US Tops Financial Development
Index Despite Subprime Woes

The United States has gained more from its ability to adjust to the changing global trade scenario than its open and liberal trade regime. However, protection to certain sectors like agriculture makes trade with the US restrictive for many countries, says a WTO report.

The openness and transparency of the US trade regime have been key contributing factors to the efficiency that characterises the US economy as a whole. Since 2006, the United States has taken further steps to liberalise its trade regime, although mostly on a preferential basis. In the face of the economic uncertainty prevalent, US welfare would be best promoted by exploiting the adjustment capacity of the US economy and continuing to reduce barriers to market access and other distorting measures, including those that result from high levels of assistance in agriculture and energy.
However, the ongoing efforts to incorporate additional security considerations into US trade and investment policies should be pursued within the framework of the risk-based approach that seems to have served the US well.
After a prolonged period of expansion, the short-run growth prospects of the US economy deteriorated appreciably from late 2007. During most of the period the performance of the US economy remained robust, with average growth of nearly 3 per cent a year.  However, in late 2007, GDP growth slowed down considerably reflecting the negative effects of the housing downturn and credit turmoil. These problems have triggered a vigorous monetary policy response by the Federal Reserve that has significantly lowered short-term interest rates. Although inflation remained relatively subdued during the period under review, an upward tendency became perceptible in late 2007, mainly a consequence of higher oil and food prices.  Thus, in early 2008 policymakers faced the dual challenge of restoring growth while curbing rising inflationary pressures.
The federal fiscal deficit contracted steadily between 2004 and 2007, to some 1.2 per cent of GDP in FY2007. However, as a result of the economic slowdown in late 2007 and the fiscal measures adopted to address it, the deficit is likely to increase in 2008. In the longer run, further reform in the fiscal area is likely to be needed to ensure fiscal sustainability, particularly with respect to entitlement programmes.
During the period under review, both US imports and exports continued to expand, on average, faster than GDP.  As a share of GDP, the deficit in the US current account of the balance of payments fell from just over 6 per cent in 2005 and 2006 to some 5.3 per cent in 2007. The willingness of foreigners to invest in the US has been vital in generating the large inflows of external capital required to finance the current account deficit. However, the sustainability of the deficit cannot be taken for granted, and as such carries certain downside risks including an increase in protectionist sentiment. The US current account deficit reflects a savings-investment gap; thus, to the extent that this requires a policy response, trade restrictive measures are not appropriate.

Trade And Investment Policy
The US considers that the expansion of international trade is vital to its national security and economic growth. In this context, the US has made numerous proposals in a wide range of negotiating areas and has continued to enter into free-trade agreements (FTAs).
In early 2008, it had FTAs with 14 countries, and three at the start of the current administration in early 2001;  FTAs with another six countries had been completed but were not yet in force. The US grants preferential treatment to developing countries conditional on adherence to criteria that the US authorities consider promote sound policies and allow trade and investment to expand.
The US has long maintained a policy of national treatment of foreign direct investment, subject to sector-specific considerations, prudential concerns, and national security. In 2007 Congress amended the process by which the executive reviews the national security implications of certain foreign direct investments. It is critical to ensure that these changes do not undermine predictability for foreign investors.

Market Access
The US accords MFN tariff treatment to all WTO members except Cuba. All except two tariff lines are bound, generally at low rates, which lend predictability to the US trade regime. The simple average applied MFN tariff was 4.8 per cent in 2007, virtually the same as in 2004 (4.9 per cent). The applied MFN rate for agriculture (WTO definition) fell from 9.7 per cent in 2004 to 8.9 per cent in 2007, reflecting the rise in commodity prices and the resulting decline in the ad valorem equivalent rates. At 4 per cent, the 2007 average applied MFN rate for non-agricultural products remained unchanged.  Around 2 per cent of all lines are subject to tariff quotas; high out-of-quota tariffs are one of the main forms of import protection for certain agricultural products.
In addition to tariffs, imports are subject to ad valorem harbour maintenance and merchandise processing fees; the second is not applied on imports from some preferential partners. A customs bond must be posted for each importation of merchandise into the United States.
Security considerations have continued to drive significant changes relating to customs procedures. The SAFE Port Act of 2006 codified and expanded existing cargo and supply-chain security programmes, and established additional filing requirements for importers. Under the Act, from mid-2012, all containers must be scanned prior to being loaded on a US-bound vessel.  However, the Act recognises that this requirement could have a significant impact on trade, and offers the possibility of delaying the implementation for specific ports.
Anti-dumping (AD) measures remain a key trade policy instrument for the United States. At end-2007, the United States maintained some 232 AD measures, down from 274 reported in its last trade policy review, affecting imports from 39 trading partners. During 2005-07, the United States initiated some 33 investigations and applied 19 provisional measures, but imposed only 11 final duties. The number of AD investigation initiations decreased in 2005 and 2006, but increased in 2007. Applied AD duties can be substantial, up to 280 per cent, and thus significantly affect US domestic prices. As most AD measures are imposed on intermediate goods like steel and chemical products, they increase costs for downstream producers and consumers.  Although temporary, the average �length� on an AD measure is 11 years.  The percentage of US imports directly affected by AD measures in force has been small, some 0.3 per cent of merchandise imports over 1980-2005, and the number of AD orders issued since 2005 has been lower than in earlier years.  Nevertheless, it would be important to ensure that AD measures do not retard adjustment to changing overall conditions in international markets.
At end 2007, the United States maintained no safeguard measures, but 31 countervailing (CV) orders were in place involving 13 trading partners.  The Continued Dumping and Subsidy Offset Act of 2000 (the Byrd Amendment) was repealed in 2005, but AD and CV duties assessed before October 2007 continue to be distributed to US producers who supported the petition for investigation. Total disbursements were estimated at approximately $1.9 billion from the entry in force of the Byrd Amendment to end 2007.
There have been no major changes at the federal level in the institutional framework governing the development of technical regulations, conformity assessment procedures, or sanitary and phytosanitary measures. During the review period, the US notified, for the first time since the creation of the WTO, technical regulations and conformity assessment procedures proposed by sub-federal agencies. A new approval process for first-time imports of fruits and vegetables subject to designated phytosanitary measures became effective in August 2007. It replaces the approval process based on the promulgation of regulation, which is otherwise applicable to all first-time imports of plants, animals, and their products. The new process is expected to accelerate import approval times, which can be as long as three years.

Export Measures
Export taxes are barred under the US Constitution. However, the US maintains export restrictions and controls for national security or foreign policy purposes, or to address shortages of scarce materials. Exports controls can result from US domestic policy decisions or US participation in non-binding export control regimes, as well as in the context of United Nations embargoes. US entities are required to apply for an export licence in certain cases when they intend to transfer controlled technologies to foreign nationals in the US. Two WTO members, Cuba and Myanmar, are subject to economic sanctions.
The US provides insurance and export financing through its official export credit agency. The fiscal cost entailed by these programmes, which carry the full faith and credit of the US government, has decreased significantly in recent years. In addition, a duty drawback programme is in place. In May 2006, the US repealed the �grandfathering� provisions that allowed US firms to exclude certain �foreign trade� income from their taxable income for certain transactions, after the WTO had found them to be prohibited subsidies.

Sectoral Policies
The US is one of the world�s largest producers, exporters, and importers of agricultural products. As measured by the OECD, overall support to agriculture, including through border measures and government payments, accounted for 11 per cent of gross farm receipts in 2006, down five percentage points from 2004. Certain commodities, including sugar and milk, continue to receive high levels of assistance. Moreover, payments under some commodity programmes (eg, marketing assistance loans) provide incentives for resource use that may be inconsistent with market signals and may affect trade when supported output finds its way into world markets. Certain aspects of domestic support programmes were challenged under multilateral rules during the period under review. The expiration of the 2002 Farm Act, and the current environment of high commodity prices, offers a favourable juncture to introduce policy changes aimed at further improving the market orientation of the agriculture sector to the benefit of both consumers and taxpayers.
The United States is a major producer and consumer of minerals and energy.  US energy policy places emphasis on domestic energy production and the provision of tax and other incentives for the supply of alternative and renewable fuels. Assistance for domestic ethanol production includes tax incentives and import duties; these measures could have a significant impact on global production patterns. The Energy Policy Act of 2005 contains provisions to address shortcomings in the regulatory framework governing electricity markets. In computing fuel economy standards, NAFTA-produced automobiles are treated differently from other vehicles.
The United States is the world�s leading producer of manufactured goods.  Multifactor productivity and output in the sector have expanded in absolute terms but the sector�s share in total US value added and employment has declined. Manufac-
turing tariffs are generally low, but high tariffs have sheltered a few industries, such as textiles, clothing, and footwear and leather, from international competition.
During the period under review, there have been no major changes in US legislation with respect to financial services. However, the sector has been considerably affected by the sub-prime mortgage turmoil, suggesting the need for improvements in financial supervision. In this respect, changes to existing regulations are under consideration to restrict certain mortgage practices, and to consolidate and strengthen supervision.



Home | Special Feature | Realty | Boardroom | WTO | WEF | International Reports
IMF Economic Briefing | Other Columns | Contact Us