sales are export sales and not sales i n the domestic market of the country of export. The next 206 a l t e r n a t i v e i s the transaction value of s i m i l a r goods. In respect of both i d e n t i c a l and s i m i l a r goods, comparison i s made with goods from the same producer and then with goods from other producers. 8 1 The deductive value method i s based on the sale p r i c e a f t e r importation into Canada and has the advantage of r e l y i n g on 8 2 information ava i l a b l e i n Canada. The computed value method, on the other hand, i s based on the cost of producing the goods and on the amount of p r o f i t and general expenses. This method requires foreign manufacturers to provide information as to the 8 3 cost of production of goods. The difference between these l a s t two methods i s that the deductive value s t a r t s with a resale p r i c e i n Canada and works backward to an export p r i c e . The 84 computed value works forward from the costs of production. In practice, the importer has the r i g h t to have the computed value method applied ahead of the deductive value method. The computed value method i s l i k e l y to be u t i l i z e d by the importer when the importer and the supplier are related companies. When goods cannot be valued under any of the f i r s t f i v e methods, they s h a l l be appraised by the residual value method which means that any of the f i r s t f i v e methods may be f l e x i b l y 8 6 applied on the basis of information available i n Canada. The app l i c a t i o n of the residual value method w i l l almost always require consultation between the importer and the Department. 207 What method i s to be used i n determining the customs valuation of goods i n countertrade transactions? F i r s t , the transaction value method as s p e c i f i e d i n Section 48 of the Custom Act, 1986 should be applied. The importer w i l l want to use the transaction value method since i t i s based on the invoiced p r i c e and the value of countertrade products i s usually lower than other products. However, i t appears that i n countertrade transactions, p a r t i c u l a r l y i n the Barter Arrangements, where there.is no p r i c e or monetary term for the countertrade product, the transaction value method may not be applicable because there 8 7 i s no sale. Even where there i s a monetary term i n a Barter or other type of countertrade arrangement, such an arrangement may be regarded as sale or p r i c e that i s subject to conditions for which a value cannot be determined as provided i n Section 48(1)(b) of Customs Act. 1986. Therefore, the transaction value 8 8 method may not be useable for countertrade transactions. I t should be noted that Memorandum D13-4-4 of Revenue Canada respecting l i m i t a t i o n on the use of the transaction value method does not include that portion of the GATT Customs Valuation Code Interpretative Note which gives examples of sales that are not acceptable under the Code. The following are examples of "unacceptable sales" i n the Code that may rel a t e to 89 countertrade. 208 "(a) The s e l l e r establishes the p r i c e of imported goods on condition that the buyer w i l l also buy other goods i n s p e c i f i e d quantities; (b) the p r i c e of the imported goods i s dependent upon the p r i c e or prices at which the buyer of the imported goods s e l l s other goods to the s e l l e r of the imported goods; (c) the p r i c e i s established on the basis of a form of payment extraneous to the imported goods, such as where the imported goods are semi f i n i s h e d goods which have been provided by the s e l l e r on the condition that he w i l l receive a s p e c i f i e d quantity of the f i n i s h goods." Professor I r i s h has commented that the omission of these three examples from the Memoranda may mean that the Canadian Custom Authorities wish to adopt a d i f f e r e n t p o l i c y or i t may mean that the i n c l u s i o n of examples was f e l t to be unnecessary as they w i l l have l i m i t e d s i g n i f i c a n c e i n any negotiation between 9 0 Canadian Custom Authorities and importers. A l l the examples provided i n the i n t e r p r e t a t i v e notes on the GATT Customs Valuation Code are aimed at overcoming problems of 91 . . . i n t e r p r e t a t i o n . I t i s the writer's opinion that the Canadian Customs Authorities should take a view s i m i l a r to that of the GATT Technical Committee and interpret the Customs Valuation Code so that the f i r s t transaction value under Section 48 of the Customs Act, 1986 w i l l not apply i n a countertrade transaction. One U.S. Customs Service Ruling i n 1984 dealt with a customs valuation problem respecting a Barter transaction. The 209 transaction involved U.S. and U.S.S.R. firms with large i n d u s t r i a l machinery going from U.S.A i n exchange for machine tools and bakery and doughnut machinery from the U.S.S.R. There was no monetary value attached to the machinery from the U.S.S.R. The U.S. Customs Service ruled that unless the barter transaction s p e c i f i e d the monetary value of the machinery, the transaction value method was not applicable. I t may be implied that i f the monetary value of the machinery was sp e c i f i e d , the transaction 92 value method would have been applied. I f t h i s view i s adopted, i t would contradict the GATT Technical Committee opinion and the provisions of the Customs Valuation Code. Even though the GATT Technical Committee's view i s not clear, the writer i s of the opinion that i n a countertrade transaction, the other two alternate transactions value of the l i k e goods or the s i m i l a r goods method also should not apply. The reasons are: (1) the comparable import of i d e n t i c a l or s i m i l a r goods to countertrade products i s not possible unless the l i k e or s i m i l a r goods to be compared are sold based on the same countertrade requirements which i s u n l i k e l y to occur, and (2) when the condition respecting countertrade requirement applies to the i d e n t i c a l or s i m i l a r goods, the f i r s t transaction value method i s 93 also not applicable. I t i s uncertain how Canadian Custom Authorities would take the p o s i t i o n i n determining the value of countertrade 210 products. Most l i k e l y the Canadian Customs Authorities would inte r p r e t the conditions under Section 48(1)(b) of Customs Act, 1986, to include the countertrade transaction as a sale subject to conditions, regardless of the non-specification of monetary value f o r the countertrade products. In c e r t a i n countertrade transactions, l i k e Counterpurchase or Buy Back arrangements where the importer agrees to do something r e l a t i n g to the production or the marketing of imported goods, t h i s condition w i l l not r e s u l t i n r e j e c t i o n of the transaction 94 value method. Ba s i c a l l y , i f the f i r s t transaction value method i s not applicable i n countertrade transactions, then other methods w i l l be employed: 1. the transaction value of i d e n t i c a l goods; 2. the transaction value of s i m i l a r goods; 3. the deductive value; 4. the computed value; and 5. the residual value. Professor I r i s h summarizes the order of app l i c a t i o n of the 95 alternate modes of determining transaction value: "transaction value of i d e n t i c a l goods from the same producer, transaction value of i d e n t i c a l goods from other producers, transaction value of s i m i l a r goods from 211 the same producer, transaction value of s i m i l a r goods from other producer...". In practice, i f a review of goods from the same producer reveals that there are no sales of i d e n t i c a l goods but there are sales of s i m i l a r goods, then the search for sales of i d e n t i c a l 96 goods from other producers might not be examined. The ap p l i c a t i o n of the above customs valuation methods to countertrade transactions w i l l depend on the products involved and w i l l be applicable on a case by case basis. Generally, the transaction value of i d e n t i c a l goods w i l l be based on the transaction value of i d e n t i c a l goods produced by the same vendor or producer i n the exporting country for export to Canada at about the same time, at the same qu a l i t y and 97 quantity. This method depends on the knowledge of the importer of sale of i d e n t i c a l goods. However, customs valuation determined by t h i s method may not be appropriate i f the transaction value of the product sold to other importers i s subject to a condition as provided i n Section 48(1)(b) of Customs Act. 1986. In t h i s case the transaction value of i d e n t i c a l goods w i l l not be used. The transaction value of s i m i l a r goods also 9 8 has t h i s problem. I f the transaction value of i d e n t i c a l or si m i l a r goods sold by other producers i s applicable (where i t i s determined that no conditions e x i s t ) , the importer of countertrade products may have to pay a higher duty since the 212 transaction value of other products or s i m i l a r products sold by other producers may be higher than those involved i n a 99 countertrade transaction. I t should be noted that i f , i n applying these two methods, more than one transaction value of i d e n t i c a l goods or s i m i l a r goods i s formed, the lowest value should be used to determine the customs value of imported products. Though these methods are less s a t i s f a c t o r y than the transaction value under Section 48 of the Customs Act, 1986, they are more convenient and predictable than the deductive value and computed value methods. 1 0 0 U.S. Customs Service takes the view that the deductive value i s most appropriate i n cases of Barter Arrangements and that the other methods are not a p p l i c a b l e . 1 0 1 The deductive value method i s based on the pr i c e at which the imported goods, i d e n t i c a l or s i m i l a r products are resold i n the domestic market. Sales used for determining the deductive value must be between parties who 102 are unrelated. This method i s not as predictable as transaction value since i t w i l l apply only a f t e r the goods are imported, but i t w i l l use information ava i l a b l e i n Canada as opposed to foreign information necessary to compute value based 103 on the cost of the product. I f the part i e s have the choice of using the deductive value method or the computed value method (which i s based on the cost 104 of the material and production), the importer should use the 213 deductive value method since the computed value method i s more 105 complex and requires information from overseas. The residual 106 value method should be avoided since i t allows the Custom . . . . . 107 Authorities to determine duty on an a r b i t r a r y basis. The method of valuation to be applied to a countertrade transaction w i l l depend on the nature of the transaction and the products involved. I t i s a complex area of law which requires d e t a i l e d examination on each p a r t i c u l a r case. The importation of countertrade products may face a surtax or surcharge imposed by the Custom Authorities under the Customs T a r i f f Act. The Canadian Customs T a r i f f Act provides for the imposition by cabinet of surtaxes or surcharges of varying 108 duration and amounts i n three separate s i t u a t i o n s . (1) To enforce Canada's righ t s under a trade agreement to respond to discriminatory conduct having an adverse e f f e c t on 109 Canada's trade. (2) Where Canada's external f i n a n c i a l p o s i t i o n and i t s balance of payments are such as to require s p e c i a l measures. 1 1 0 (3) Where imported products are causing or threatening "serious i n j u r y " to a Canadian producer of a l i k e or a d i r e c t l y 214 competitive p r o d u c t . 1 1 0 The two government departments which are responsible for the i n i t i a t i o n of the imposition of the surtax are the Department of Finance and the Department of External A f f a i r s . The Department of Finance plays the major ro l e , while the Department of External A f f a i r s w i l l recommend the imposition of the surtax when i t arises from a trade agreement. Countertrade transactions may r a i s e concerns about the imposition of the surtax i n several s i t u a t i o n s . (1) I f a developing country imposed a mandatory countertrade requirement on a discriminatory basis against Canadian firms, the Canadian cabinet might impose the surtax against products 112 imported from that country using Section 7(2)(b)(d). The order to impose the surtax would have e f f e c t for the period s p e c i f i e d , unless the order i s revoked at an e a r l i e r date. The order must 113 be published i n the Canada Gazette. (2) I f an importer of countertrade products causes or threatens serious injury to a Canadian producer of a l i k e or competitive product as determined by the Canadian Import Tribunal under the Special Import Measures Act, or the T e x t i l e and Clothing Board under T e x t i l e and Clothincr Board Act, then the Cabinet may impose a surtax on the imported goods under Section 215 8(1) at a rate s p e c i f i e d i n the order. The maximum rate i s not exceed what i n the opinion of the governor-in- council i s 114 s u f f i c i e n t to prevent further injury or threat of injury. The order w i l l remain i n e f f e c t for a s p e c i f i e d period or u n t i l revoked, but s h a l l not exceed three years. The order must be 115 published i n the Canada Gazette. I t may be advisable for Canadian importers to seek a r u l i n g or consult with the Department of Finance and the Department of External A f f a i r s p r i o r to importing countertrade products. Even though t h i s w i l l not protect against action being taken by other producers i n Canada, i t may l i m i t the exposure to the surtax. C. Conclusion The Customs Valuation methods and the possible imposition of a surtax are major l e g i s l a t i v e l y - b a s e d actions that may e f f e c t countertrade products imported into Canada. The current Canadian Customs Act and Customs T a r i f f Act are broad enough to deal with countertrade transactions. The importer i s advised to plan and structure the countertrade transaction cautiously i n order to avoid costs. Other producers who may suff e r from the importation of countertrade products may seek r e l i e f through the imposition of a surtax under the Customs T a r i f f Act i n conjunction with the Special Import Measures Act. 216 5.4.2.3 Income Tax Act A. Introduction Canadian income taxes are le v i e d pursuant to the Income Tax 116 Act ("ITA") on a l l persons, including corporations, estates and t r u s t , which come within the federal taxing j u r i s d i c t i o n . Due to the complexity of the application of the ITA, t h i s thesis w i l l examine b r i e f l y on only two s p e c i f i c questions that may be relevant to countertrade transactions. F i r s t , the tax implications for a non-resident company engaging i n a countertrade transaction with Canadian companies. Second, the method of determining the value of goods or services under countertrade transactions for tax purposes. This thesis, however, does not deal with Part XIII of the ITA respecting income tax of non-residents i n Canada which imposes a withholding tax on payments made to or income made by a non-resident of Canada, including int e r e s t s , dividends, rents and r o y a l t i e s . Part XIII of the ITA i s referred to as a "non-resident withholding tax" and i s pegged a statutory rate of 25 (twenty-five) percent. The discussion w i l l be l i m i t e d only to the tax l i a b i l i t y of non-residents under Part I and Part XIV of the ITA. 217 B. Legal Implications As to the f i r s t point, non-resident corporations, individuals or other e n t i t i e s are taxed i n Canada under the ITA only i n respect of c e r t a i n types of income: (1) Income from a business c a r r i e d on i n Canada; (2) Employment income earned i n Canada; (3) Income or c a p i t a l gains from the d i s p o s i t i o n of taxable Canadian property; and (4) Unearned or investment type of income from sources i n Canada. There are three c r i t e r i a used to ascertain when a non-resident engages i n a countertrade transactions i n such a way as to become subject to Canadian tax: (1) Whether there i s a business; (2) Whether i t i s being c a r r i e d on i n Canada; and (3) I f a Double Tax Agreement exists between Canada and the country i n which the non-resident resides, whether the p r o f i t s are a t t r i b u t a b l e to a permanent establishment i n Canada. A business i s defined under Section 248(1) of the ITA as: ""business" includes a professional; c a l l i n g trade manufacture or undertaking of any kind whatever and except f o r the purposes of paragraph 18(2)(c), an adventure or concern i n the nature of trade but does not 218 include an o f f i c e of employment". Undoubtedly, countertrade transactions between a foreign company and a Canadian firm are regarded as a business. The second element - whether a business i s being c a r r i e d out i n Canada - i s the most complex one to determine. There are a number of conditions that, i f s a t i s f i e d , d i r e c t s that a non-resident w i l l be considered to be carrying on business i n Canada. These conditions are: (1) i f the non-resident or an agent on his behalf, continuously concludes contracts i n Canada, and (2) i f the non-resident concludes contracts, d e l i v e r s goods and receives payment within Canada, even though no physical establishment i s maintained i n Canada and the non-resident i s not present i n 118 Canada. Section 253 of the ITA provides that a non-resident i s to be considered carrying on business i n Canada i f the non-resident produces, grows, mines, creates, manufactures, fabricates, improves, packs, preserves, or constructs any thing, eit h e r i n whole or i n part, i n Canada or i f the non resident s o l i c i t s , orders, or of f e r s anything for sale i n Canada through an agent or servant i r r e s p e c t i v e of whether the contract or transaction i s to be ca r r i e d out i n Canada or outside Canada. Therefore, i f a foreign firm concludes a countertrade agreement and d e l i v e r s goods and receives payment within Canada, the foreign firm w i l l be deemed a non-resident carrying on business i n Canada. However, a single countertrade transaction may not be s u f f i c i e n t to meet the conditions that generally apply for carrying on business i n Canada because i t does not meet the 219 "continuity i n carrying on business" t e s t . Subject to the Double Tax Agreements, a non-resident company deemed to be carrying on business i n Canada w i l l be subject to Canadian income tax. Once the non-resident's taxable income has been determined, the amount of Canadian tax payable i s computed by applying the federal and p r o v i n c i a l tax rates for 12 0 corporations. The branch tax at the rate of 25% may be applicable to a non-Canadian corporation which c a r r i e s on business i n Canada. This tax i s normally l e v i e d on the post-tax p r o f i t s earned by a non-Canadian corporation through i t s business a c t i v i t i e s i n Canada, less a special allowance which i s designed to permit the corporation to increase the amount of the c a p i t a l 121 invested by i t i n i t s Canadian operations. Tax exemptions or deduction are avai l a b l e to national corporations of countries that have entered Double Tax Agreements with Canada. So f a r Canada has entered into over 40 double tax t r e a t i e s (which are o f f i c i a l l y c a l l e d Conventions or Agreements for the Avoidance of Double Taxation and the Prevention of Tax 122 . . Evasion). Thailand i s among those countries which has concluded a Double Tax Agreement with Canada, having completed the treaty i n 1984. This Double Tax Agreement i s c a l l e d the Convention Between Canada and the Kingdom of Thailand for the Avoidance of Double Taxation and the Prevention of F i s c a l Evasion 12 3 with respect to Taxes on Income (hereinafter c a l l e d "Canada-220 Thailand DTA"). Therefore, i f a Thai company enters into a countertrade agreement with a Canadian firm and the Thai company does not constitute a permanent establishment under A r t i c l e 5 of the Canada-Thailand DTA, i t w i l l not subject to Canadian income tax. Detailed discussion of t h i s issue i s beyond the scope of t h i s t h e s i s . F i n a l l y , countertrade transactions may give r i s e to problems respecting the valuation of goods and services problem for purposes of computation of income and expenses. The issue i s complex and i s beyond the scope of t h i s t h e s i s , however the writer w i l l provide an overview of some of the tax implications that may a r i s e i n countertrade transactions. In a Barter transaction where the parties may or may not specify the value of the goods or services, the method of determining the value i s complex. There i s no provision i n the ITA that deals d i r e c t l y with international barter. However, Interpretation B u l l e t i n IT-490 issued by Revenue Canada 1 2 4 respecting domestic barter may be of assistance. In domestic 125 barter, Revenue Canada takes the p o s i t i o n that: "... barter transactions are within the purview of the Income Tax Act. Such transactions can therefore r e s u l t i n income or expense as contemplated by sections 3 and 9 thereof or can r e s u l t i n the a c q u i s i t i o n or d i s p o s i t i o n of c a p i t a l property, e l i g i b l e c a p i t a l property, personal-use property or inventory, depending upon the circumstnaces of the persons who are bartering and the nature of that which i s bartered, on the same 221 basis...". Revenue Canada has the following guidelines f o r the valuation * • 126 of goods and services: (1) In e f f e c t , the tax consequences of a p a r t i c u l a r barter transaction w i l l be determined as i f cash were the consideration. (2) Where an amount must be brought into income or treated as the proceeds of a d i s p o s i t i o n of c a p i t a l property, that amount i s the p r i c e that the taxpayer would normally have charged a stranger for the goods or services, adjusted for any cash paid or received as part of the transaction. (3) In the event that only one-half of the barter transaction can be valued, Revenue Canada w i l l accept that value for purposes of the t o t a l transaction, provided that the p a r t i e s were dealing at arm's l e n g t h . 1 2 6 There i s only one Tax Court of Canada decision, the 1985 127 Linnett case, respecting domestic barter which may have implications for international barter. The tax-payers were partners i n a law firm. The firm had an account with a barter exchange known as Tradex. Under the Tradex scheme member businesses accepted barter c r e d i t s from other members i n exchange for goods and services. The taxpayers accepted Tradex c r e d i t s i n exchange for l e g a l services and for tax purposes valued each 222 d o l l a r c r e d i t at f i f t y - f i v e cents rather than at the face value of one d o l l a r . The Minister based i t s tax assessment on the face value of one d o l l a r . In the case the taxpayers successfully proved to the court that the c r e d i t s could be exchanged only for goods or services offered by other Tradex members, and t h i s l i m i t a t i o n of the use of the cr e d i t s c l e a r l y indicated that t h e i r value had to be les s than t h e i r face value. The court, however, did not ascertain the true value of the c r e d i t s , instead ordering 128 a reassessment. In the case of international barter, i f the p r i c e or value of goods or services i s lower than the market value, which i s normally the case, Revenue Canada may assess the income or expenses of the taxpayer (an importer of countertrade products or a non-resident who c a r r i e s on business i n Canada) based oh the 129 market value or actual value of the goods and services. The writer i s of the opinion that i f the taxpayer can es t a b l i s h the fact that: (a) the goods i n a barter transaction have some r e s t r i c t i o n s p e c i f i e d i n the barter agreement (such as market r e s t r i c t i o n f o r countertrade products); (b) the cost of countertrade product i s lower than the market pr i c e due to excessive surplus of supplies; or (c) the importers of countertrade products have to pay a fee to trading houses i n disposing of the countertrade product which i n turn get a big discount from the exporters, then Revenue Canada should accept the agreed prices and the difference of the transaction from the 223 ordinary sales and services agreement. I f Revenue Canada views that the pri c e or value of goods has to be reassessed, then the assessment of prices must be reasonably done taking the countertrade obli g a t i o n and i t s c h a r a c t e r i s t i c s into consideration. The Tax Court decision i n the L i n e t t case may form the basis for further developments i n inte r n a t i o n a l barter t r a n s a c t i o n s . 1 3 0 Some forms of countertrade transactions may constitute a non-arm's length transaction because of the commitment or re c i p r o c a l nature of the countertrade agreement and the pa r t i e s to i t . I f a countertrade transaction i s regarded as a non-arm's length transaction, then the value of the goods or services must be determined based on a " f a i r market value" or a reasonable "arm's 131 length p r i c e " . The ITA does not provide an a l l - i n c l u s i v e d e f i n i t i o n of an arm's length transaction. However, Revenue Canada, i n 1987, 132 issued an Information C i r c u l a r defining the "arm's length 133 p r i n c i p l e " to mean that: "each such transaction should be c a r r i e d out under terms and at a pri c e that one could reasonably have expected i n s i m i l a r circumstances (similar product or service, market c r e d i t terms, r e l i a b i l i t y of supply and other pertinent circumstances) had the parti e s been dealing at arm's length". I f the countertrade transaction takes place at a f a i r market 224 value, the question of whether the parties do or do not deal at 134 arm's length w i l l not be an issue. The c r i t e r i o n which have been examined by the courts i n determining whether or not a transaction i s at arm's length are ^ ->-> 135 as follows: (a) the existence of a common mind which d i r e c t s the bargaining for both par t i e s to a transaction; (b) p a r t i e s to a transaction acting i n concert without separate i n t e r e s t s ; and (c) de facto control. In addition to the above c r i t e r i o n , "related persons" are deemed not to deal with each other at arm's length f o r Canadian tax p u r p o s e s . 1 3 6 "Related persons" are defined a s : 1 3 7 "a. i n d i v i d u a l s connected by blood relationships, marriage or adoption; b. a corporation and a person who controls the corporation, or a person who i s a member of a related groups which controls the corporation; c. any two corporations, i . i f they are controlled by the same person or group of persons i i . i f each of the corporations i s controlled by one person and the person who controls one of the 225 corporations i s related to the person who controls the other i i i . i f one of the corporations i s controlled by one person and that person i s related to any member of a related group which controls the other corporation i v . i f one of the corporations i s controlled by one person and that person i s rela t e d to each member of an unrelated group that controls the other corporation v. i f any member of a related group that controls one of the corporations i s related to each member of an unrelated group that controls the other v i . i f each member of an unrelated group that controls one of the corporations i s related to at leas t one member of an unrelated group that controls the other corporation." The meaning of "control" f o r Canadian tax purposes means the ownership of enough shares which carry voting r i g h t s to el e c t the majority of the board of d i r e c t o r s . In general terms, t h i s means owning more than f i f t y percent (50%) of the voting r i g h t s of a 138 corporation. Revenue Canada's c r i t e r i a i n determining the "arm's length" transaction of unrelated persons i s based on a theory of separate economic int e r e s t s which r e f l e c t "ordinary commercial dealing 139 between part i e s acting i n t h e i r separate i n t e r e s t " . Thus, the mere fac t that a countertrade agreement has been concluded by a Canadian and a non-Canadian firm may not be s u f f i c i e n t to have i t regarded as an arm's length transaction. I t requires detailed examination of the transaction. Some forms of countertrade such 226 as compensation or o f f s e t arrangements may be deemed to be a non-arm's length transaction because the Canadian firm and non-Canadian firm may have a share i n a j o i n t venture company or 140 control over each other. In general, the " f a i r market value" of goods and services i s the most s i g n i f i c a n t one since i f the value of the goods or services does not r e f l e c t the f a i r market value, Revenue Canada may consider that the transaction was not conducted at arm's length. There are several provisions i n the ITA that contain the term " f a i r market value" but there i s no d e f i n i t o n of the term i n the ITA. The decision of the Supreme Court of Canada i n the Untermyer case and Mann Estate may be useful. 141 In Untermyer Estate v. A.G.B.C. the Supreme Court of Canada defined " f a i r market value" as: "The highest price, expressed i n terms of obtainable i n an open and unrestricted market between prudent p a r t i e s , dealing at arm's length, both having a reasonable knowledge of a l l relevant facts and neither party being under any complulsion to transact." In Minister of Finance v. Mann Estate the Supreme Court of Canada defined " f a i r market value" as: "The highest p r i c e available estimated i n term of money which a w i l l i n g s e l l e r may obtain for the property i n an open and unrestricted market from a w i l l i n g , knowledgeable purchaser acting at arm's length." 227 There i s a l o t of jurisprudence respecting f a i r market value 143 but various issues remain unresolved. The valuation of goods or services i n a countertrade transactions i s one of these unresolved issues. Generally, i n countertrade transactions, the value of goods or services r e f l e c t s the actual value or the f a i r market value because the parties to the countertrade agreement, i f at arm's length, w i l l have knowledge of a l l the facts and are not under any compulsion to complete the transaction. Revenue Canada's current p o s i t i o n on " f a i r market value" or "reasonable arm's length p r i c e " i s to look at the p r i c e or value i n the market where the transfer i s being made, as opposed to 144 looking at the home market of the supplier. Revenue Canada's p o s i t i o n provides l i t t l e guidance for determining the value of goods and services i n a countertrade transaction. In fact, a key question i s whether Revenue Canada should recognize and accept that countertrade transactions are a unique and complex transaction which d i f f e r from t r a d i t i o n a l sale arrangements. The re c i p r o c a l contractual commitment i n a l l countertrade transactions (such as the Framework Agreement, the Primary Sale or Services Agreement, the Countertrade Agreement) should be taken into consideration. I f countertrade i s entered into at arm's length, the value or prices determined by the parties w i l l most often r e f l e c t the actual value of goods or services. I t should be noted that Revenue Canada takes the buy and s e l l 228 agreement into consideration i n determining the value of shares 145 i n an arm's length domestic shares transfer. Therefore, so long as there i s no cl e a r p o l i c y or i n t e r p r e t a t i v e note given by Revenue Canada, t h i s guideline may be used by anology for a countertrade transaction. One may argue, however, that t h i s Interpretation B u l l e t i n should not be used as a basis i n determining the value of goods or services i n a countertrade transaction because i t applies only to a domestic shares transfer. C. Conclusion The question respecting the valuation of goods and services i n a countertrade transaction for tax purposes remains unresolved u n t i l Revenue Canada issues guidelines which deal s p e c i f i c a l l y with countertrade transactions. The writer i s of the view that Revenue Canada should recognize and accept the f a c t that a countertrade transaction i s a unique transaction and that a l l the conditions contained i n agreements should be taken into consideration so that the method of determining the value of goods or services w i l l be f a i r and reasonable to the taxpayers. The question of the tax l i a b i l i t y of the importer and exporter i n countertrade transactions i s an important factor i n structuring countertrade agreements because the pa r t i e s may end up paying more taxes than i n a t r a d i t i o n a l sale or services transaction. The provisions under the ITA are s u f f i c i e n t l y f l e x i b l e to deal 229 with the countertrade situations but guidelines would be very h e l p f u l . 5.4.2.4 Export and Import Permits Act A. Overview There are a number of d i f f e r e n t acts which r e s t r i c t the 146 import of p a r t i c u l a r products into Canada. The Export and 147 Import Permit Act. (hereinafter c a l l e d the "EIP Act") i s the major import and export control law i n Canada. This law's two aspects, the import control and the export control, w i l l both be discussed. Concerning import control, the EIP Act confers power on the Cabinet to e s t a b l i s h an import products control l i s t r e s t r i c t i n g the import of products for the following purposes i n accordance with the needs of Canada: (1) to ensure the best possible supply and d i s t r i b u t i o n of products that are scarce i n the world market or are subject to govermental control i n countries of o r i g i n or 148 to a l l o c a t i o n by inter-governmental arrangement; (2) to r e s t r i c t the importation of farm products, meat products, a g r i c u l t u r a l products, fishery products under relevant l e g i s l a t i o n i n order to support any action or to support the 149 p r i c e of the product under the relevant l e g i s l a t i o n s ; and (3) 150 to implement an inter-governmental arrangement or commitment. 230 In addition, Section 5(2) of the EIP Act allows the Cabinet to include c e r t a i n products on the import control l i s t i f the importation of these products would cause or threaten serious in j u r y to Canadian production as determined by an inquiry made by the Board established under the T e x t i l e and Clothing Board Act or 151 Special Import Measures Act. Permits are issued by the Export and Import Permits D i v i s i o n of the Department of External A f f a i r s 152 but are administered by the custom o f f i c e r s at ports of entry. As to the export control, the EIP Act authorizes the Cabinet to e s t a b l i s h an export control l i s t f or the purposes provided i n Section 3: "(a) to ensure that arms, ammunition, implements or munitions of wars, naval, army or a i r stores or any a r t i c l e s deemed capable of being converted thereinto or made useful i n the production thereof or otherwise having a st r a t e g i c nature or value w i l l not be made availab l e to any destination wherein t h e i r use might be detrimental to the security of Canada; (a.i) to ensure that any action taken to promote the further processing i n Canada of a natural resource that i s produced i n Canada i s not rendered i n e f f e c t i v e by reason of the unrestricted exportation of that natural resource; (a.2) to l i m i t or keep under surveillance the export of any raw or processed material that i s produced i n Canada i n circumstances of surplus supply and depressed prices and that i s not a product of agri c u l t u r e ; (b) to implement an intergovernmental arrangement or commitment; or (c) to ensure that there i s an adequate supply and 231 d i s t r i b u t i o n of such a r t i c l e i n Canada f o r defence or other needs." I t must be noted that there are a number of acts that control the export of products from Canada with which the exporter must 153 comply i n order to export such a product. For example, the export of o i l , gas and power i s subject to a l i c e n s i n g 154 requirement under the National Energy Board Act. The exportation of c e r t a i n radioactive products and nuclear technology requires a licence granted from the Atomic Energy 155 Control Board under the Atomic Control Act. Exporters of a g r i c u l t u r a l products must f i r s t comply with the regulations of the relevant p r o v i n c i a l marketing agency as delegated to them by the federal A g r i c u l t u r a l Products Marketing A c t . 1 5 6 Certain a g r i c u l t u r a l products are subject to export control under the 157 Canada A g r i c u l t u r a l Products Standard Act. The procedure for export permit issuance i s governed by the Export and Import Permit regulations. Export permits are administered by the Export Control D i v i s i o n of the Department of External A f f a i r s . Products that require export permits are divided into two t y p e s . 1 5 8 F i r s t , those products on the export control l i s t , which sets out s p e c i f i c categories of goods by type 159 . . . or o r i g i n . Second, the area control l i s t which l i s t s countries 160 which export i s prohibited without a permit. The importer,