INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: FOIA
• Collection: FOIA Collection
• Document Number (FOIA) /ESDN (CREST): 06280539
• Release Decision: RIPPUB
• Original Classification: U
• Document Page Count: 43
• Document Creation Date: December 28, 2022
• Document Release Date: August 28, 2018
• Case Number: F-2017-01874
• Publication Date: June 22, 1990

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International
Economic & Energy
Weekly (u)
22 June 1990
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22 June 1990
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International
Economic & Energy Weekly (u)
22 June 1990
iii Synopsis
1 Perspective�Growing Concerns Over Environmental Protection Costs
Environmental Issues Branch, RTT
5 USSR: Environmental Pressures Hurting Industrial Performance
SOVA
11 Taiwan: Economic Considerations Outweighing Environmental Concerns
0EA
17 EC: Impact of German Unification and East European Reforms on Agriculture
Policy
EURA
23 China: Seeking GATT Membership
0EA
27 International Financial Situation: Update on LDC Debt
DI Analysts
31 Briefs Energy
International Finance
Global and Regional Developments
National Developments
Comments and queries regarding this publication are welcome. They may
be directed to the editor, Directorate of Intelligence,
i
�Seeret--
DI IEEW 90-025
22 June 1990
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--Seeret�
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International
Economic & Energy Weekly (u)
Synopsis
1 Perspective�Growing Concerns Over Environmental Protection Costs
The high price tag for protecting the environment is becoming more apparent as
environmental issues attract greater political attention worldwide. Nevertheless,
the momentum of international efforts to stem environmental degradation is
unlikely to slow, and plans to address climate change, ozone depletion, and other
environmental concerns will continue to develop at a rapid pace.
5 USSR: Environmental Pressures Hurting Industrial Performance
Over the past several years, numerous Soviet industrial plants have been closed for
damaging the environment. Although the closings have helped reduce pollution,
they also have led to shortages of critical products. Moscow has acknowledged that
such closures endanger economic performance but has yet to develop an effective
strategy to deal with the problem.
11 Taiwan: Economic Considerations Outweighing Environmental Concerns
Taiwan's growing pollution problems stem mainly from the government's "growth
at any cost" economic policies over the past four decades. Although popular
support for cleaning up the environment has increased in recent years, environ-
mentalists face an uphill battle because of Taipei's concern about the current
slowdown in economic growth. We believe the issue will remain politically
contentious, but environmental cleanup is unlikely to become a major part of
Taipei's industrial policy, at least in the near term.
17 EC: Impact of German Unification and East European Reforms on Agriculture
Policy
Although progress toward German unification and East European economic
reform will gradually build pressure for reform of the European Community's
protectionist Common Agricultural Policy (CAP), they are unlikely to significantly
alter the EC's resistance to rapid liberalization of agricultural trade in the GATT
Uruguay Round. By the mid-1990s, however, we believe rising East German farm
output will increase CAP spending at a time when the EC will probably have to
deal with mounting surpluses of such commodities as grain. Although budget
constraints are likely to increase the likelihood of dramatic cutbacks in EC
agricultural subsidies, EC member demands for some continued protection of
agriculture might lead the Community to contemplate other policies troublesome
to the United States
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23 China: Seeking GATT Membership
Beijing's desire to become a full GATT member has increased in light of the
recent changes in Eastern Europe and the Soviet Union and China's need to boost
exports because of poor prospects for foreign investment and tourism earnings. In
addition to raising a number of thorny issues such as Soviet and East European
membership, Chinese accession to GATT would offer Washington little in the way
of leverage over further economic reforms in China. Moreover, it would probably
accelerate the growth of Chinese exports to the United States but would have little
impact on US sales, enlarging China's rapidly growing bilateral trade surplus and
intensifying economic friction.
27 International Financial Situation: Update on LDC Debt
Developments this week focus on Mexico, Egypt, and G-15 Summit issues
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International
Economic & Energy Weekly (0
22 June 1990
Perspective Growing Concerns Over Environmental Protection Costs
The high price tag for protecting the environment is becoming more apparent as
environmental issues attract greater political attention worldwide. Although West
European countries generally remain firm advocates of strong environmental
protection policies, some officials are beginning to have second thoughts. Japan
believes environmental agreements offer opportunities to improve its image, but it
also views such accords as potential threats to Japanese economic growth. East
European and Soviet governments, meanwhile, are torn between domestic pres-
sures to clean up the environment and the impact of such action on their ailing
economies. Although the newly industrializing economies (NIEs) are beginning to
face up to serious environmental problems, they are largely unwilling to adopt
policies that may impede continued rapid economic expansion. Similarly, some
LDCs have already indicated they will oppose any global environmental protection
agreements that compromise their prospects for economic development. Despite
the growing concern over costs, the momentum of international efforts to stem
environmental degradation is unlikely to slow, and plans to address climate
change, ozone depletion, and other environmental concerns will continue to
develop at a rapid pace. Economic issues nevertheless will almost certainly play a
growing role in upcoming international environmental debates.
Growing economic concerns about the cost of environmental protection may
affect�albeit modestly�Western Europe's continuing determination to press for
agreements on global environmental issues�particularly climate change. Al-
though most West European countries remain solidly behind efforts to develop
agreements to address the climate issue and other concerns, economic ministries
are becoming increasingly vocal in their criticism of greenhouse gas emission
targets and may force governments to modify their environmental goals.(
In Japan, economic considerations carry greater weight than in Western Europe.
Japan, for example, has opposed the carbon dioxide emission targets favored by
West Europeans because it sees such targets as limiting Japanese economic
expansion. The Japanese trade ministry is attempting to divert attention from
emission targets by promoting a 100-year plan to tackle climate change, ozone
depletion, and other environmental problems through the development of new
technologies. Although the plan lacks formal government approval or funding,
Japan's final policies, which may eventually include loose emission targets, will
carefully protect its economic interests.
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In Eastern Europe, governments will have to face hard choices�balancing the
popular mandate to clean up the environment with concerns over continued poor
economic performance and rising unemployment. The GDR, Poland, Czechoslova-
kia, and Bulgaria already have announced plant closings or production cuts
because of the negative environmental impact of specific plants. Some countries in
the region also have begun to close coal mines as part of their effort to reduce their
reliance on soft coal, which is particularly harmful to the environment. But
demands for plant and mine closings on environmental grounds are beginning to be
matched by union organization to defend jobs. Popular dissatisfaction with the
environmental policies of the former East European governments helped bring
about their downfall; the economic dislocation caused by policies such as plant
closings could help crystallize discontent and lead to rejection of the newly elected
governments. Although East Germany almost certainly will be spared this fate, its
environmental problems are likely to become a significant economic burden for
West Germany with the economic and environment union on 2 July.
Moscow faces a dilemma similar to that of its East European neighbors. Despite
growing grassroots activism that has forced Soviet central authorities to give
greater attention to environmental problems, if additional plant closing further
exacerbate shortages of key industrial and consumer goods, public pressure for an
environmental cleanup may be subordinated to the goal of restoring economic
growth. In any event, although Moscow is likely to be responsive to international
environmental pressures, it will probably use its economic problems as a reason for
not participating in many environmental agreements unless it can receive Western
financial and technical assistance.
Developing countries also demand aid and technology transfer as their price for
participating in international environmental agreements. For example, some LDCs
refuse to ratify the Montreal Protocol on Substances That Deplete the Ozone
Layer until specific provisions are made to fund LDC acquisition of costly
alternative technology needed to comply with the agreement's restrictions on
common refrigerants, foams, and solvents. India is chief proponent of this view and
recently sponsored a meeting of developing countries designed to build an LDC co-
alition that will pressure developed countries into providing aid in exchange for
LDC acquiescence to environmental accords. LDC leaders also see environmental-
ism as a means to attract badly needed foreign investment. Countries such as
Mexico, Brazil (in a reversal of its former policy), Paraguay, Ecuador, Chile, and
Venezuela are actively seeking debt-for-nature swaps.
The next several months, meanwhile, may indicate the extent to which China
intends to enforce the sweeping environmental protection law it enacted early this
year. It will likely further concentrate its efforts on cleaning up at least some of its
worst polluted cities and rivers. Nevertheless, China admitted recently that it
cannot afford to reduce greenhouse gas emissions. Among the NIEs, Taiwan is
slowly beginning to face up to the environmental problems that arose from rapid
industrialization, although its unwillingness to make significant economic conces-
sions will limit cleanup efforts.
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The growing growing concern over the cost of environmental protection is likely to
influence debates leading toward an agreement on climate change, in our
judgment. In late August, the UN's Intergovernmental Panel on Climate Change
(IPCC) will hold a plenary session in Sweden to thrash out the final version of its
first assessment report on the causes, consequences, and policy responses to climate
change. The report will be reviewed by the Second World Climate Conference in
Geneva (29 October-7 November) and by the UN General Assembly. Both bodies
almost certainly will make recommendations for a global climate convention, the
negotiations for which could begin as early as December. Although economic
issues such as targets and timetables for reducing greenhouse gas emissions and
for providing aid to LDCs will probably be contentious, they are unlikely to delay
passage of the convention. Nevertheless, economic concerns may prevent a number
of countries from ratifying the convention or enforcing its provisions.
Several other ongoing or upcoming environmental conferences also will almost
certainly be affected by economic issues. The Conference of the Parties to the
Montreal Protocol that began tlis week in London, for example, will devote a
significant portion of the meeting to discuss the establishment of a financial
assistance mechanism to help LDCs reduce their CFC use. Concerns over the cost
of environmental protection also are likely to affect the second preparatory
conference for the 1992 UN Conference on Environment and Development, in
.
August in Nairobi, and a meetillig in Santiago in November on the Antarctic
Minerals Regime Treaty.
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USSR: Environmental Pressures
Hurting Industrial Performance
Over the last several years, numerous industrial plants
throughout the USSR have been closed for damaging
the environment. Most of the closures are a result of
local initiative, with republic and national officials
generally going along with local decisions. Although
the closings have helped reduce pollution to some
extent, they also have had a negative impact on
already weak industrial performance. Indeed, the
closure of polluting facilities has led to shortages of
critical products�in particular, chemical and paper
and pulp products. Although the leadership has ac-
knowledged that plant closings endanger economic
performance, it has yet to develop an effective strate-
gy to deal with such closures. Gorbachev may believe
shutdowns are less costly in the short run than
devoting the resources necessary to clean up the
environment�particularly at a time of large budget
deficits and stiff competition for resources.
Growing Environmental Concerns
Although the central government has ordered some
plant closings because of pollution, most of the pres-
sure has been at the local level. Soviet citizens�
joining together in informal groups�have seized upon
glasnost to vent their anger at the environmental
degradation in which they live. Local officials�no
longer able to ignore the problem in the open political
climate�have in most cases agreed to the demands of
such groups. In an about-face, the central leadership,
which once would have stifled such dissent, has
acquiesced. Indeed, key policymakers now freely ad-
mit the country faces serious environmental problems.
Prime Minister Nikolay Ryzhkov, for example, noted
earlier this year that more than 100 large cities in the
Soviet Union have air pollution 10 times the accept-
able levels set by the central government. The Soviet
media�undoubtedly with Moscow's permission�also
have encouraged the environmental movement by
publishing disturbing stories on the human costs of
pollution. As a result of the growing pressure, 70 to
100 Soviet industrial facilities were shut down in
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USSR: Environmental Horror Stories
The Soviet media over the past year has helped fuel
the nascent Soviet environmental movement with
stories about the consequences of pollution. For
example:
� In Chardzhou, Turkmen SSR, children have been
given gas masks to protect them from air pollution
from a cotton-processing plant.
� In Ufa, Bashkir ASSR, poisonous phenol leaked
from a chemical plant into the river that is the
city's main water source, forcing the people to rely
on supplies brought in by truck.
� In Ventspils, Latvian SSR�the site of a large
chemical plant-40 percent of infants are born with
serious congenital defects, such as blindness and
mental retardation.
� In Chernovtsy, Ukrainian SSR, children developed
baldness because of pollution from a local chemical
plant.
� In Nizhniy Tagil, RSFSR, children's faces have
been burned by smog caused by a 45-year-old coke
oven at a steel plant there.
1989, and almost twice as many have been closed or
threatened with closure this year for violations of
Soviet law on environmental protection, according to
the Soviet press. Most of the closings involve chemical
and timber-processing plants that have been polluting
their surroundings for years.
High Cost of Closures
Plant closings have led to shortages of critical prod-
ucts and have contributed to the poor performance of
the Soviet economy. The deputy chairman of the
State Committee for Statistics stated in April, for
example, that "mass shutdowns�owing to public
ec
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Soviet Popular Opinion:
The Environment Comes First
In a recent poll in the Moscow region conducted
jointly by the Institute of Sociological Research of
the USSR Academy of Sciences and a US university,
those responding were more worried about domestic
environmental problems than rising crime rates, food
shortages, AIDS, and interethnic conflicts. More than
three of four said they would refuse to tolerate
environmental pollution for the sake of economic
development. Moreover, respondents indicated they
trusted "Green" groups more than any other institu-
tion in the Soviet Union apart from the church.
Survey results are as follows:
Importance of Domestic Problems (percent)
Very
Important
Important
Not Very
Important
Unimpor-
tant
Pollution
75
23
1
1
Crime
72
23
4
1
Food shortages
69
25
4
AIDS
61
24
7
7
Interethnic
conflicts
59
27
7
5
Trust in Domestic Institutions (percent)
Complete
Trust
Trust
Not Much No Trust
Trust
Church
18
47
24
5
Green movement
13
42
16
9
Armed Forces
12
44
34
8
Communist
Party
5
33
37
17
Trade unions
4
33
39
19
Government
4
24
42
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demand�of environmentally hazardous production
units" were a major factor in the poor industrial
performance during the first quarter of this year. For
example:
� Closure of the Nairit Production Association�part
of the huge Yerevan Synthetic Rubber and Chemi-
cal Plant, in Armenia�has halted the USSR's
production of a particular type of synthetic rubber
and has led to a severe shortage of certain medi-
cines. Ryzhkov warned that closing the Nairit plant
would result in shutting down 750 other industrial
facilities that depend on it for materials, costing the
national economy at least 14 billion rubles in lost
output in 1990. As a result, he urged Armenian
authorities to resume production despite the ecologi-
cal costs, but the plant remains closed.
� The shutdown of several paper and pulp production
plants has resulted in widespread shortages of vari-
ous paper products. For example, the Sloka Pulp
Plant in Latvia�closed earlier this year because it
had contaminated popular vacation beaches by
dumping untreated waste into the nearby Baltic�
was the USSR's sole source of paper for computer
punchcards, book and magazine covers, braille pub-
lications, and packaging for cigarettes and ice
cream cups. The USSR Council of Ministers has
predicted the closing of such plants will lead to an
overall pulp shortage of 500,000 tons and losses of
1 billion rubles per year.
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USSR: Major Major Plants Closed During the First Quarter
of 1990 for Environmental Reasons
Location
Principal Products
Nairit Production Association (entire plant)
Yerevan, Armenian SSR Plastics, synthetic rubber, chemi-
cals for medicines.
Copper-smelting combine (production unit)
Kirovgrad, RSFSR Acid used in production of
medicines.
Azot (Nitrogen) Production Association (production unit)
Kiev Chemicals Plant (production unit)
Azot Production Association (production unit)
Khimprom (production unit)
Kerner�Vo, RSFSR
Kiev, Uf5rainian SSR
Dneprodzerzhinsk,
Ukrainidn SSR
Ufa, BaShkir ASSR
Chemicals for medicines.
Chemicals for medicines.
Chemicals, including medicines.
Chemical fibers.
Sloka Pulp Plant (entire plant)
Jurmalal Latvian SSR
Paper products, including computer
punchcards.
Sulfuric acid plants (three entire plants)
Synthetic and fatty acid plant (entire plant)
Kedainiai, Lithuanian SSR
Fertilizer.
Berdyansk, Ukrainian SSR Soap.
Copper-smelting combine (entire plant)
Karabash, RSFSR Copper.
This table is Unclassified.
� The closing�for environmental reasons�of three
sulfuric acid plants in Lithuania before its declara-
tion of independence will mean that all-union pro-
duction of fertilizers is likely to be 1 million tons�
or some 3 percent�less than planned, according to
Western reporting.
The social costs of closing polluting plants�in partic-
ular, increased unemployment�also may be high.
According to Pravda, more than 6,000 workers in the
printing industry will have to find other jobs because
of the Sloka closing. To help minimize the social costs
of closures and reduce the threat of unrest, authorities
in some cases have closed only small production units
rather than the entire plant. In other cases, plants
have been closed repeatedly because the ministries
made either few or no changes. For example, the
Nairit plant had been closed in 1988, and the Keme-
rovo plant had been closed in 1984 and again in 1989.
Despite the economic and social costs, closing pollut-
ing plants is generally less expensive than moderniz-
ing or converting the facilities. Where the costs of
conversion appear to be acceptable, the Soviets have
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begun to make such changes. A chemical plant in
Barnaul, for example, shifted from the production of
paints and solvents to the production of medicines.
Converting a plant from one product to another that is
compatible with the facility's equipment, however,
does not guarantee against further pollution.
Moscow Lacks a Game Plan
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Although the Soviet leadership has acknowledged
that plant closings endanger economic performance, it
has yet to develop an effective strategy to deal with
such closures. To date, Moscow's response has been
largely bureaucratic, calling upon a national commis-
sion, the ministries, and oblast and republic officials
to work toward reopening the plants on an environ-
mentally sound basis. The two governmental agencies
charged with protecting the environment�Goskomgi-
dromet, the State Committee for Hydrometeorology
and Environmental Control, and Goskompriroda, the
State Committee for the Protection of Environment�
have been jockeying for power since Goskompriroda
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Shortages of Essential Medicines
Soviet officials agree that an emergency situation in
availability of medicines has developed as a result of
chemical plant closings. The Ministry of the Medical
Industry projected a 30- to 40-percent decrease in
production in 1990 because of the shortages of raw
materials. At least one-third of all Soviet plants that
produced medicines and drugs were closed for envi-
ronmental reasons in 1989, according to a Western
specialist speaking at an international conference in
March. The Nairit plant in Armenia, which was
closed earlier this year, produced cardiovascular
drugs, muscle relaxants, fever retardants, pain reliev-
ers, and vitamins. Closing the production unit at the
fertilizer plant in Kemerovo, meanwhile, halted the
output of chemicals necessary for the manufacture of
14 medicines, including antibiotics and gastrointesti-
nal and cardiovascular drugs, as well as medical
supplies such as X-ray film. Shutdowns of chemical
plants in Kiev and Dneprodzerzhinsk resulted in
similar losses, and the copper-smelting combine at
Kirovgrad was forced to stop production of an acid
used in the manufacture of antibiotics and cardiovas-
cular medicines.
According to Prime Minister Ryzhkov, the USSR in
1989 was forced to buy some $954 million worth of
medicines abroad�much of it for hard currency. He
implied that the government would be hard pressed to
meet similar expenses in 1990. Nevertheless, addi-
tional medicines have been purchased abroad, ac-
cording to an official in charge of distribution.
was created in 1988. Goskomgidromet is mandated to
function as the monitoring agency and Goskomprir-
oda as the policymalcing and enforcement agency. The
former, however, has not given up many of its activi-
ties that may be perceived as endangering the envi-
ronment such as damming and rerouting rivers, and
Goskompriroda still does not have the constitutional
authority to enforce all-union compliance. As a result
Soviet Environmental Legislation
Over the past 20 years, the Soviets have passed
numerous environmental protection regulations in an
effort to deal with their serious pollution problems.
The legislation sets penalties for noncompliance such
as:
� Jail terms and confiscations of property for dam-
ages caused by mining.
� Jail terms, correctional tasks, or fines for illegal
deforestation.
� Fines and imprisonment for release of industrial
pollutants into water sources that supply the popu-
lation and agriculture.
� Fees charged for disposal of industrial pollutants.
The Soviets, however, have not enforced environmen-
tal protection regulations equally against offenders.
Indeed, some industries�including the worst pollut-
er, the chemical industry�have been exempted.
More recently, the Supreme Soviet in 1989 an-
nounced the "Urgent Measures for the Country's
Ecological Improvement" that set standards for re-
duced levels of air and water pollution by the year
2005. The legislation, however, is still under discus-
sion in the Committee on Ecology and Rational
Utilization of Natural Resources. Even if it clears the
committee, the legislation is unlikely to be passed by
the Supreme Soviet because of its high price tag.
Moreover, Goskompriroda, the national government
agency created in 1988 to enforce environmental
protection laws, still does not have the constitutional
authority to carry out all-union compliance.
of the bureaucratic wrangling, enforcement of exist-
ing environmental protection laws is weak, and addi-
tional empowering legislation languishes in the Ecolo-
gy Committee.
Moscow also has failed to provide the economic
incentives needed to motivate republics and industrial
enterprises to clean up the environment. For example,
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rt-
- A e etezeree MbI ryr examine, seapene-.
� Tix ear namely Tat 6onexofi e erepedil
Old man: "In our youth, this is where we swam,
dived . . ."
Boy: 'So that's why you're sick and old!" (u)
although the Soviets allocated only an estimated
1 percent of GNP to environmental protection, the
ministries and republics have been spending only
about half to two-thirds of the funds they are granted.
The Council of Ministers took a step in the right
9
direction recently by creating Ekoprom�a consor-
tium to produce ecologically mandated equipment.
The Council hopes a proposed tax system that imposes
large fines on polluters will encourage enterprises to
buy such equipment. Moscow, however, would have to
strengthen enforcement capabilities if it expects the
legislation to be effective.
Moscow's foot-dragging on environmental protection
issues, to some extent, may be deliberate. Gorbachev
probably views sporadic plant closings as a short-term
way of dealing with environmental problems, with a
cost less expensive than that of undertaking a com-
plete industrial cleanup. The longer he delays in
taking the necessary steps to modernize existing
plants, however, the greater risk he runs that addi-
tional unplanned closings will occur, lowering output
still more and further worsening shortages of industri-
al and consumer goods.
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Taiwan: Economic Considerations
Outweighing Environmental Concerns
Taiwan's growing pollution problems stem mainly
from the government's "growth at any cost" economic
policies over the past four decades. Popular support
for cleaning up the environment has increased in
recent years; the issue played a role in last Decem-
ber's legislative elections. Nevertheless, environmen-
talists face an uphill battle because of Taipei's con-
cern about the current slowdown in economic growth.
Moreover, the government's plans to push ahead with
several industrial projects to alleviate domestic short-
ages suggest that the environmental situation is likely
to become even worse. We believe the issue will
remain politically contentious, but environmental
cleanup is unlikely to become a major part of Taipei's
industrial policy, at least in the near term.
Pollution on the Rise
Although a dearth of information makes it difficult to
assess the extent of Taiwan's pollution problem, it is
becoming increasingly clear that pollution has become
a serious problem over the past decade:
� International environmental experts estimate that
Taiwan produces at least 60,000 metric tons of
industrial waste daily, which would rank it third�
behind Poland and Czechoslovakia�in the amount
of waste produced per square kilometer, according
to recent OECD statistics.
� The island produces some 5,700 tons of sludge
daily-40 percent of which is contaminated with
pesticide residues and heavy metals.
� According to press reports, more than half of
Taiwan's pesticide factories do not use advanced
pollution control technology�such as incinera-
tors�and fail to meet the Taiwan Environmental
Protection Agency's (TEPA) ' air and water emis-
sion standards, which are more lax than their US
counterparts.
� Water pollution helped lower Taiwan's inland fish-
eries production by approximately 80,000 tons�
some 23 percent�during the 1980s. According to
press reports, three of Taiwan's 15 rivers no longer
contain any fish, except for very short stretches.
Government Policies Largely to Blame
Taiwan's "growth at any cost" economic development
policies over the past 40 years and, to a lesser extent,
the growing wealth of its citizens are largely responsi-
ble for the increase in pollution:
� The government has encouraged domestic and for-
eign investment in "dirty industries," such as petro-
chemicals, pesticides, paper production, and leather
tanning. For example, investment in such industries
during the 1980s accounted for nearly 30 percent of
total investment, with the chemical industry alone
absorbing nearly 20 percent.
� Taipei has done little to stem the growth of illegal
factories. Roughly a third of Taiwan's estimated
90,000 factories are not registered and thus are
ineligible to take part in any government-assisted
cleanup programs.
'The cabinet-level TEPA was established in August 1987, replac-
ing the Bureau of Environmental Protection, which was under the
Department of Health. TEPA employs more than 900 enforcement
officers, and its budget for 1990 is approximately $360 million. (u)
11
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Taiwan's Major Pollutants
Inert and semi-inert substances include the nonbiode-
gradeable plastics, glass, and metal found in ordinary
garbage. Taiwan's average daily output of household
waste has increased 8 to 10 percent annually since the
early 1980s, according to press reports, reaching over
17,000 tons a day and bringing per capita garbage
output close to the 2- to 4-pounds-per-day level of
developed nations. A particular problem is the 250-
million plastic soda bottles Taiwan consumes annu-
ally, which, since becoming popular in the mid-I980s,
have been blocking drainage systems and causing
flooding in large cities.
Biologically active wastes, such as food wastes, pa-
per, fertilizers, human and animal bodily wastes,
often cause health problems. Only 2 percent of
Taiwan's 20 million people receive sewer service, and
less than 3 percent of Taiwan's human and animal
sewage, which flows directly into groundwater, rivers,
and the sea, is treated. As a result, approximately
20 percent of Taiwan's population is infected with
hepatitis B, the highest rate in the world, according to
press reports. Hepatitis B causes approximately 85
percent of Taiwan's cases of cirrhosis and cancer of
the liver and causes some 4,000 deaths annually.
Hazardous wastes include caustic chemicals, pesti-
cides, radioactive wastes, heavy metals, and a range
of other substances used or produced by industry,
agriculture, or people. The Taiwan Environmental
Protection Agency (TEPA) lists 13 of Taiwan's 21
rivers as heavily polluted, and eight others as lightly
to moderately polluted. According to press reports,
only 15 percent of Taiwan's groundwater supply is
safe to drink.
Atmospheric emissions consisting of gases, such as
carbon monoxide, hydrocarbons, and chloroflurocar-
bons, are produced by motor vehicles, factories, and
aerosols. Some of the island's worst air pollution
occurs in the Kaohsiung region because of its heavy
concentration of petrochemical, cement, steel, and
paper-processing facilities. Fifty-six percent of all air
quality warnings in Taiwan in the first 10 months of
1989 were issued in the Kaohsiung region. The TEPA
issues warnings only when a given monitoring station
records a pollution standard index (PSI) rating over
200 or when weather in an area prevents speedy air
diffusion; international standards rate PSIs under 50
to be light, between 50 and 100 to be moderate,
between 100 and 150 to be high, and PSIs over 150 to
be medically dangerous.
� The government's ambitious highway construction
program has opened Taiwan's mountain interior and
less congested west coast to illegal logging and
waste dumping. The program also has encouraged
auto ownership.
� Taipei's rural industrialization policy�aimed at
balancing regional development and discouraging
emigration to overcrowded cities�has spread pol-
luting industries across the island and prevented
centralization of waste treatment and recycling
facilities. For example, Taipei's plan to ease
Taiwan's severe shortage of industrial land by con-
structing its first offshore industrial zone on an
undeveloped island near Yunlin County in south-
eastern Taiwan will introduce heavily polluting in-
dustries, such as petroleum processing.
Seeret
� Government regulations require the government-
owned Taiwan Power Company (Taipower)�a
major polluter�to purchase locally produced coal,
although it generates more smoke and sulfur than
imports. Environmentalists and fishermen also
charge Taipower with destroying aquatic life by
dumping hot water from power plants into lakes and
the sea.
� The island's economic success, which has more than
doubled annual per capital income over the past five
years to about $7,500, has launched a buying spree
that has played a significant role in Taiwan's pollu-
tion problems. Taiwan now has 2 million cars and
7 million motorcycles�and the island is importing
12
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more than 10,000 automobiles per month. Accord-
ing to press reports, Taipei's traffic density is 10
times greater than that of Los Angeles. Taiwan's
lack of an adequate public transportation system
compounds the problem; major portions of the is-
land's $16 billion subway system are 10 years
behind schedule.
Despite Growing Support for the Environment...
Public anger over the ruling Kuomintang's (KMT)�
or Nationalist Party's�failure to deal with pollution
has risen in recent years. Indeed, environmental is-
sues, along with a host of other social problems, are
sparking almost daily protests. According to Taiwan
media surveys, 20 percent of the demonstrations held
since the lifting of martial law in 1987, which legal-
ized open dissent, were linked to the environment;
some 400 antipollution protests were staged between
October 1988 and November 1989. Although the
majority of these demonstrations are loosely orga-
nized outbursts over local issues�such as gas leaks,
damage to fisheries, or the construction of new fac-
tories�concern over the environment helped reduce
the KMT's share of the vote in last December's
legislative elections to below 70 percent for the first
time, according to the American Institute in Taiwan
(AIT). Meanwhile, the victories of several Democratic
Progressive Party (DPP) candidates�the major oppo-
sition party�stemmed in part to the party's pledges
to prevent construction of environmentally controver-
sial projects such as a fifth naptha cracking plant and
a fourth nuclear power plant.'
... Environmentalists Face An Uphill Struggle
Despite the groundswell of popular support, rising
public demands for reform of Taiwan's outdated
legislative system and jockeying for power within the
'China Petroleum Corporation's fifth naptha cracking plant�
naptha is a petroleum product used in producing solvents, petro-
chemicals, and synthetic natural gas�and Taipower's fourth nucle-
ar power plant have met with stiff opposition and sometimes violent
protests from residents of the areas in which they are scheduled to
be built. These protests have delayed the government's plan to
construct the facilities from the middle-to-late 1980s. (u)
13
KMT are preoccupying the leadership and pushing
the environment onto a back burner. Moreover, recent
changes in the government's leadership mean an
especially tough battle for environmentalists. In his
first interview after being appointed premier in May,
Hao Po-ts'un pledged to push ahead with the con-
struction of several major projects�presumably the
fifth naptha cracking plant, the fourth nuclear power
plant, and the DuPont titanium dioxide complex �
that! have been delayed by environmental protests and
to prevent such demonstrations from interfering with
economic development. In addition, according to press
reports, newly appointed Defense Minister Chen
Li-an is an outspoken supporter of the progrowth
philosophy and believes all environmental motivated
protesters are seeking to blackmail government and
private corporations rather than improve the environ-
ment. Although he has called on firms to give greater
priority to controlling pollution, Chen and other KMT
officials have threatened to use the military police to
reopen factories during several prolonged protests.
Even before these appointments, however, the depth
of official support for environmental cleanup was
questionable. In May 1989, for example, Taiwan's
legislature cut TEPA's budget by some 5 percent�
$28: million�claiming that the Agency performed
poorly. Meanwhile, other government agencies have
opposed TEPA's enforcement of environmental pro-
tection laws. The Taiwan Board of Health, for exam-
ple, so far has successfully opposed TEPA's efforts to
press hospitals to dispose of medical waste properly.
According to press reports, the Industrial Develop-
ment Bureau (IDB)�which represents industry's in-
terests in government economic planning and admin-
isters the special economic zones�last year refused to
pay a TEPA fine for illegally discharging hot water
from one of its waste water treatment facilities and,
subsequently, won a court case brought against it by
the TEPA.
'DuPont has attempted to build this $235 million paint pigment
facility in Taiwan since 1984. Environmental protests have prevent-
ed construction, despite government support for the plant's con-
struction. (u)
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Taipei's Cleanup Program: A Paper Tiger?
During the past three years, Taipei has announced a
number of ambitious plans it hopes will significantly
reduce pollution by the year 2000. Although we
harbor serious doubts about senior Taipei officials'
commitment to many cleanup programs, TEPA direc-
tor Eugene Chien claims Taipei and the private sector
will spend approximately $40 billion over the next
decade to improve Taiwan's environment. The gov-
ernment is also considering new environmental pro-
tection regulations and incentive packages�including
tax breaks and low interest loans�to encourage
businesses to import antipollution equipment:
� In an effort to strengthen Taiwan's antipollution
legislation, the TEPA is drafting 60 new and
amended laws and regulations. Although the TEPA
will begin submitting the new measures to the
Executive Yuan�Taiwan's cabinet�early next
year, press reporting indicates they are unlikely to
go into effect before 1993.
� TEPA and Taipower are working on a plan to cut
off electricity supplies to serious polluters because
many ignore TEPA fines or bribe officials to look
the other way. .1.1. Taipower cooperates fully, this
program could become TEPA 's most important
weapon against polluters because, according to
press reports, the fines issued by the TEPA�$40
million last year, double the 1988 figure�failed to
deter polluters who accept them as a cost of doing
business. According to AIT reporting, many corpo-
rations routinely budget funds for fines imposed for
violating pollution regulations or refuse to pay fines
because the TEPA has little enforcement authority.
� To help reduce air pollution, Taiwan required
catalytic converters on all domestic and imported
cars beginning this year.
The antipollution drive also has been hampered by
overlapping authority and bureaucratic infighting be-
tween the various government agencies responsible for
overseeing cleanup operations. For example, jurisdic-
tional ambiguities among the TEPA, the Defense
Ministry, and the Communications Ministry delayed
action for several days last April when a storm-
damaged freighter dumped more than 1,300 barrels
of oil onto Taiwan's north coast. Currently, a dispute
between the TEPA and the IDB over the number of
factories Taiwan's first toxic waste disposal facility
will serve is delaying construction of the facility.
Environmentalists also face a formidable opponent in
Taiwan's business community, which has argued the
government should focus more attention on economic
growth and less on environmental concerns. Industries
point to Taiwan's economic slowdown over the past
two years�industrial production grew by only
4.1 percent annually during the 1988-89 period com-
pared with 13.9 percent in 1987, according to press
reports�as proof that environmental protests and
stricter government pollution standards are harming
the economy. In particular, businessmen claim:
� Environmental protests are partially responsible for
domestic and foreign companies postponing or can-
celing investments.4 They point to Taiwan authori-
ties' willingness to give into environmentalists' de-
mands at the Linyuan petrochemical zone protest in
1988 and the decision by Formosa Plastics�
Taiwan's largest private corporation�to suspend
investment in Taiwan because of opposition to the
firm's plans to build a petrochemical plant on the
island.
The Linyuan incident, Taiwan's first major environmental protest,
was staged in October 1988 by local residents angered by heavy soil
and water pollution caused by the zone's 18 petrochemical facili-
ties. To stop the protest and reopen the zone�which produces 75
percent of Taiwan's petrochemicals and supplies more than 30,000
secondary factories�government authorities awarded Linyuan res-
idents $45 million. Taipei then demanded that the Linyuan plants
finance the compensation fund, a move that sparked a series of
copycat demonstrations during the first half of 1989 that were
largely motivated by hopes of similar settlements, according to AIT
reporting.
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Exporting Pollution: The Case of Formosa Plastics
Formosa Plastics is moving forward on a deal to
construct a $3.5 billion industrial complex in Xiamen
Special Industrial Zone in China, according to the
US Consulate in Guangzhou, because Taiwan envi-
ronmentalists prevented such construction on the
island. The complex, which would roughly triple the
dollar value of Taiwan's mainland holdings, is ex-
pected to include a naptha cracking plant and related
factories producing plastics and raw materials for
synthetic fibers. Industry specialists estimate that
total investment could reach $7 billion once second-
ary apparel, toy, and electronics-manufacturing facil-
ities are added. Increasingly eager to attract Taiwan
investment as Western investors look to Eastern
Europe and Southeast Asia, Chinese authorities are
offering Formosa Plastics a number of incentives,
including the use of roughly 100 square kilometers of
land, $1.2 billion in transportation and communica-
tions upgrades, and more than $210 million in financ-
ing, according to US Embassy reporting. The project,
however, faces several obstacles. Taipei officially
bans investment on the mainland, and, although the
ban has not been enforced, the high visibility of this
project is causing concern among Taiwan authorities,
who believe it would open the floodgates of large-
scale investment, further binding Taiwan's economy
to the mainland.
� The cost of pollution control equipment and plant
startups delayed by environmental protests have
helped push a number of industries offshore.
(Taiwan's direct overseas investment in 1989 was
more than $7 billion�equivalent to 5 percent of
GNP�and is expected to reach $11 billion in 1990.)
Even state-owned firms�such as China Steel Cor-
poration�are looking to build new facilities over-
seas because of antipollution protests against its
construction plans. While China Steel is examining
sites in Australia, Malaysia, and Canada for an
$80 million factory capable of producing more than
3 million tons of steel annually, Taiwan is relying
increasingly on steel imports from South Korea and
Japan�nearly 3 million tons in 1989�to meet
domestic demand.
15
Little Relief in Sight
Despite the growing public support for environmental
protection, we believe concern over the economy
makes it unlikely the government will take the neces-
sary steps to significantly curtail pollution. Indeed,
barring a major environmental accident�such as an
explosion at a petrochemical complex or the release of
a significant quantity of radioactive material from a
nuclear plant�Taipei is likely to make several deci-
sions in the coming years that will risk further
damage to the environment:
� Growing power shortages are likely to convince
Taipei to move ahead on plans to build a third oil
refinery. Environmentalists have delayed construc-
tion of the facility since 1988, but, with Taiwan's
two plants falling short of daily consumption by
70,000 barrels and government officials anticipating
serious shortages of gasoline, low-sulfur fuel oil, and
liquefied petroleum gas by the mid-1990s, construc-
tion is likely.
� The Ministry of Economic Affairs is vowing to
begin construction of a $5 billion, 2,000 megawatt
fourth nuclear power plant next year, despite strong
opposition from Taipei County residents and the
DPP. Environmentalist are worried about
Taipower's poor nuclear safety record.
�
The government is likely to move forward on the
construction of a fifth naptha cracking plant. Tai-
wan authorities probably believe they must act
quickly to avoid greater shortages of ethylene,
which would cripple the island's petrochemical, and
related industries. These industries account for
37 percent of Taiwan's gross national product.
If economic growth rises, the government will proba-
bly focus more on environmental protection but is
unlikely, in our judgment, to make it a major part of
Taiwan's industrial policy, at least in the near term.
In any event, environment issues are likely to remain
contentious and to continue to play a political role�
particularly at the local level.
Secret�
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EC: Impact of German Unification
and East European Reforms
on Agriculture Policy 1
Although progress toward German unification and
East European economic reform will gradually build
pressure for reform of the European Community's
protectionist Common Agricultural Policy (CAP),
they are unlikely to significantly alter the EC's
resistance to rapid liberalization of agricultural trade
in the GATT Uruguay Round. In the near term, the
CAP can readily accommodate East Germany be-
cause an increase in demand for food in the GDR is
expected to exceed any rise in GDR agricultural
output. By the mid-1990s, however, we believe rising
East German farm output will increase CAP spending
at a time when the EC will probably have to deal with
mounting surpluses of such commodities as grain.
Moreover, Eastern Europe's likely shift from a net
food importer to a net exporter by the end of the
decade will probably add to the CAP's subsidy costs
by pushing down global food prices. Although budget
constraints are likely to increase the likelihood of
dramatic cutbacks in EC agricultural subsidies, mem-
ber-states are likely to demand some continued pro-
tection of agriculture. As a result, the Community
may contemplate other policies troublesome to the
United States, such as indirectly reducing US exports
to the EC market by granting East European products
wider access.
Limited Impact in the Near Term but ...
Over the next year or two, we expect continued
German integration to provide more opportunities than
problems for Western farmers. East Germany's de-
mand for more varied and better quality food products
almost certainly will rise as economic recovery pro-
gresses, with the growth in demand likely to outpace
the country's agriculture production. As a result, the
imbalance is likely to create greater sales possibilities
for European and US food producers and widen the
GDR's $1.2 billion deficit in agricultural trade�
already one of the highest in Eastern Europe.
17
1989 EC CAP Budget, by Product Percent
Total: 25.7 billion ECU
Fruit/vegetables 4.3
Wine 5.1
Sugar 8.0
Unclassified
327043 6-90
Because East Germany is likely to remain a net
agricultural importer at least in the near term, its
absorption into the CAP should pose few problems�
especially in the important dairy and grain sectors;
these two sectors, along with meat and oilseeds,
currently account for the bulk of CAP spending.2
(b)(3)
(b)(3)
2 East Berlin will introduce the EC price and market intervention
systeth on 1 July, adjusting producer prices to EC levels in one step.
A subsidy program will be introduced to reduce output of some
goods and a cash compensation program will be implemented. T(b)(3)
latter, aid is intended to strengthen the liquidity of GDR farms.
C
(b)(3)
(b)(3)
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East European Food Exports:
Knocking on the EC's Door
East European countries view agriculture as an im-
portant sector of their economies and will emphasize
it in their reform programs. Food production ac-
counts for about 20 percent of the region's GNP and
employs nearly 22 percent of the labor force. This
compares with 2.3 percent of GDP and 8 percent of
the labor force for the EC. Moreover, exports of food
and raw agricultural products have been both a
major earner of hard currency on Western markets
and important in barter trade with the USSR to
acquire energy and raw materials.
The East Europeans are pressing for increased access
to the EC market�particularly in meat, dairy, and
grains�in order to earn badly needed hard currency
to modernize their economies. A Hungarian economic
official, for example, has expressed concerns over EC
protectionist tendencies, arguing that the EC needs to
open its agricultural markets and abandon its agri-
culture subsidies if it is serious about aiding the
East. The EC has always been a key market for East
European agricultural goods, taking about a third of
the region's agricultural exports. In fact, Eastern
Europe is a net exporter of foodstuffs to the Commu-
nity despite protectionist EC policies, such as quotas
on East European beef that were imposed in 1974.
The EC probably realizes that it will have to make
concessions to Eastern Europe in agriculture or face
the anomaly of supporting liberalizing economic re-
forms in the East European countries while still
protecting the EC's own highly managed agricultural
system. In our view, the EC is likely to grant the East
Europeans "controlled access" to its agriculture mar-
ket. Potential East European food exports are in
sensitive EC sectors, and the Community is likely to
negotiate new voluntary restraint-type agreements
with the individual East European countries or ex-
pand existing quotas. These would most likely be in
meat and dairy products, along with some grains. It
already has increased the beef quotas granted to
Hungary, Romania, Poland, and Yugoslavia and
suspended import levies for sheep and goat meat for
all the East European countries except Romania.
The EC is likely to be generous when deciding how to
adjust existing production quotas on dairy products
and grain to take account of the GDR's entry, in part
to avoid antagonizing Bonn at a time when most
Europeans want to "anchor" Germany more firmly in
the Community. In addition, with Europe's famous
butter-and-cheese mountains now virtually eliminat-
ed, the EC has more leeway in raising its milk quota
to accommodate most East German milk produc-
tion�currently equivalent to an estimated 8 percent
of EC production. The EC also will probably have
little trouble expanding the Community's grain pro-
duction limit by some 6-7 percent because the GDR
at present is a large net grain importer. The Commu-
nity, however, is unlikely to agree to any West
German demands to suspend the rules mandating
automatic price cuts if the new production limits are
breached. Offsetting these increased costs will be the
likely expanded sales to the GDR of EC surplus
products such as fruit, vegetables, and wine.
. . . Competitive Challenge Expected Eventually
By the mid-1990s, East German agriculture may pose
a major competitive challenge to West German farm-
ers. West German agricultural specialists note that
parts of the GDR were once considered the "granary
of Germany" and that some of its land is still the most
productive in Germany. More important, the econo-
mies of scale made possible by East Germany's large
farm cooperatives confer significant advantages. Al-
though many of the collectives' component farms are
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Comparison of West and East German Agricultural
Sectors, 1987
FRG GDR
Size
Hectares (million) 12.0 6.0
Farms (thousands) 685 4
Employment (millions) 1.5 0.9
Average farm size (hectares) 17.0 1,500.0
Grain production (million metric tons)
Wheat
Barley
Rye
Yields (100 kilogram/hectares)
9.9
8.5
1.5
4.0
4.2
2.2
Grains
Winter wheat
Barley
Potatoes
Sugar beets
50.6
60.0
47.0
332.0
507.1
45.6
54.2
47.1
272.7
350.2
This table is Unclassified.
likely to be reprivatized as part of the reform effort in
the GDR, we expect East German farms to remain
much larger than those in West Germany.
In light of economic reforms and modernization ac-
companying unification of the two Germanys, the
GDR could increase its agricultural output 20 to 30
percent by the middle of the decade because:
� Market-determined prices will strengthen incentives
for the production of goods in which East Germany
is most efficient.
� Western know-how will improve crop yields, which
currently are roughly 20 percent below West Ger-
man levels.
� Investments in transportation, storage, and distribu-
tion systems will remove bottlenecks that currently
limit production and keep costs high.
Embassy reporting, however, indicates that some East
German officials are less optimistic and that they
believe the emphasis being placed on the environment
may limit GDR yield increases-or take land out of
production-and dampen the anticipated competitive
challenge.
19
Eastern Europe: Supply and Demand for Wheat
and Coarse Grains a
Area Yield
Harvested (metric
(million tons per
hectares) hectare)
Production Net
(million Imports
metric (million
tons) metric
tons)
1979/80
1980/81
1981/82
1982/83
1983/84
1984/85
1985/86
1986/87
1987/88
1988/89
1989/90
29.0
29.0
28.8
28.8
28.9
29.0
28.7
29.1
28.5
29.1
29.2
3.14
3.35
3.31
3.70
3.54
3.96
3.56
3.86
3.61
3.59
3.73
91.1
96.9
95.1
106.5
102.3
114,8
102.1
112.3
102.7
104.3
108.9
14.7
11.5
8.2
3.9
2.4
-0.6
4.6
2.4
4.3
3.0
4.7
a Includes Bulgaria, Czechoslovakia, East Germany, Hungary,
Poland, and Romania.
This table is Unclassified.
If, as we expect, East Germany's agricultural output
significantly exceeds the GDR's demand for food by
the mid-to-late 1990s, a sharp rise in CAP spending is
likely. Surpluses in commodities such as grain would
grow, forcing the EC to spend larger sums to subsi-
dize exports-if still permissible under post-
GATT-Uruguay Round rules-or store the excess.'
The size of the increase in CAP outlays will depend
on world agricultural prices and the health of EC
economies. The greater the decline in world food
prices, the more untentable high EC support prices
are in the face of rising surpluses. Increases in outlays
for the CAP are restricted to 74 percent of the
Community's GNP growth rate.
A similar transformation of other East European
countries into substantial agricultural exporters would
add to the pressure on the CAP-by lowering world
prices-even if the EC does not open its doors to
Eastern agricultural products.
' The USDA estimates that merely bringing East German yields
up, and feed use levels down, to West German levels would make
approximately 3-4 million tons of wheat and barley available for
export each year
Rperet
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eLre
EC Agriculture Policy and the Uruguay Round
Movement toward German unification is unlikely to
have a significant impact on the EC's hardline posi-
tion on agriculture in the GATT Uruguay Round
talks. The EC already has submitted its proposal for
the talks, which are scheduled to end in December.
The EC is pushing a minimalist "global approach"
that would entail "rebalancing," a concept that would
allow raising protection on some products while
lowering it on others, as long as the overall level of
protection is reduced:
� The EC advocates a progressive reduction in do-
mestic support for farmers over five years with the
goal left undefined, rejecting the US call for the
elimination within 10 years of these subsidies.
� Brussels, adamantly rejecting the US proposal for
eliminating export subsidies, urges instead that
they only be reduced in line with cuts in import
levies.
� The EC accepts only in part the US concept of
"tariffication," a process that would convert all
nontariff barriers to tariffs and then reduce them
to near zero, but would permit a "corrective factor"
to be added to allow tariffs to counteract
changes in exchange rates and world market prices.
In addition, Brussels has tied partial "tariffication"
to acceptance of "rebalancing."
The Community feels it already has made a major
concession by accepting partial tariffication and ap-
pears to hope that a delay in serious talks at least
until September will prompt concessions from GATT
members concerned about meeting the December
deadline for concluding the round. Indeed, the Kohl
government is facing national elections in December
and is loath to antagonize the crucial farm vote by
making sweeping concessions. While the EC may be
reluctant to make major concessions because of the
uncertainty of incorporating the GDR into the CAP,
we believe the Community still places a high value on
successfully completing the GATT talks and will give
them the high-level political attention necessary to
make last-minute concessions when negotiations en-
ter the homestretch.
According to a recent USDA study, the region has the
capability to become self-sufficient in most foods and
to become a substantial overall net exporter of agri-
cultural products by the end of the decade. For
example, should the region close its agricultural pro-
ductivity gap with the West by half, it would become
a net grain exporter, according to USDA
Additional Pressures for CAP Reform
In addition to growing agricultural surpluses, other
factors are likely to sow the seeds for CAP reform
during the last half of the decade. Unification is likely
to shift the regional balance of power within Germa-
ny, changing Bonn's traditional opposition to agricul-
tural reform. At present, West German policy is
shaped by the politically influential south�Bavarians
Secret
have held the Agriculture Ministry for over 20
years�rather than the more efficient north. The
addition of more efficient farmers in eastern Germany
will eventually dilute Bavaria's influence on agricul-
tural policy and probably tip the balance in favor of
greater market liberalization. Assuming northern
Germany shares in the economic boom unification is
expected to bring, northern farmers are likely to find
common cause with their eastern counterparts and be
more supportive of a more market-oriented agricul-
ture regime.
Other Community members are also likely to view
more favorably fundamental reform of the CAP�
that is, increased production quotas, and virtual elimi-
nation of the dual-price system�by the end of the
decade. Indeed, Paris�a frequent hardliner�already
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Seerct
is indicating that it believes French grains are com-
petitive in a free market and occasionally espouses
making the CAP more market oriented. Other factors
will probably work to weaken political support for
subsidization of agriculture in Europe:
� Concerns over the environmental effects of agricul-
tural overproduction are likely to grow in coming
years, pushing the EC to implement reforms that
would reduce its agricultural surpluses.
� Demographic trends�especially the expected re-
tirement of the majority of farmers during the next
decade in both Germany and France�will reduce
the farm lobby's political influence
Even with reform of the CAP, the EC likely will
remain committed to some protection for agriculture,
as evidenced by its hardline position at the GATT
Uruguay Round negotiations. Over the next several
years, as the scope of Eastern Europe's challenge to
21
the CAP and world agriculture trade becomes clearer,
we expect the EC to discuss options ranging from
retargeting subsidy policies to market-sharing ar-
rangements. Community agricultural policy may
move closer to US preferences, such as the EC ending
its resistance to the US-favored idea of substituting
direct income supports to farmers for price supports.
US exports to Western Europe could face major
obstacles, however, if the West German Government
gives in to growing political pressure to limit the
access of US agricultural products to the Communi-
ty--particularly soybeans and nongrain feedstuffs.
Bolin presumably would try to persuade its EC part-
ners1 that such limits on US exports is an acceptable
pride for reform of CAP subsidy mechanisms.
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See
China: Seeking GATT Membership
Beijing's desire to become a full member of the
General Agreement on Tariffs and Trade (GATT) has
increased in light of the recent changes in Eastern
Europe and the Soviet Union and of China's need to
boost exports because of poor prospects for foreign
investment and tourism earnings. But China's case for
GATT membership as an LDC on the basis of
promised economic reforms has been weakened by
Beijing's backtracking on decentralization and trade
reforms. In any event, Chinese accession to GATT, in
addition to raising a number of thorny issues such as
Soviet and East European membership, would proba-
bly accelerate the growth of Chinese exports to the
United States but would have little impact on US
sales. As a result, China's bilateral trade surplus
would grow at a faster pace and economic frictions
would intensify.
Membership Becoming Increasingly Important
Beijing's sense of urgency that GATT members ap-
prove China's application for membership has grown
this year because of:
� Taiwan's application for GATT membership in
early January.
� Chinese fears that many Western nations will begin
to consider China less important as a result of recent
changes in Eastern Europe and the Soviet Union.
� The need to promote exports has become more
pressing as hard currency earnings from tourism
have plummeted and prospects for foreign invest-
ment have dimmed following the crackdown last
June on prodemocracy demonstrators
GATT membership would provide several tangible
economic benefits to China that observer status�
granted to China in 1985�does not. For example,
membership provides China unconditional most-fa-
vored-nation trading status from other GATT
23
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members, except those that opt to decline to apply
GATT principles to their trade with China at the time
of Beijing's accession. In addition, GATT membership
would give Beijing recourse to the GATT's dispute
settlement provisions to protect China from unfair
adjudication of complaints by its trade partners.
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Key Stumblingblock: Applying as an LDC
Beijing's insistence that it be admitted to the GATT
as a less developed country (LDC) rather than as a
nonmarket economy is a major impediment to China's
accession. Since applying for membership in 1986,
Beijing has argued that it is moving toward a market-
oriented economy and thus should be admitted as an
LDC. This claim, however, has been undercut over (b)(3)
the past two years as China has increasingly resorted
to central plans and administrative measures�such
as price controls and import licenses�to rein in
inflation and halt a deterioration in China's trade
balal nce. Moreover, China's economic problems and
its weak and divided leadership are likely to prevent
Beijing from undertaking any major economic reform
initiatives in the near term.
Almost certainly aware that its case for GATT
membership on the basis of promised economic re-
forms has been weakened, Beijing is likely to increas-
ingly justify accession on foreign policy consider-
ations, arguing that the way Western nations treat
China's GATT application is a test of their commit-
ment to China's full participation in the global eco-
nomic system. In addition, Beijing may try to over-
come resistance to its membership by offering other
major Western members minor concessions similar to
those extended to the United States. For example,
Beijing is likely to offer to discuss more freely the
policies and regulatory mechanisms that govern
China's foreign trade regime�a key sticking point in
the GATT negotiations thus far. In mid-January,
Beijing authorized such discussions with a group from
the US Embassy.
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Implications of Acceding as an LDC
LDC status would permit Beijing to use high tariffs
and quantitative import restrictions to protect infant
domestic industries or to reverse balance-of-payments
difficulties. GATT membership as a nonmarket econ-
omy, however, carries stringent obligations. For ex-
ample, it generally enables other GATT members to
retain quotas and other nontariff barriers on imports
from the nonmarket economy to protect them from a
flood of exports at state-set, often subsidized, prices.
The issue is crucial to GATT members because
China is the first predominantly state-controlled
economy with a huge export potential to apply for
membership under the preferential terms accorded
less developed economies. Many GATT members fear
China's accession as an LDC would significantly
increase its access to foreign markets; China's ex-
ports have grown at a 13-percent average annual rate
since 1980, a rate matched during the period only by
Taiwan, South Korea, and Hong Kong, among major
exporters. In addition, GATT members are concerned
that the reduction of Chinese tariff rates, the normal
requirement for LDCs acceding to the GATT, would
not meaningfully improve their access to the Chinese
market because central plans and administrative
measures�rather than markets, prices, and duties�
largely determine the volume and composition of
Chinese imports.
Beijing also may reiterate its willingness to accept
"temporary safeguards" as a condition of GATT
membership; this would allow GATT members to
treat China as a nonmarket economy initially and
hold out the promise of full LDC privileges if Beijing
makes substantial progress on reforms. Chinese trade
officials objected to such "temporary safeguards"
when US negotiators raised the possibility several
years ago, but during bilateral talks in May 1989,
officials agreed to incorporate these provisions in a
draft protocol of accession to be considered by the
GATT working party on China.
--Secrisr
Membership Likely To Raise Thorny Issues
Chinese accession to the GATT would set a precedent
for Soviet membership in the GATT and would lend
credibility to efforts by East European countries such
as Poland and Hungary to renegotiate the terms of
their GATT membership on the basis of economic
reforms they have undertaken recently. If China is
granted GATT membership even though it has moved
away from market-oriented reforms, Moscow almost
certainly would argue it should be granted similar
treatment; Moscow's application for GATT observer
status was recently accepted. The incorporation of a
large nonmarket economy such as China's on the
basis of its promises to undertake further reforms
would make it difficult for GATT members to turn
down a Soviet bid�even if Moscow were to request
special treatment as a reforming, rather than a non-
market economy.
China's early accession also would complicate resolu-
tion of Taiwan's GATT application. If Beijing ac-
cedes to the GATT first, it would most likely support
Taiwan's accession only if Taipei agreed to member-
ship as a customs territory under the governing
authority of Beijing, which we believe Taiwan would
be unwilling to do. Both Beijing and Taipei will expect
the United States to take the lead in resolving these
differences, and their lobbying efforts are likely to
escalate this year.
Limited Leverage for the United States...
We do not believe granting GATT membership to
China would markedly influence Beijing to implement
further economic reforms. China's leaders are cur-
rently constrained by the country's economic difficul-
ties, particularly by the fear that�as in 1988�a new
round of price reforms would release inflationary
pressures and that decontrol of the trade sector would
cause imports to balloon. The direction of economic
policy in China, in our judgment, will largely be
determined by the jockeying for position to succeed
Deng Xiaoping as China's paramount leader.
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In addition, Chinese membership in the GATT is
unlikely to substantially improve US sales to China
even if China reduced administrative barriers to
imports and made dramatic progress on its trade and
price reforms�a prospect we consider remote over
the next few years. Foreign exchange will probably
remain tight because of lower earnings from tourism
and foreign investment, combined with the reluctance
of China's orthodox leaders to take on more foreign
debt. Growth in US exports to China in recent years
has generally reflected gains in sales of wheat and
agricultural chemicals�sales that are more influ-
enced by trends in Chinese agricultural production
than by trade barriers. In addition, US sales of
machinery, which have languished for several years,
will probably continue to stagnate because China's
sluggish domestic economy has depressed demand for
industrial equipment and because the resumption of
export credits by Japan and the European Community
will reduce the United States' ability to compete.
... And Formidable Challenges
By facilitating Chinese efforts to boost exports to the
United States, however, Chinese membership in the
GATT could enable China's trade surplus with the
United States to burgeon.' US Commerce Depart-
ment statistics indicate that China's bilateral trade
surplus jumped nearly 70 percent in 1989 to about
$7 billion, and, even without GATT membership,
China's surplus could exceed $10 billion this year. We
believe the surplus could grow even more rapidly if
Chinese membership in the GATT gives Beijing more
clout in efforts by textile exporters to eliminate the
global quota system on textiles�the Multifibre Ar-
rangement�that, under a GATT waiver, now permits
'We anticipate that even without GATT membership, China's
exports to the United States may continue to average more than 30-
percent annual growth over the next few years. Beijing will
probably achieve this rapid export growth by continuing to move
into higher-value export product lines, boosting credit to the export
sector, and directing scarce raw materials to export-producing
factories. Targeting of the US market and continued growth in US
demand for the products China exports will probably enable
China's exports to the United States to grow two or three times as
fast as its overall exports, continuing the pattern of the last decade.
25
China: Targeting the US Market
The United States last year became China's primary
export market, and Beijing has targeted the United
States for rapid export growth in the 1990s. In the
coming decade, Beijing plans to focus on the US
market for sales of machinery and consumer elec-
tronics; China has invested heavily in these sectors
with an eye to boosting export earnings, and, accord-
ing to diplomatic reporting, has found it much easier
to sell these products to the United States than to the
more heavily protected markets in Japan and West-
ern Europe. China's exports of labor-intensive manu-
factured goods such as televisions, radios, toys, foot-
wear, hand tools, and household electrical appliances
are likely to grow most rapidly, in our view, because
China's low wages give it a comparative advantage
relative to producers in countries with higher labor
costs and because foreign as well as domestic invest-
ment has been concentrated in these sectors.
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the United States and the European Community to
impose volume quotas on textile imports. Such a move
would probably cause China's clothing exports to the
United States to accelerate; they currently account
for roughly one-fourth of China's sales to the US
market.
In addition, if the United States wishes to apply the
GATT to China, it must grant Beijing unconditional
most-favored-nation (MFN) trading status.' Such a
move would require a Congressional amendment to
the Jackson-Vanik Amendment to the Trade Act of
1974, which withholds MFN status to nonmarket
economies except through annual waivers by the
President. If the United States fails to apply the
'Article 35 of the General Agreement permits members to decline
to accord new members GATT privileges�including most-favored-
nation trading status�at the time of accession provided that the
countries concerned have not entered into bilateral tariff negotia-
tions.
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GATT to China, however, US products could face
higher tariffs in China than products from countries
that agree to grant MFN status because Washington
would not be eligible to conduct tariff reduction
negotiations with Beijing.
If China accedes to the GATT with temporary safe-
guards�pending the implementation of comprehen-
sive trade and price reforms�the United States and
other GATT members would have to decide when to
eliminate the interim measures. They would need to
continually reevaluate China's trade system to deter-
mine when market forces had developed to the point
where tariffs were sufficient to regulate trade with
China. The reassessment process would be contentious
and prolonged because the stakes are high for both
sides. If Beijing cannot shed the safeguards, GATT
membership would do little to improve China's access
to foreign markets. If, on the other hand, GATT
Civ
members agreed to drop the safeguards before market
forces played a predominant role in the Chinese
economy, the Chinese market would remain largely
closed to their products, and they could be subjected
to Chinese targeting of their markets with state-
subsidized products. We believe that China would
apply enormous bilateral pressure for the removal of
safeguards because Beijing regards US support as
critical to making headway within the GATT.
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�Secret�
International Financial Situation:
Update on LDC Debt
Developments this week focus on Mexico, Egypt, and G-15 Summit issues:
L
Mexico City Anticipates Reprivatization of Commercial Banks. Mexico City
expects a majority of the state legislatures to approve the constitutional
amendment to begin reprivatizing commercial banks by the end of this summer.
the first two banks to be put
on the auction block will be Banca Serfin and Banorte� institutions that the
Mexican VISA Group of Monterrey is interested in reaquiring. Foreign banks
are likely to be permitted to play a larger role once new bank regulations are in
place. According to press reports, foreign investors will probably be allowed to
own up to 49 percent of the shares of the reprivatized banks. In addition,
\the government intends to allow foreign
banks to open branches in Mexico.
� Cairo's US Military Debt Worries Mubarak. Last week President Mubarak
informed a visiting US official that Egypt will be unable to meet its annual
Foreign Military Sales (FMS) obligations of more than $1 billion. Cairo must
pay $287 million from June through September to avoid triggering sanctions
under the Brooke Amendment, which mandates the suspension of US aid to
FMS debtors who are a year iii arrears. The US Embassy reports the
government's foreign exchange resources are perilously low, and Cairo is
scrambling to finance wheat iMports with the aid of Persian Gulf Arab states.
Grain on hand and scheduled Shipments will last only until early August, but
Egypt hopes gift wheat from the United Arab Emirates�and possibly Kuwait�
will stretch supplies through October.
Mubarak's concern about debt service is well founded, in our view, although the
Egyptians may be painting a bleak picture in the hope that Washington will
forgive at least part of Egypt's $6 billion military debt. Cairo is seeking an IMF
standby arrangement to facilitate debt rescheduling, but an accord may be
months away. The IMF wants to see additional budget measures and a more
flexible exchange rate regime before agreeing to a standby, according to an
Embassy readout from the IMF team in Cairo. In the interim, Cairo may be re-
quired to take unusual steps to avoid Brooke Amendment sanctions. Possible
measures to raise foreign exchange include halting imports by the Central Bank
of nonessential rationed foods, buying dollars from commercial banks or private
moneychangers, or drawing from foreign exchange accounts held by the Oil and
Defense Ministries.
27
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Key LDC Debtors:
Economic/Financial Indicators
Foreign Debt
(yearend 1989 in
billion US $) a
Exchange
Rate
(per US $)
Months of Import
Coverage by
Reserves
Other
Indicators
Brazil 56.00 (19 Jun 90) 6.3 (Dec 89) a
112 12.74 (Jan 90) 4.2 (Aug 89) b
Trade balance figures show a surplus of $1.7 billion
for May, the highest monthly trade surplus since June
1989. Exports amounted to $3.2 billion and imports
reached $1.5 billion, according to press reports.
Mexico 2,846 (19 Jun 90) c 2.65 (Dec 89)
98 2,682 (Jan 90) 3.49 (Aug 89) d
Consumer prices rose 1.7 percent in May compared
with April's 1.5-percent increase, according to press
reports.
Argentina
59
5,330 (19 Jun 90) a 3.62 (Mar 90) a
1,100.0 (Jan 90) 1.6 (Dec 89)d
The Central Bank projects June's inflation rate to be
between 10.4 and 12.5 percent
Inflation for May was 13.6 percent,
according to official statistics.
Egypt
47
2.708 (19 Jun 90) g 1.6 (Aug 89) d
2.558 (Jan 90) 1.6 (Jul 89)
Central Bank Governor Salah Hamed announced the
Central Bank exchange rate would be devalued from
le 1.10/US$ to le 2.00/US$ on 1 July. This rate
affects 25 percent of all imports.
Venezuela
39
47.65 (19 Jun 90) c 4.59 (Mar 90)d
43.50 (Jan 90) 3.5 (Nov 89) d
Caracas suspended plans to increase gasoline prices
because of student protests, according to press
reports.
Nigeria
34
7.88 (19 Jun 90)
7.70 (Jan 90)
3.4 (Nov 89)"
2.0 (Jul 89) d
Consumer prices rose 5.8 percent in May, led by price
increases in paper products, kerosene, bus fares, and
milk products. Inflation for April was 0.2 percent.
Philippines 22.72 (19 Jun 90) c 1.1 (Mar 90) d
29 22.08 (Jan 90) 1.0 (Nov 89) d
The unemployment rate for the first quarter of 1990
was 8.6 percent, according to official sources. The
employment prospects for the next two years are
bleak, according to US Embassy reports.
Morocco 8.69 (19 Jun 90)
22 8.00 (Jan 90)
1.0 (Aug 89)
0.7 (Oct 89)
Although Finance Ministry officials insist inflation
for 1990 will not exceed 10 percent, if the first
quarter trend continues, inflation could reach 15
percent for the year, according to US Embassy
reports.
Chile 286.44 (19 Jun 90) h 5.01 (Nov 89) d
19
282.95 (Jan 90) 3.8 (Oct 89) d
Consumer prices rose 1.5 percent in May, and cumu-
lative inflation for the year is now 8.8 percent,
according to press reports.
Peru
19
61,072 (19 Jun 90) 1.42 (Feb 90)
8,389 (Jan 90) 4.0 (Oct 89) d
Lima imposed sharp restrictions on withdrawals from
savings accounts in early June in an apparent effort to
ease speculation on the US dollar. The value of the
inti dropped 25 percent in the last two weeks of May.
a Estimated.
h Ratio of foreign exchange to imports.
c Floating rate.
d Ratio of gross reserves, minus gold, to imports.
a Financial rate.
f Ratio of net reserves to import.
g Free market rate.
h Official rate.
Ratio of gross reserves, minus gold, to imports of goods.
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Status of Debtor-Creditor Relations
Domestic Political Scene
Chief debt negotiator Jorio Dauster announced the IMF
visit to Brazil, scheduled for mid-June, will be delayed for a
few weeks, while the government continues to work on
budget revisions.
The 12 June general strike fizzled because many transporta-
tion, communication, and bank workers refused to partici-
pate for fear of losing their jobs,
Mexico City will receive $776 million in loans from Tokyo
for the fight against air pollution. This includes a $315
million loan for the construction of an oil refinery.
Mexico City is preparing to receive bids in the sale of the
government's 51-percent stake in Telefonos de Mexico
S. A., which could bring over $4 billion, according to press
reports.
Three international banks with substantial Argentine expo-
sure stated Buenos Aires's token $40 million interest pay-
ment was not sufficient to restart talks.
At least three foreign investor groups plan to submit bids in
the planned privatization of the Argentine national tele-
phone company ENTel, to be awarded 28 Juner
An IMF official in Egypt reports no breakthroughs last
week in discussions with Cairo. The fund is in no rush to
reach agreement with the Egyptian Government, according
to US Embassy reports.
Education Ministry and World Bank sources announced a
$100 million loan for the development of the primary
education sector will be released to Lagos next year,
according to US Embassy reports.
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An Egyptian industrial delegation held talks with Moscow
earlier this month, resulting in an agreement on Soviet loan(b)(3)
and participation in a paper production plant to be estab-
lished in Egypt.
Caracas issued a public invitation to domestic and interna-
tional consulting firms and investment banks to apply to
prequalify as advisers for its privatization program.
Lagos's program to privatize or commercialize approxi-
mately 130 public-sector enterprises appears to be on
schedule for completion before the transition to civilian rule
in 1992, according to US Embassy reports.
Because the IMF and Manila are at odds over the budget
deficit, the IMF withheld the last $300 million installment
of the $900 million extended fund facility, originally sched-
uled for release this month.
President Aquino approved a comprehensive tax reform
package featuring 16 new tax proposals, the first of which is
a tax on "sin" products such as tobacco and alcohol.
The African Development Bank is considering a $20 million
loan to Rabat for a road rehabilitation and maintenance
project, according to US Embassy reports.
Rabat is delaying implementation of its privatization plans
as Cabinet officials debate the amount of control that
foreign investors will be allowed to have over Moroccan
companies.
Tokyo promised Santiago a $300 million credit that will be
channeled through Japan's Foreign Cooperation Fund, ac-
cording to press reports.
President-elect Fujimori announced he would resume repay-
ments on Peru's foreign debt under an economic plan aimed
at restoring the country's international creditworthiness.
President Aylwin announced the adoption of measures to
assist people in debt with housing, taxes, utility, and in
paying back government loans for university students.
Alberto Fujimori, former president of the National Agrari-
an University and agricultural engineer, won the 10 June
presidential runoff against novelist Mario Vargas Llosa,
according to press reports.
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Sccrct
"SEET��et
Egyptian Brooke Amendment
Payment Obligations to the United States
June - September 1990
Million US $
Total
286.6
June
75.6
July
71.5
August
0
September
139.5
� G-15: Emerging Cautiously from Inaugural Summit. External debt dominated
discussions at the G-15 inaugural summit in Kuala Lumpur in early June, but no
agreement on a united position was reached. The delegates�whose countries'
$600 billion external debt accounts for nearly half of the Third World's total�
want developed nations to lower interest rates, stabilize exchange rates, and
provide better access to their domestic markets for developing countries exports,
according to press reports. The G-15 also proposed that financial institutions link
debt servicing capacity to economic performance. While some Latin Aamerican
countries wanted a strong position on debt relief, others such as Indonesia,
Malaysia, and India, were more moderate. G-15 representatives have publicly
announced they will meet during the coming months to draft a compromise
strategy for dealing with creditors.
Three initiatives emerged from the summit that are designed to facilitate
economic growth in the Third World. According to US Embassy and press
reporting, the group agreed to create a data exchange center to distribute
information on trade, investment, and technology-transfer opportunities among
developing nations. An initiative to boost South-South trade by utilizing Central
Banks to guarantee payment to domestic exporters and one establishing a forum
of businessmen, investors, and government officials to boost trade and invest-
ment between LDCs were also approved. The group failed, however, to establish
a permanent Secretariat�a move that would have capped its commitment to
become a formal organization representing Third World:interests. Instead, the
group established a steering committee of Foreign Ministers from Malaysia,
Venezuela, and Senegal to coordinate the group's activities until next year's
summit in Caracas, where the Secretariat issue is likely to re-emerge. Malaysia
was appointed to present G-15 positions to the G-77, but the group elected not to
approach G-7 countries before the Houston Summit, according to US Embassy
and press reports.
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--Secret-
Briefs
Energy
Italian Nuclear Plant
Closure Ratified
The Italian Parliament last week ratified the decommissioning of Italy's two
nuclear power plants, according to the US Embassy in Rome. The two reactors,
with a combined capacity of 1,150 megawatts, were shut down shortly after the
Chernobyl' incident but had been kept ready for use pending the expiration of a
five-year moratorium on nuclearl power enacted after a 1987 referendum. Al-
though the parliamentary action is the death knell for the nuclear operation of the
two plants�they might still be converted to traditional fuels�the Parliament
refused to support environmentalists' calls to ban any future development of
nuclear power in Italy. Rather, it recommended that the National Agency for
Nuclear and Renewable Energies and the National Agency for Electricity
undertake research for safe reactors that might be built after 1992. Embassy
reporting suggests that the compromise seems to have satisfied the Italian Green
parties�which believe that such safe reactors will be unavailable for at least 15
years�and Italian energy and industry officials. These officials reportedly worry
that, without the possibility of nuclear expansion, Italy will be unable to meet
carbon dioxide emission targets being promoted by EC partners such as West
Germany and France to help combat climate change
International Finance
Western Banks Western banks have reacted to increasing Soviet indebtedness and delayed
Requiring Higher payments with tougher credit terms, including higher interest rate margins. Short-
Margins on Loatis to term loan arrangements completed in the first quarter of this year show that
USSR Western banks increased their margins to 0.5- to 1.25-percentage points over
LIBOR, the London Interbank Offered Rate, with long-term loans priced even
higher. Some Western banks made offers with margins as high as 3.0- to 4.0-
percentage points over LIBOR. The Soviet Union, considered an impeccable credit
risk until recently, had enjoyed interest rates averaging just 0.125- to 0.25-
percentage points over LIBOR on short-term loans since the mid-1980s, with
slightly higher margins as debt exposure crept up at the end of the decade. The loss
of such favorable terms will aggravate Moscow's foreign payments problem, with
additional debt servicing from the increased margins alone likely to amount to over
$100 million next year. Even if the Soviets were to clear up the arrearage problem
in the near term, margins will remain high because of banker concerns about the
poor performance of the domestic economy and continued ethnic tensions.
31
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Scent
Global and Regional Developments
India Welcomes
US Decision on
Super 301
Indian officials were pleased with the US announcement postponing a decision
involving retaliation under the Super 301 provision of the 1988 Trade Act until af-
ter the Uruguay Round ends in December. According to the US Embassy in New
Delhi, they view the move as part of a broader improvement in US-Indian relations.
In our view, New Delhi now will try to address some of Washington's insurance and
investment concerns in the Uruguay Round to avoid possible US action against
India after the Round ends. In addition, New Delhi may even negotiate bilaterally
with the United States if it can avoid appearing to bow to US pressure.
New Delhi may push some elite Indian
businessmen to personally call for the government to negotiate with the United
States, after which Prime Minister Singh would agree to talk� claiming that he is
only trying to protect important business interests from possible US retaliation.
Some Indian exporters have already stated that they fear the United States will im-
pose sanctions after the Uruguay Round and hope that New Delhi will move faster�
to open up the economy, according to the US Consulate in Bombay.
Highlight�Global and
Regional The release of new data on AIDS at the International AIDS meeting that began
Developments on 20 June in San Francisco is likely to further hurt tourism in a number of coun-
tries. . . tourism in Haiti, for example, dropped 80 percent the year its AIDS
prevalence was publicized, according to the US Embassy. . . tourism in parts of
the Caribbean, East Africa, and Thailand�because of strong links between local
prostitution and tourism�are likely to be adversely affected by data presented at
the conference. .. more countries may also require HIV tests for foreign visitors;
some 41 countries, including some OECD members, and a few corporations
already require such tests, which cost between $40 to $330 per person.
Costa Rica Announces
New Economic
Stabilization Measures
National Developments
Americas
In an effort to ease pressure on interest rates and inflation, President Calderon late
last month unveiled a plan to slash Costa Rica's domestic budget deficit, which has
risen steadily from 2 percent of GDP in 1988 to a projected 7 percent this year.
Calderon plans to cut the projected deficit by more than 60 percent with a 25- to
30-percent cut in government spending and substantial hikes in utility rates,
according to US Embassy reporting. Over the longer term, San Jose hopes to hold
the deficit down by boosting revenues through higher consumption and business
taxes, by broadening the sales tax base, and by reducing exemptions. The
President's proposal enabled Costa Rica to sign a letter of intent with the IMF ear-
lier this month for a new standby agreement. San Jose sought to soften the
package by allocating more money for social programs, but businessmen, farmers,
labor groups, and the main opposition political party are protesting the new
measures. Calderon probably will go ahead with the increase in public-sector
prices, but securing legislative approval for the proposed spending cuts and tax
changes may be difficult.
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Low-Level Cuban-
Nicaraguan Cuban-
Nicaraguan Shipping
Activity Despite Ban
Although Cuba suspended all commerical shipments to Nicaragua in mid-March
following President Chamorro's inauguration, Havana is quietly arranging for
other shippers to transport Nicaraguan-bound cargoes, and limited shipping
activity between the two countries is continuing aboard flag-of-convenience ships.
Havana probably wants to keep the door open for future economic trade with
Managua, and its decision to pick up cargo in Nicaragua suggests that the Cuban
economy needed those goods. If the economic situation in Cuba continues to
deteriorate, Havana may rescind its self-imposed ban against trading with the new
Chamorro government. Nicaragua�bolstered by the suspension of US sanctions
and the ability to trade freely with US firms�no longer needs Cuban maritime as-
sistance. Now that the conflict between the Sandinistas and Contras is winding
down, the Nicaraguans probably see no need to dedicate two ships to a liner service
with Cuba, and they are hoping to lease these ships to earn hard currency.
Europe
(b)(3)
EC Makes Progress on EC Finance Ministers last week broke a 20-year deadlock on tax problems
Single-Market Corporate encountered in cross-border business within the EC, giving a significant boost to
Tax Policy completion of the single internal market by the end of 1992. The measures,
strongly supported by EC firms, will abolish withholding taxes on dividends paid
by a subsidiary to a parent firm in another member state, abolish capital gains tax-
es arising from cross-border mergers, and establish the use of arbitration in cross-
border tax disputes. West Germany cleared the way for agreement�perhaps in an
attempt to show its commitment to the Community�by dropping its longstanding
opposition to the withholding tax measure after the other members agreed to give
Bonn until 1996 to comply fully. Agreement on these tax issues may signal
increased member-state willingness to resolve other deadlocked tax issues that
threaten timely completion of the single market. Italy, which takes over the EC
Council's rotating presidency in July, has said agreement on harmonizing value-
added tax rates will be a top priority.
Italy Strengthens
Antistrike Law
Threats of wildcat rail strikes, which would have disrupted the World Cup soccer
championship, spurred the Italian Parliament to pass legislation making it easier
for Rome to issue back-to-work orders. Informal unions have disrupted rail
transportation this spring, pushing for higher wages than Italy's three major labor
confederations have sought. The 'three confederations�affiliated with the Chris-
tian Democrats, Socialists, and the Communists�have often agreed to lower wage
rates in exchange for concession that further their political agendas. The specter
of strikes during the World Cup united Italy's normally fractious political class be-
hind antistrike legislation covering essential public services. Under the new law,
Rome can broadcast back-to-work orders on television; previously, such orders had
to be hand delivered to each striker. The law will allow Rome to reduce Italy's no-
torious disruptions to public services, thereby cutting the cost of doing business and
generally making the country more competitive in international trade.
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Paris Proceeding
Cautiously on Income
Redistribution Proposals
East German Uranium
Industry's Bleak Future
Kenya Presents
Optimistic. Budget
ca. c
22 June 1990
The French Government will proceed cautiously in efforts to alleviate a growing in-
come disparity between rich and poor in France. President Mitterrand views
redistribution as a way of bolstering his sagging popularity and of fulfilling
promises made when he first took power in 1981. He and other Socialists are
pushing Prime Minister Rocard to devise plans to spread the fruits of prosperity
more evenly, although the government recently had to back away from a Socialist
parliamentary proposal to raise the corporate capital gains tax from 19 to 25
percent when the stock market reacted negatively. Rocard warned fellow Socialists
that the proposal would discourage investment from other EC countries, and
Mitterrand and Finance Minister Beregovoy subsequently tried to reassure finan-
cial markets by promising to consider other ways of narrowing the income gap.
Paris also is threatening to supplement :the annual minimum wage hike if private
industry does not come up with suggestions to help low-wage workers.
West German officials are almost certainly planning to shut down East Germany's
uranium mining industry, although the fact that it is a joint GDR-USSR project
will increase the political and economic costs for Bonn. The GDR's uranium
mining operation�one of the largest in the world with over 40,000 employees�is
causing major environmental and health damage in the southern GDR; mining at
the site was initiated by the Soviets in 1946, and their contracts do not expire until
2000. West German authorities normally would have no compunction in shutting
dawn this environmentally unsound industry, but the Kohl government is commit-
ted to ensuring that Soviet economic interests are not damaged by unification�
and Soviet officials already have explicitly raised the issue of uranium mining in
bilateral talks. West German negotiators, for their part, probably believe that the
Soviets are merely looking for compensation. Since production costs are five times
�that of world market prices, the Germans doubt the Soviets are serious about
wanting to continue operating the plant, particularly after 1 July when GDR trade
is to be on a hard currency basis. One compromise solution under active
consideration in Bonn is an agreement to replace the uranium the Soviets receive
from the GDR through German purchases on the world market.
Africa! Middle East
Kenya's budget for FY 1990/91�starting 1 July�is based on improved revenue
performance, tighter controls on government borrowing, increased debt service
capability, and stronger export achievement, according to the US Embassy in
Nairobi. The government projects total expenditures to increase 10 percent and
revenues to grow by 24 percent. As a result, Nairobi hopes to reduce the budget defi-
cit to 3.8 percent of GDP, down from 4.2 percent in FY 1980/90, and to cut the
country's debt service ratio to 20 percent of export earnings by 1995 from the present
level of 27.5 percent. Kenya also is emphasizing export promotion in its economic pol-
icy for FY 1990/91 to sustain the country's fairly strong 5-percent average annual
economic growth rate since 1980. Toward this end, the government introduced a duty
exemption scheme for horticultural exports�a growing product line�and plans to
step up its initiatives on the operation of Export Processing Zones (EPZs).
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Scott
We believe some of Nairobi's budget assumptions are too optimistic. For example,
we concur with the US Embassy's view that the debt service projections are
unrealistic because exports continue to stagnate, while imports�partly paid for
with increased foreign borrowing�continue to rise sharply. In addition, foreign
investors have shown little interest in Nairobi's EPZ promotions because of an
unfavorable investment climate highlighted by bureaucratic redtape and corrup-
tion, according to diplomatic and press reporting. Moreover, Nairobi has on
several occasions in the past been unable to hold projected government expendi-
tures within targeted limits.
Asia/Pacific
Tokyo Trying To Japanese officials are offering new incentives to try to revitalize the Technopolis
Revitalize Technopolis program�a plan designed to encourage regional development and the decentral-
Program ization of frontier technology industries by creating high-technology centers
throughout Japan. Existing incentives�corporate investments in technology cen-
ters have been tax deductible since the plan's inception�have not spurred large-
scale industry involvement. The project�officially launched in the early 1980s�
has not attracted much industry participation because many firms are reluctant to
locate new research and manufacturing ventures far from established company
facilities and trading centers. To get the program back on track, Tokyo has
committed itself to match any Technopolis-related funds set aside by prefectural
governments and provide marketing assistance for small and medium-sized
companies. The Trade Ministry will also extend government support for the
program through 2000, rather than the early-to-middle 1990s as originally
scheduled.
Japanese Setting
Carbon Dioxide Target
(b)(3)
(b)(3)
Japanese officials agreed in principle to adopt an as yet unspecified carbon dioxide
emission target at an 18 June cabinet-level meeting, according to Japanese press
reports. The target reportedly would be part of a new 20-year "master plan" to be
finalized this fall that would stress reducing emissions of several greenhouse gases
through technological innovation. The plan would supplement the 100-year plan to
combat climate change currently being promoted by the Ministry of International
Trade and Industry (MITI). One report suggested that the target would likely
permit at least some emissions growth before, and possibly after, 2000. As such, it
would not be nearly as strict as the targets being promoted by several West
European countries. Nonetheless, the reports suggest proponents of the target (b)(3)
believe that by demonstrating some flexibility on the target issue�where it had ;.
D)( 1 )
shown little before� Tokyo can reduce its isolation at the Houston G-7 Summit(
and upcoming climate change conferences, and possibly reach a compromise with
the West Europeans.
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South Korea Threatens
to "Discipline"
Foreign Banks
In a notice sent in early June to all foreign banks with branches in South Korea,
the Bank of Korea (BOK) warned they will face stiff penalties unless BOK
regulations are followed, according to the US Embassy in Seoul. Disciplinary
action could include the expulsion of the bank's general manager from the country.
The South Korean press observed that in the past the BOK has taken strong
measures against Korean employees who have ignored regulations, but this is the
first warning to foreign bankers. As Seoul prepares for the complete liberalization
of its financial markets in 1992, authorities want to ensure compliance by both do-
mestic and foreign banks of remaining regulations. For example, Seoul is
especially concerned about the foreign exchange speculation that has occurred
since government officials partially liberalized the market earlier this year.
Although US branches will be affected by this tougher policy, Seoul is probably
most concerned about the potential for illegal behavior by the powerful Japanese
banks
South Korea Likely To The South Korean Ministry of Trade and Industry (MTI)�striving to establish
Adopt US HDTV high-definition television as a major export market�is likely to adopt the US
Standard HDTV standard, which is scheduled to be established in 1993.
MTI ruled out the adoption of the Japanese standard because it felt
Tokyo would not allow South Korean manufacturers access to the Japanese
HDTV market. South Korean concerns over access to the European market will
also probably encourage MTI to adopt the US standard. Not only is the United
States the largest potential HDTV market but also South Korean television
manufacturers are already established here. In addition, adoption of the US
HDTV standard would assist South Korean firms in their efforts to establish
HDTV joint ventures with US companies. Waiting for the establishment of the US
standard, however, means the South Korean HDTV effort�whose government
funding was put on hold in late 1989�is not likely to make substantial progress
until 1993.
Hong Kong Unions
Protest Foreign Labor
About 1,000 members of the Federation of Trade Unions recently demonstrated
against a government plan to import about 15,000 more craftsmen, supervisors,
and construction workers from China, the Philippines, and Thailand. The trade
unionists fear losing their bargaining power with employers and slower wage
increases in Hong Kong's inflationary economy; retail prices rose about 10 percent
last year. According to government statistics, job vacancies rose to about 85,000 in
1989, in part because of emigration driven by fear of the territory's return to
Chinese control in 1997. By allowing more foreign workers, the government hopes
to ease the chronic labor shortage and sluggish economic growth; GDP grew only
2.5 percent last year. Staffing difficulties and rising wages have fueled inflation,
lowering the competitiveness of Hong Kong's exports and causing firms to move
production facilities to other countries. We believe the government will probably
face increasingly strong opposition to foreign workers after the legislative election
next year; unions are politicizing the issue by joining with Hong Kong's first
political party, which supported the rally.
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Punjab Province
Pressuring Islamabad
for More Funds
Soviets Improving
Enterprise Taxation
The Punjab provincial government, which is headed by Prime Minister Bhutto's
main political rival, Nawaz Shari'', recently announced its budget for FY 1991 and
is pressuring Prime Minister Bhutto to fund the province's deficit�projected to be
over $88 million. Islamabad, however, is facing IMF pressure to cut its own
federal budget deficit and will be unable to bail out the Punjab government, in our
view. According to US Embassy reports, the province plans to increase operational
expenditures by about 15 percent over last year's level, but, as in past years, will
not tax politically powerful landowners. Instead, the Punjab government reported-
ly hopes to get more federal funds for its Annual Development Program, but the
federal government has already increased the province's ADP allocation by 15
percent over last year. If additional federal funds are not forthcoming, we believe
the Punjab's government almost certainly will blame the federal government for
cuts in provincial spending in an attempt to garner political support.
USSR
The enterprise tax bill the Supreme Soviet passed yesterday establishes a
maximum 45-percent tax on the profits of most state enterprises. Currently,
ministries often arbitrarily tax the most efficient firms at much higher rates.
Foreign enterprises will pay a 30-percent rate; joint ventures, except for those
engaged in services, will continue to be exempt from taxes for their first two years
of profitability. The tax receipts will flow about equally into union and republic
budgets, providing needed resources for republic autonomy. Profits in excess of a
30-percent return on capital will be confiscated. The law is an important step in
giving the government fiscal tools to regulate the economy and to pursue social
goals as it dismantles administrative controls. It is also a victory for reformers, who
lobbied against the government-proposed 55-percent rate. Nonetheless, a rate of
45 percent and the confiscation of "excess" profits are still likely to discourage en-
trepreneurial activity.
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