Definition of the Problem

Intersection of sustainable economic development, good trade policy practice, and gaining and defending market access.

Analysis

•         Economic                                                 •     Political

•         Policy                                                      •     Commercial

Alternative and Preferred Solutions

Challenge US import measures in US courts and under the WTO

Resolve problem areas and strengthen confidence in Guatemala as a reliable, compliant supplier

Required means

General background issues for discussion

•         Object and purpose of GATT/WTO

•      Role and interests of developing countries

•         Market access

•      Economics

•      Politics

•      Gaining and keeping it

•         National Treatment and Product Standards

•      WTO SPS Agreement

•      Economic and legal issues

•      Challenges for developing countries

Case-specific background issues

•         The Guatemala Snow Pea Industry

•      Agricultural issues

•      Commercial issues

•      Development issues

•      Environmental issues

•         The US Phyto-Sanitary Regime

•         The players and their perspectives

•      The Guatemala Snow Pea Industry

•      Government of Guatemala officials

•      US government officials — regulatory, policy

•      US distributors and retailers

•      Intermediaries: shippers, brokers, etc.

•      US consumers

Exhibit 1

WTO Trade Policy Review Body: Guatemala
Report by the Secretariat — Summary Observations[1]
In recent years, trade has played an important role in promoting growth and development in Guatemala. Increases in exports have outpaced GDP each year since 1996. There has been considerable progress in reducing tariff and non-tariff trade barriers, although protection remains significant in a few areas. Most restrictions to foreign investment have also been eliminated, and a wide-ranging privatization program has led to reduced state involvement in production activities and increased efficiency in key activities. Moreover, legislation to improve government procurement regulations and the protection of intellectual property rights has been adopted. These efforts have been part of a multi-pronged strategy that encompasses unilateral, regional, and multilateral initiatives aimed at achieving sustainable economic growth through economic liberalization and public-sector modernization.

Economic growth in Guatemala has been steady but will need to be stepped up to effect a significant improvement in living standards. This will require in particular a consolidation of, and further forward movement in, Guatemala’s liberalization efforts. In trade-related areas, further initiatives may be required to achieve greater efficiency in the domestic market, including by continuing with the privatization program and strengthening pro-competitive policies and regulations. Non-distortionary sectoral policies will need to be favoured, bearing in mind that export-promotion programs often result in discrimination against domestically oriented activities. Consolidation of Guatemala’s liberalization efforts would also be aided through specific capacity-building programs. Ultimately the success of these efforts is contingent upon securing lasting institutional stability. In all these areas the international community can continue to play an important role.

Guatemala has Central America’s largest economy, with a population of 11.4 million and a per capita GDP of close to US$1,700. Since the signing of the Peace Accords in December 1996, which ended 36 years of internal armed conflict, one of the main objectives of the authorities has been to achieve stable and sustainable economic growth. Between 1995 and 1998 real GDP grew at an average annual rate of about 4.4%; subsequently, stagnant private consumption and reduced investment spending led to a slowdown in 1999 and 2000, with GDP growth rates of 3.6% and 3.3% respectively. Despite this relatively solid growth performance, due to Guatemala’s strong population growth, per capita GDP has expanded too slowly to improve living standards significantly; poverty thus continues to be a serious problem.

  In order to meet an agreed Peace Accords target to fund social programs, efforts are being made to expand tax revenue; for this purpose, the value-added tax was increased to 12% in mid 2001. The Government has also undertaken efforts to strengthen the tax administration and broaden the tax base, although tariffs and value-added tax on imports still account for a large part of state income. The fiscal deficit has ranged between 0.1% and 2.8% since 1995.

Guatemala maintains a flexible exchange rate system; the Central Bank intervenes in the market only to moderate exchange rate fluctuations. A law passed in late 2000 allows the free circulation of machinery and transport equipment, food products, fuels, and chemicals. The upward trend in the share of fuels in total merchandise imports reflects the increases in world prices of foreign currency, with a view to increasing confidence in the banking system. Disciplined financial policy has contributed to a reduction in inflation from double-digit rates at the beginning of the 1990s to 5% in 2000, and has played a role in keeping the exchange rate to the U.S. dollar relatively stable since 1999. Real interest rates have shown a rising trend in recent years and reached almost 15% in 2000.

Guatemala’s current account has registered important deficits in recent years, due mainly to persistent and growing trade deficits. The deficit has been financed largely by remittances and privatization income. Returning capital and privatization inflows increased international reserves to nearly US$1.9 billion in 2000, equivalent to five months of total imports.

The United States is Guatemala’s most important trading partner, being the market for 36% of Guatemalan exports and the source of 40% of its imports. Other important trading partners are other members of the Central American Common Market, the European Union, and Mexico. Between 1995 and 2000, the U.S. dollar value of Guatemalan imports grew at an average rate of 8.2% annually, well above the 6.9% growth rate of exports, reflecting in great part unfavourable terms of trade.

Agricultural goods (WTO definition) account for about 60% of Guatemalan exports. Despite their declining shares in total exports, coffee, sugar, and bananas continue to be Guatemala’s strongest export products. Over the past years, tourism and exports of apparel and non-traditional agricultural products have increased in importance. Intermediate and capital goods dominate Guatemala’s imports.

Guatemala is in the process of consolidating its legal and institutional framework; the strengthening of governance is a priority and a necessary condition for Guatemala to achieve its ambitious development objectives. The Ministry of Economy is the lead agency for all issues related to foreign trade. Guatemala joined the GATT in 1991 and became a WTO Member in July 1995. As an international treaty, the WTO Agreements take precedence in Guatemala over domestic legislation. Guatemala has been active in the multilateral trading system, taking part in the negotiations on telecommunications services, and making use of the dispute settlement mechanism on a few occasions. Guatemala has also participated in the mandated negotiations on services and, as a member of the Cairns Group, on agriculture.

Guatemala has increasingly participated in preferential trade arrangements; the Central American Common Market is at the centre of its regional trade relations. Guatemala has a Free Trade Agreement (FTA) with Mexico, now supported by new initiatives for closer physical integration between the two and with other countries in the region. Negotiations for FTAs with Canada, Chile, the Dominican Republic, and Panama have been initiated or concluded; the Agreement with the Dominican Republic was expected to enter into force in late 2001. Further negotiations with El Salvador, Honduras, and Nicaragua on the formation of a customs union, and an agreement on trade in services and investment are under way. Guatemala also has Partial Scope Agreements with Colombia, Cuba, and Venezuela, and participates in the negotiating groups of the Free Trade Area of the Americas.

The number and scope of these preferential initiatives, each imposing its own negotiating and implementation demands, combined with Guatemala’s institutional weaknesses, raises questions about its capacity to participate effectively in all such initiatives. New FTAs are compounding trade policy implementation difficulties by, inter alia, requiring the administration of different tariff-reduction programs and rules of origin. Incompatibilities between agreements may also emerge, for example with respect to customs valuation or safeguard measures; provisions in some of Guatemala’s FTAs take precedence over multilateral rules.

Between 1996 and 1998, Guatemala implemented an ambitious privatization program; however, the program has since slowed considerably and a number of enterprises, mostly in the services sector, remain state-owned. The privatization program was accompanied by the enactment of new telecommunications and electricity laws that ended state monopolies in these sectors and opened them to private-sector participation. The Foreign Investment Law of 1998 grants national treatment to all foreigners with only few sectoral exceptions, notably transport.

Guatemala grants at least MFN treatment to all its trading partners. Tariffs are Guatemala’s main instrument of border protection; the average applied MFN rate is 7.0%. Agricultural imports (WTO definition) are levied an average tariff of 10.2%, while non-agricultural products excluding petroleum are levied a 6.4% tariff on average. Alcoholic beverages and spirits face the highest tariffs with an average rate of 24.8%. Guatemala maintains import tariff quotas for a number of agricultural products under its Uruguay Round minimum access commitments.

In the Uruguay Round, Guatemala bound all its tariffs. While non-agricultural products were bound at a ceiling rate of 45%, Guatemala’s final bound rates for agricultural products range from 10% to 257%. Closing the wide margin between applied and bound rates would further increase the predictability of market access conditions.

Tariff reductions under preferential agreements have contributed to improved access to the Guatemalan market for partners. Duty-free access is offered to most imports from the Central American Common Market. Preferential tariffs are also offered to Mexico under a bilateral free-trade agreement, and to Colombia, Cuba, Panama, and Venezuela.

Irrespective of their origin and in accordance with the national treatment principle, imports are subject to domestic taxes, most notably a 12% value-added tax, applicable on the c.i.f. value of imported goods. In addition, various goods, such as alcoholic beverages, cement, and vehicles, are subject to specific consumption taxes.

In order to strengthen customs procedures, Guatemala obtained a delay until November 2001 on the application of the WTO Agreement on Customs Valuation. Minimum import prices for customs valuation purposes are in place for rice, used clothes, and second-hand vehicles. A new customs law is expected to be enacted in 2002.

The use of non-tariff trade barriers appears limited. Guatemala maintains various import restrictions and prohibitions, which apply equally to all trading partners, for reasons of security, health, and environmental protection. Guatemala has not taken recourse to contingency measures, with the exception of one anti-dumping case, which was withdrawn by the authorities after a panel was established to examine its WTO consistency.

Legislation on free-trade zones and maquila enterprises constitute Guatemala’s main instruments for export promotion. Pursuant to these arrangements, exporting enterprises may, under certain conditions, benefit from exemptions from import duties and various internal taxes. Guatemala does not make use of official export credits or insurance programs to promote exports.

Guatemala benefits from various GSP schemes and the unilateral U.S. Caribbean Basin Initiative. Guatemalan raw cane sugar exports to the United States benefit from preferential tariff quotas. Guatemala’s textiles and clothing exports to the United States are also subject to quotas. Export quotas are in place for products covered by the WTO Agreement on Textiles and Clothing. Guatemala maintains export taxes only for the coffee sector.

Government procurement is regulated by the Government Contracts Law of 1992, which accords national treatment to foreign suppliers of goods and services. Guatemala does not have a comprehensive legal framework for competition policy but the authorities are preparing such a framework. Although there are sector-specific regulations to ensure that domestic markets remain competitive, the information available suggests that competition is restricted in some key sectors, such as financial services.

The WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) became part of Guatemala’s legislation through its ratification of the Marrakesh Agreement. Subsequently, Guatemala has undertaken legal and administrative reforms to facilitate the protection of intellectual property rights, such as the enactment of new copyright and industrial property laws. Annual registrations of intellectual property rights have increased substantially since 1995.

Agriculture generates about 23% of Guatemala’s GDP. Despite its decreasing share in GDP, agriculture remains a central sector of the Guatemalan economy due to its contribution to employment and export earnings. However, Guatemala’s two main agricultural exports, coffee and sugar, have come under considerable pressure in recent years due to adverse international market conditions.

The industrial sector, including manufacturing, construction, mining, electricity and water, accounts for 20% of GDP. Manufacturing, which accounts for some 13% of GDP, is largely concentrated in the processing of agricultural products, geared to the domestic, Central American and U.S. markets. Other important manufacturing subsectors are footwear, textiles, metals, and chemical products.

Guatemala’s special fiscal arrangements for free trade zones and maquila enterprises appear to have favoured particularly the production of various non-traditional goods, although no precise estimates exist. These goods comprise agricultural products such as cut flowers and specialty vegetables, fishery products such as shrimps, and manufactures, in particular textiles and apparel. As foreign trade under these special arrangements is not recorded, actual exports in these sectors as well as imports of necessary inputs may be underestimated in official trade statistics.

The services sector contributes some 57% to GDP, with commerce being the dominant subsector. Pursuant to the Foreign Investment Law, market access to most services sectors on a non-discriminatory basis is guaranteed to foreign investors. Market access to financial services is regulated by specific sectoral legislation. Subject to approval of the regulatory authorities, insurance companies and banks may incorporate a Guatemalan enterprise; foreign banks may also establish branches or subsidiaries.

Guatemala’s commitments under the GATS are relatively limited, covering only five service categories, as they bound the policy framework in place before the beginning of Guatemala’s privatisation program and the enactment of the Foreign Investment Law.

State-owned enterprises continue to operate in financial services, maritime transports and telecommunications; however, they represent only a minor share of the respective sector’s output. Minimum local capital requirements are in place only in the transport sector. The enactment of a new Telecommunications Law in 1996, together with the privatization of the state-owned telecommunications company, prepared the ground for the rapid growth observed in this sector in recent years. Tourism has developed into an important source of foreign exchange, generating more than US$500 million annually. Despite the significant improvement made in upgrading the Guatemala’s infrastructure, problems remain in certain sectors, such as financial services and port facilities.
  

Exhibit 2[2]

Understanding the WTO Agreement on Sanitary and Phytosanitary Measures

Key Features
All countries maintain measures to ensure that food is safe for consumers, and to prevent the spread of pests or diseases among animals and plants. These sanitary and phytosanitary measures can take many forms, such as requiring products to come from a disease-free area, inspection of products, specific treatment or processing of products, setting of allowable maximum levels of pesticide residues or permitted use of only certain additives in food. Sanitary (human and animal health) and phytosanitary (plant health) measures apply to domestically produced food or local animal and plant diseases, as well as to products coming from other countries.
 

Protection or protectionism?
Sanitary and phytosanitary measures, by their very nature, may result in restrictions on trade. All governments accept the fact that some trade restrictions may be necessary to ensure food safety and animal and plant health protection. However, governments are sometimes pressured to go beyond what is needed for health protection and to use sanitary and phytosanitary restrictions to shield domestic producers from economic competition. Such pressure is likely to increase as other trade barriers are reduced as a result of the Uruguay Round agreements. A sanitary or phytosanitary restriction that is not actually required for health reasons can be a very effective protectionist device, and because of its technical complexity, a particularly deceptive and difficult barrier to challenge.  

The SPS Agreement builds on previous GATT rules to restrict the use of unjustified sanitary and phytosanitary measures for the purpose of trade protection. The basic aim of the Agreement is to maintain the sovereign right of any government to provide the level of health protection it deems appropriate, but to ensure that these sovereign rights are not misused for protectionist purposes and do not result in unnecessary barriers to international trade.
 

Justification of measures
The SPS Agreement, while permitting governments to maintain appropriate SPS protection, reduces possible arbitrariness of decisions and encourages consistent decision-making. It requires that sanitary and phytosanitary measures be applied for no other purpose than that of ensuring food safety and animal and plant health. In particular, the agreement clarifies which factors should be taken into account in the assessment of the risk involved. Measures to ensure food safety and to protect the health of animals and plants should be based as far as possible on the analysis and assessment of objective and accurate scientific data.  

International standards
The SPS Agreement encourages governments to establish national SPS measures consistent with international standards, guidelines and recommendations. This process is often referred to as ‘harmonization.’ The WTO itself does not and will not develop such standards. However, most of the WTO’s member governments participate in the development of these standards in other international bodies. The standards are developed by leading scientists in the field and governmental experts on health protection and are subject to international scrutiny and review.

International standards are often higher than the national requirements of many countries, including developed countries, but the SPS Agreement explicitly permits governments to choose not to use the international standards. However, if the national requirement results in a greater restriction of trade, a country may be asked to provide scientific justification, demonstrating that the relevant international standard would not result in the level of health protection the country considered appropriate. 
 

Adapting to conditions
Due to differences in climate, existing pests or diseases, or food safety conditions, it is not always appropriate to impose the same SPS requirements on food, animal, or plant products coming from different countries. Therefore, SPS measures sometimes vary, depending on the country of origin of the food, animal, or plant product concerned. This is taken into account in the SPS Agreement. Governments should also recognize disease-free areas that may not correspond to political boundaries, and appropriately adapt their requirements to products from these areas. The agreement, however, checks unjustified discrimination in the use of SPS measures, whether in favour of domestic producers or among foreign suppliers. 
 

Alternative measures
An acceptable level of risk can often be achieved in alternative ways. Among the alternatives — and on the assumption that they are technically and economically feasible and provide the same level of food safety or animal and plant health — governments should select those which are not more trade restrictive than required to meet their health objective. Furthermore, if another country can show that the measures it applies provide the same level of health protection, these should be accepted as equivalent. This helps ensure that protection is maintained while providing the greatest quantity and variety of safe foodstuffs for consumers, the best availability of safe inputs for producers, and healthy economic competition.

Risk Assessment

The SPS Agreement increases the transparency of SPS measures. Countries must establish SPS measures on the basis of an appropriate assessment of the actual risks involved, and, if requested, make known what factors they took into consideration, the assessment procedures they used and the level of risk they determined to be acceptable. Although many governments already use risk assessment in their management of food safety and animal and plant health, the SPS Agreement encourages the wider use of systematic risk assessment among all WTO member governments and for all relevant products.
 

Transparency
Governments are required to notify other countries of any new or changed sanitary and phytosanitary requirements which affect trade, and to set up offices (called ‘Enquiry Points’) to respond to requests for more information on new or existing measures. They also must open to scrutiny how they apply their food safety and animal and plant health regulations. The systematic communication of information and exchange of experiences among the WTO’s member governments provides a better basis for national standards. Such increased transparency also protects the interests of consumers, as well as of trading partners, from hidden protectionism through unnecessary technical requirements.  

A special committee has been established within the WTO as a forum for the exchange of information among member governments on all aspects related to the implementation of the SPS Agreement. The SPS Committee reviews compliance with the agreement, discusses matters with potential trade impacts, and maintains close co-operation with the appropriate technical organizations. In a trade dispute regarding a sanitary or phytosanitary measure, the normal WTO dispute settlement procedures are used, and advice from appropriate scientific experts can be sought.  

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