Iceland: January 2000
A liberal trade regime as well as structural reforms, disciplined macroeconomic policies, and a favourable environment have contributed in Iceland to increased investment and trade, low unemployment and strong growth. A new WTO report on the trade policies of Iceland states that Iceland is a prime example of the benefits of international specialization, having achieved high living standards through the deft exploitation of its fish and energy resources, while meeting many of its domestic needs via imports.
Liberal trade regime in Iceland contributes to increased trade and strong growth
The report notes, however, that high protection of certain activities such as agriculture remains in Iceland and that foreign investment restrictions still exist in key sectors such as energy and fisheries. Further liberalization, the report says, would help reduce remaining distortions and enhance competition in the domestic market. Undertaking this on an most-favoured-nation (MFN) basis and securing it in the WTO would prevent any over-reliance on the European Economic Area (EEA) market, and avoid trade or investment diversion.
The new WTO Secretariat report, along with a statement from the Icelandic government, will serve as the basis for the second trade policy review of Iceland which will take place in the WTO Trade Policy Review Body on 2 and 4 February 2000.
The report says that fish and fish products continue to be Iceland's main export accounting for 71% of all exports. Aluminium exports have increased substantially in recent years, to over 13% of total exports, reflecting the strong foreign direct investment in the industry. Iceland's imports are dominated by manufactures, with motor vehicles and other equipment the main items. The report notes that Iceland's balance-of-payment continues to be vulnerable to changes in fish catches, and to fish or aluminium prices.
The report states that, benefiting from EEA membership and WTO participation, trade has expanded faster than the economy as a whole. The merchandise trade to GDP ratio in Iceland was just over 50% in 1999. Between 1994 and 1999, merchandise imports expanded at an annual rate of over 12% in value terms, while the equivalent rate for exports was almost 6%. Trade in services also expanded at a brisk pace since 1994, exports growing at an annual rate of almost 10% and imports at some 11%.
Like trade, foreign investment in Iceland has expanded considerably during the 1990s. The report notes that national treatment is granted to foreign investors, but that foreign ownership is restricted or not allowed in some key areas, such as airline operations, energy and fisheries.
The report notes that, given Iceland's significant dependence on foreign trade, access to foreign markets is a longstanding policy priority. Thus Iceland participates in the European Free Trade Association (EFTA) and the EEA and is a founding member of the WTO. As a member of the EEA, Iceland grants largely unrestricted movement of goods, workers, services, and capital to other members. EFTA provides for free trade in industrial products and fish and other marine products. Iceland also participates in a large and growing number of preferential agreements with European and Mediterranean countries which provide for free trade in all goods except sensitive unprocessed agricultural products.
The report says that the average MFN tariff rate in Iceland was about 4% in 1999 and the average preferential tariff 1.7% . The report notes however that protection for agricultural products remains substantial, the average MFN tariff rate standing at 10.8% compared with 2.5% for manufactured goods.
Imports, as well as domestic production, are subject to a number of indirect taxes, such as the value-added tax, the commodity tax, and excise tax on vehicles. The report notes that although non-discriminatory in nature, in many instances these taxes fall exclusively on imports due to the absence of domestic production, for example, in the case of motor vehicles. And the resulting tax burden is in many cases considerably greater than the tariff itself. Thus, the report notes, while tariff collection is equivalent to some 1.5% of the total value of merchandise imports, tariff plus other duties collected on imports are estimated at some 18% of their value.
Although its importance has diminished somewhat, fisheries remain the most important single economic activity in Iceland, accounting for some 13% of GDP, 71% of merchandise exports, and 49% of foreign currency earnings. The report says that a system based on individual transferable quota shares has played a key role in ensuring the sustainable exploitation of marine resources and in reducing overcapacity in the industry. The report notes that since 1999, fishing permit applications are open, unconditionally, to any registered shipping vessel. However, the allocation of quotas free of charge remains a major topic of policy discussion in Iceland both for creating windfall profits for vessel owners, and foregoing public revenue.
In agriculture, Iceland's commitments under the WTO and EEA Agreements provided further impetus for the replacement of price support measures with direct income payments. Nevertheless, the report notes that such payments also grant considerable support to domestic producers, notably of lamb and meat. The report says that assistance to the agriculture sector is equivalent to some 1.5-2% of GDP, the sector's GDP share amounting only to some 2%. Agriculture is also protected by strict sanitary measures.
Manufacturing activities other than fish processing are concentrated in power-intensive industries taking advantage of Iceland's low energy costs. In 1998. the sector contributed 12% of GDP, and 22% of total merchandise exports. The report notes that most foreign direct investment Iceland is concentrated in the manufacturing sector.
The services sector accounts for some two-thirds of GDP. and has been expanding rapidly in the 1990s, particularly in the areas of financial services, tourism, software production, and biotechnology.
Notes to Editors
trade policy reviews are an exercise, mandated in the WTO agreements, in which member countries trade and related policies are examined and evaluated at regular intervals. Significant developments which may have an impact on the global trading system are also monitored. For each review, two documents are prepared: a policy statement by the government of the member under review, and a detailed report written independently by the WTO Secretariat. These two documents are then discussed by the WTOs full membership in the Trade Policy Review Body (TPRB). These documents and the proceedings of the TPRBs meetings are published shortly afterwards. Since 1995, when the WTO came into force, services and trade-related aspects of intellectual property rights have also been covered.
For this review, the WTOs Secretariat report, together with the policy statement prepared by Iceland, will be discussed by the Trade Policy Review Body on 2 and 4 February 2000. The Secretariat report covers the development of all aspects of Icelands trade policies, including domestic laws and regulations, the institutional framework, trade policies by measure and by sector.
Attached to this press release is a summary of the observations in the Secretariat report and parts of the government's policy statement. The Secretariat report and the governments policy statement are available for the press in the newsroom of the WTO internet site (www.wto.org). These two documents and the minutes of the TPRBs discussion and the Chairmans summing up, will be published in hardback in due course and will be available from the Secretariat, Centre William Rappard, 154 rue de Lausanne, 1211 Geneva 21.
Since December 1989, the following reports have been completed: Argentina (1992 and 1999), Australia (1989, 1994 and 1998), Austria (1992), Bangladesh (1992), Benin (1997), Bolivia (1993 and 1999), Botswana (1998), Brazil (1992 and 1996), Burkina Faso (1998), Cameroon (1995), Canada (1990, 1992, 1994, 1996 and 1998), Chile (1991 and 1997), Colombia (1990 and 1996), Costa Rica (1995), C˘te dIvoire (1995), Cyprus (1997), the Czech Republic (1996), the Dominican Republic (1996), Egypt (1992 and 1999), El Salvador (1996), the European Communities (1991, 1993, 1995 and 1997), Fiji (1997), Finland (1992), Ghana (1992), Guinea (1999), Hong Kong (1990, 1994 and 1998), Hungary (1991 and 1998), Iceland (1994), India (1993 and 1998), Indonesia (1991, 1994 and 1998), Israel (1994 and 1999), Jamaica (1998), Japan (1990, 1992, 1995 and 1998), Kenya (1993), Korea, Rep. of (1992 and 1996), Lesotho (1998), Macau (1994), Malaysia (1993 and 1997), Mali (1998), Mauritius (1995), Mexico (1993 and 1997), Morocco (1989 and 1996), New Zealand (1990 and 1996), Namibia (1998), Nicaragua (1999), Nigeria (1991 and 1998), Norway (1991 and 1996), Pakistan (1995), Papua New Guinea (1999), Paraguay (1997), Peru (1994), the Philippines (1993), Poland (1993), Romania (1992 and 1999), Senegal (1994), Singapore (1992 and 1996), Slovak Republic (1995), the Solomon Islands (1998), South Africa (1993 and 1998), Sri Lanka(1995), Swaziland (1998), Sweden (1990 and 1994), Switzerland (1991 and 1996), Thailand (1991, 1995 and 1999), Togo (1999), Trinidad and Tobago (1998), Tunisia (1994), Turkey (1994 and 1998), the United States (1989, 1992, 1994, 1996 and 1999), Uganda (1995), Uruguay (1992 and 1998), Venezuela (1996), Zambia (1996) and Zimbabwe (1994).
The Secretariat s report:Back to top
POLICY REVIEW BODY: ICELAND
Report by the Secretariat Summary Observations
Iceland is a prime example of the benefits of international specialization, having achieved high living standards through the deft exploitation of its fish and energy resources for export, while meeting many of its domestic needs via imports. Iceland has thus traditionally maintained a generally liberal trade regime, extended since its first Trade Policy Review in 1994 as a result of the implementation of the Uruguay Round results and the European Economic Area (EEA) Agreement. This and structural reforms, disciplined macroeconomic policies, and a favourable external environment have all contributed to increased investment and trade, low unemployment and inflation, and strong growth; in this favourable conjuncture, preventing the economy from overheating has become the main short-term policy challenge.
Iceland's remarkable recovery from the economic difficulties it faced at the time of its first Review must be seen against the historical background of a highly cyclical economy. The question of whether recent reforms have made the economy sufficiently flexible to ride out future external shocks thus arises, particularly in view of a still high foreign debt and current account deficit, high protection of certain activities - notably agriculture - and foreign investment restrictions in key sectors such as energy and fisheries. Further liberalization would help reduce remaining distortions and enhance competition in the domestic market; undertaking this on an MFN basis and securing it in the WTO would prevent any over-reliance on the EEA market, and trade or investment diversion.
Iceland has experienced economic growth of over 5% per year since 1996. Growth was initially supported by an investment boom, particularly related to the aluminium industry, and subsequently by an expansion in private consumption. Strong growth has been accompanied by a significant reduction in inflation and unemployment, which reached record lows in 1999, and by an improvement in public finances, with a surplus in both 1998 and 1999.
In the past, Iceland tended to meet external shocks through credit expansion and currency devaluations, resulting in high levels of inflation. Since the late 1980s, macroeconomic stabilization policies have been geared at reducing inflation, using the exchange rate as an instrument of monetary policy restraint. Capital controls were removed in 1993-95. Structural reforms have included privatization and improved financial regulations and tax system; better fisheries management increased and subsequently stabilized stocks, and reduced export-income fluctuations. Secular shifts in Iceland's economic structure have continued, notably the decline of the agriculture sector and the growing importance of services.
The economy has shown signs of overheating since early 1999, including higher than expected GDP growth and inflation. A relatively large current account deficit of some 4.6% of GDP reflects expansion of domestic demand, and indicates Iceland's low savings rate and growing investment. To maintain price stability, check domestic demand, and take some pressure off the current account, monetary policy has been progressively tightened and higher general government surpluses targeted (equivalent to 3.5% of GDP in 1999).
Benefiting from EEA membership and WTO participation, trade has expanded faster than the economy as a whole; the merchandise trade to GDP ratio was just over 50% in 1999. Between 1994 and 1999, merchandise imports expanded at an annual rate of over 12% in value terms, while the equivalent rate for exports was almost 6%. Trade in services has also expanded at a brisk pace since 1994, exports growing at an annual rate of almost 10% and imports at some 11%.
Iceland has traditionally followed a Europe-oriented foreign economic policy, the lion's share of its trade being with EEA countries. Trade with North America, mostly the United States, is relatively modest, at 16% of the total ,but has increased considerably since 1994.
Fish and fish products continue to be the main export, accounting for 71% of all exports; aluminium exports have increased substantially in recent years, to over 13% of the total, reflecting the strong foreign direct investment in the industry. Nevertheless, the balance of payments continues to be vulnerable to changes in fish catches, and to fish or aluminium prices.
Imports are dominated by manufactures, with motor vehicles and other equipment the main items. Other important imports include agricultural products, mainly cereals and fruit, and liquid fuels, of which there is no domestic production.
Like trade, foreign investment has expanded considerably during the 1990s: as a proportion of GDP, in 1998 the stock of foreign direct investment (FDI) in Iceland reached 5%, while Icelandic direct investment abroad was up to 4.5%. Growth in FDI has been propelled mainly by major projects in electricity and aluminium production, while direct investment abroad has expanded in the wake of the entry into force of the EEA.
Iceland has continued to pursue a liberal trade policy since its first Review, with regional initiatives, particularly the EEA, providing a strong impetus over the past six years. Customs procedures are straightforward, and increasingly computerized. Since 1997, Iceland has used the New European Rules of Origin, a system of origin cumulation, covering various free-trade agreements.
The average MFN tariff rate is low, about 4% in 1999, with over two thirds of tariff lines duty free. Detracting from this, protection for agricultural products remains substantial, the average MFN tariff rate standing at 10.8% compared with 2.5% for manufactured goods. The entire tariff was bound as a result of the Uruguay Round negotiations. The average preferential tariff in 1999 was 1.7%; all manufacturing products from preferential members enter duty free.
Tariff quotas apply in principle to 320 lines in the agriculture sector; in practice, however, they are used only for products for which Iceland made minimum access commitments in the Uruguay Round and for live plants and flowers. Out-of-quota tariff rates are seldom used; imports generally take place at in-quota or lower tariff rates.
Imports as well as domestic production are subject to a number of indirect taxes, such as the value-added tax, the commodity tax, and an excise tax on vehicles (7.5 to 70% of the f.o.b. value). Although non-discriminatory in nature, in many instances these taxes fall exclusively on imports due to the absence of domestic production, for example, in the case of motor vehicles. The resulting tax burden is in many cases greater than the tariff itself; thus, while tariff collections are equivalent to some 1.5% of the total value of merchandise imports, tariff plus other duties collected on imports are estimated at some 18% of their value.
Iceland has largely shunned the use of non-tariff trade barriers, although a number of products, especially in agriculture, are subject to licensing requirements. The importation of certain goods must comply with strict sanitary and phytosanitary conditions, and in some cases importation may be restricted or banned. Although legislation regulating contingency measures is in place, no such measures have been used since the establishment of the WTO. Iceland is an observer to the WTO Government Procurement Agreement, and applied for accession in June 1998. Iceland's procurement rules are designed to conform to EEA standards.
Iceland's standards and technical regulations broadly follow those of the EEA; there are only a handful of Icelandic standards. Certification and test data from other EEA countries are accepted. Competition policy also follows EEA guidelines. Enforcement takes place at the domestic level, when the effects of a practice are limited to Iceland, or at the EFTA or EEA levels.
Patent and copyright legislation have been amended to bring them into conformity with the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights. Patent protection to pharmaceutical products has been fully granted since 1996. In the same year, copyright protection was extended to life, publication, or making plus 70 years. Enforcement of intellectual property rights takes place through the courts, includes both civil and penal procedures, and may result in seizure of imports, fines, and imprisonment.
Other than in agriculture, support programmes are not sector-specific, instead they are aimed at addressing market failure, building comparative advantage or promoting employment. The network of support programmes has been streamlined in recent years, and growing emphasis is being placed on the co-financing of projects, especially in research and development. Support for sectoral restructuring is not provided.
National treatment is granted to foreign investors but foreign ownership is restricted or not allowed in some key areas, such as airline operations, energy, and fisheries (in contrast, much of the Icelandic direct investment abroad takes place in the latter). Other restrictions to investment regarding residency, establishment, and real estate ownership apply only to non-EEA or non-OECD nationals and companies.
Although its importance has diminished somewhat, fisheries remain the most important single economic activity in Iceland, accounting for some 13% of GDP, 71% of merchandise exports, and 49% of foreign currency earnings. A system based on individual transferable quota shares has played a key role in ensuring the sustainable exploitation of marine resources and in reducing overcapacity in the industry. Since 1999, fishing permit applications are open, unconditionally, to any registered shipping vessel. However, the allocation of quotas free of charge remains a major topic of policy discussion in Iceland both for creating windfall profits for vessel owners, and forgone public revenue.
In agriculture, Iceland's commitments under the WTO and EEA Agreements provided further impetus for the replacement of price support measures with direct income payments. Nevertheless, such payments also grant considerable support to domestic producers, notably of lamb and meat. Assistance to the agriculture sector is equivalent to some 1.5-2% of GDP, the sector's GDP share amounting only to some 2%. Agriculture is also protected by high tariffs and seemingly strict sanitary measures.
Manufacturing activities other than fish processing are concentrated in power-intensive industries taking advantage of Iceland's low energy costs. In 1998, the sector contributed 12% of GDP, and 22% of total merchandise exports. Most foreign direct investment in Iceland is concentrated in the manufacturing sector, the expansion of aluminium and ferrosilicon production, and associated power-generating capacity, accounted for much of the surge in investment in recent years.
The services sector accounts for some two thirds of GDP, and has been expanding rapidly in the 1990s, particularly in the areas of financial services, tourism, software production, and biotechnology. Iceland's GATS offer grants unlimited market access and national treatment for cross-border supply, consumption abroad, and commercial presence of telecommunication services, construction and related engineering services, distribution services, and transport services. Market access through commercial presence in banking and other financial services is subject to conditions that generally also apply to domestic firms. Nevertheless, foreign penetration in telecommunications and banking remains limited.
Given Iceland's considerable dependence on foreign trade, access to foreign markets is a long-standing policy priority. Iceland participates in EFTA and the EEA, and is a founding member of the WTO. Complying with WTO and EEA commitments has required parliamentary passage of various Acts, as international agreements must be incorporated into domestic legislation before they may be invoked in Icelandic courts.
Iceland participated in the WTO Negotiations on Financial Services and submitted an offer in the Negotiations on Basic Telecommunications.
Iceland has not been involved as plaintiff or defendant in any dispute in the WTO since its inception.
As a member of the EEA, Iceland grants largely unrestricted movement of goods, workers, services, and capital to other members. Companies domiciled in any other EEA member country have the same rights to operate in Iceland as an Icelandic registered company, and citizens of other EEA countries do not need a work permit in Iceland.
Iceland's participation in EFTA has increased the complexity of its trade policies; a large and growing number of preferential agreements with European and Mediterranean countries compounds the potential differentiation among trading partners. All such agreements provide for free trade in all goods except sensitive unprocessed agricultural products; they also contain provisions in areas such as technical regulations, public procurement, and intellectual property. Free-trade agreements with Canada and Cyprus are under negotiation.Back to top
POLICY REVIEW BODY: ICELAND
Report by the Government - Part I and III
I. Trade and economic policy environment
1. Iceland today is a small open economy with basically the same social and economic fabric as the most advanced OECD countries. The economy is market-orientated with quite an extensive welfare system. Public expenditure is estimated around 36% of GDP in 1999 and is close to the average in the OECD countries. Both GDP and private consumption per capita are in the top range among the OECD countries. The level of education is high and Iceland's technical infrastructure is well advanced. Macroeconomic performance has been remarkable in recent years. Economic growth has been rapid, inflation has been kept in check and employment has been increasing. As a member country of the European Economic Area, Iceland has a similar legislative framework for businesses and industries to those prevailing in the EU.
2. Behind these improvements in recent years lie extensive economic reforms. The most significant reforms relate to the strengthening of markets, opening up of the financial markets and more disciplined economic management. Distortions in the economic environment have been corrected by containing inflation and allowing interest rates and the exchange rate to be determined by economic conditions. Furthermore, general attitudes towards the economy have changed. There has been growing appreciation of the need for stability and a consensus appears to have emerged that economic stability is the key to future prosperity.
3. The phases of economic reform during this decade can be characterised by five milestones:
(i) First, inflation was contained at the beginning of the decade. Tight economic policies and moderation in the labour market achieved this. Iceland has a long history of high inflation.
(ii) Second, the exchange rate and interest rates were allowed to be determined by market forces.
(iii) Third, the European Economic Area was established, creating a similar legislative framework for businesses in Iceland to those in the EU.
(iv) Fourth, capital flows have been liberalised in steps during the past few years and the final step was taken in the beginning of 1995 by liberalising short-term capital flows.
(v) Fifth, ongoing market reforms, incorporation and privatisation.
4. The latest development in this area is a successful first phase of privatisation in the financial market. The Government is firmly committed to further privatisation in the financial and telecommunications sectors.
5. These reforms have significantly changed the structure and characteristics of Iceland's economy by establishing a reasonable macroeconomic balance and integrating the national economy with the global one. Good macroeconomic conditions are a prerequisite for a competitive business environment and integration with the global economy provides conditions which are conducive for growth in foreign trade. Hence, the economy has been streamlined and is now fitter than before to meet the challenges of the future.
6. Over the last four years, annual economic growth has averaged more than 5% per year, compared with 2,5% in the OECD as a whole. Strong performance has also been reflected in low inflation, ample employment, sharply improved living standards and a budget surplus. Inflation has been kept in check, basically below 2% since the recovery started. However, in recent months there has been an upward trend in inflation signalling capacity constraints in the economy.
7. Unemployment has declined sharply since it peaked in 1995. It is estimated to average 2% this year, down from 5% in 1995. Unemployment is now at its lowest since 1991. As can be expected, vacancy rates have also moved up. Real disposable income per capita has risen by more than 20% over the last four years.
8. The Treasury finances have improved significantly in recent years. The surplus is estimated to be 7,5 billion krˇnur this year on the accrual basis or 1,2% of GDP, a turn around from a deficit of 8 billion four years ago and a record a net financial surplus is expected of 20 billion krˇnur. Although local government finances have been somewhat weaker, general government finances have improved strongly. In 1995, there was a deficit of 3% of GDP, while a surplus of 1,2% is expected for this year.
9. The performance of the Icelandic economy has improved overall and there has been progress in many individual sectors. For example, the so-called knowledge industries, in particular software and biotechnology, have expanded rapidly and large investments have been made in the power-intensive sector. In addition, manufacturing in general and tourism have flourished over the past few years. Fisheries have strengthened as well, due to an advanced resource management system in the sector. There are also clear signs of increased productivity and improved efficiency in most other sectors, which are undoubtedly the result of the changed economic environment. Globalisation of the markets has changed the whole economic environment. The Government is committed to developing a competitive and diversified Icelandic economy in a global environment.
10. As a consequence of rapid growth of expenditure, the current account has turned into a deficit corresponding to 4,2% of GDP in 1999. Before the recovery started there was a surplus on the current account, but as investment increased it has turned into deficit. Now booming consumption is preventing a reduction in the current account. There are signs of overheating in the economy. It appears that the economy has been testing the limits of non-inflationary growth. In response to growing demand, the Government has been tightening monetary and fiscal policies with the aim of slowing down the pace of economic activity. This tightening will be central to economic policies in the year 2000.
11. Prospects for economic growth in 2000 must be seen in this light. The Governments goal is to achieve a "soft landing" for the economy, by slowing growth from 5% to 2,5-3% level, which is the average expected for the industrial countries. This rate of growth should be consistent with price stability and should also ensure the best feasible continuation of the current growth phase. The challenge ahead is finding the right policy mix to achieve this objective.
12. National expenditure growth is expected to slow down, leading to 2,7% growth in GDP compared with estimated 5,8% in 1999. In 2001-2004, growth is expected to slow further, to 2% per year on average.
13. Price increases in 1999 were higher than in the recent past, and sharply higher than among trading partners. The National Economic Institute projects an increase in the CPI of 5% in the course of 1999 and a 3,2% increase between the 1998 and 1999 averages. If national expenditure growth slows, however, the pressure on prices can be expected to ease. The institute, therefore, forecasts 2,5% CPI inflation in the course of 2000 implying an increase of 4% between the 1999 and 2000 averages.
14. Unemployment in year 2000 is on average expected to be similar to what it was in 1999, or 2% of the labour force. Real disposable income per capita is assumed to rise in the range 1-1,5%.
15. Exports of goods and services are projected to grow by 2,5% and imports by 2%. A small deterioration in the terms of trade this year is expected to be reversed next year. A large current account deficit is expected to remain, although a gradual decline is projected in the medium term.
16. The Governments macroeconomic policy challenge is to find the right policy mix to achieve a soft landing for the economy. The Government has already taken certain steps with presenting a Budget with a record surplus, a surplus corresponding to 2,2% of GDP, and the Central Bank raised the repo-rate by 0,6% points in September 1999 after three successive interest rate increases during the prior twelve months.
17. The Government does not exclude further tightening of monetary policy; such an action is possible, if the pace of the economy does not slow down. Further tightening of fiscal policy than is envisaged in the Budget is also conceivable in order to secure continued stability. These issues will be carefully assessed in the next months ahead in light of developments in the economy. The Government is determined to take all the necessary steps in order to prevent overheating of the economy, which may jeopardize economic stability.
18. Iceland has always been heavily dependent on imports. Most necessities of life need to be imported and financed through the export of fisheries products. Although attempts have been made in recent years to diversify, fisheries remain the mainstays of the economy. For this reason, Icelands overriding foreign trade interests continue to be identified largely with free trade in fish.
19. Full free trade in fisheries products has been established not only within EFTA but also in a series of free-trade agreements with countries in Central and Eastern Europe and in the Mediterranean. The EEA Agreement, with some exceptions, secures preferential access for most Icelandic products to the EU market.
20. The European market is likely to remain the most important outlet for Icelandic products for the foreseeable future, while the US market, although relatively less important than Europe, will certainly not be neglected. But progress in fish processing technology and transport has opened up new possibilities farther afield that are far from being exhausted. Exports to Japan are increasing in importance and emerging markets in China and Korea seem to hold promise for the future. There are traditional markets for Icelandic products in Africa and South America.
21. No matter how its relations develop with the European Union, Iceland cannot depend exclusively on the European market. In the absence of any preferential trade agreements, trade with partners outside Europe relies on the contractual framework provided by the World Trade Organisation (WTO). The establishment of the WTO with its improved disputes settlement procedures and increased scope will provide not only more security for trade but also a valuable forum for Iceland to develop its contacts and solve any potential trade disputes.
II. The Role of the Fisheries Policy
22. Efforts to establish an international regime to protect the fishing grounds of coastal states have in the past been among the most important planks of Icelandic foreign policy. Since fishing is a sine qua non for the Icelandic people, governments have been obliged to take all necessary measures to preserve this vital resource. In so doing they have sought both to work within the framework of relevant international law and to influence the direction of the progressive evolution of that law in previously uncharted waters.
23. The entry into force of the United Nations Convention on the Law of the Sea in November 1994 marks a high point in this process. For Iceland, the convention is of major significance, mainly because it ensures the right of a coastal state to extend its economic zone unilaterally to 200 miles from the coastal base line.
24. In 1983 it became apparent that effort limitations, which had been in force in Iceland since 1973, had not proved successful and the Icelandic cod stock was in decline. The catch that year dropped to 294,000 tonnes from 462,000 tonnes in 1981. After marine biologists recommended a drastic cut in the cod catch for 1984 and subsequent years in order to allow the stock to recover, it was decided to adopt a system of transferable quotas for individual vessels, based on each one's catch performance over the period 1981-83. The vessel quota management system had the twin objectives of limiting the total catch and encouraging more efficient fishing operations, through the transfer of fishing rights among vessels and more rapid reduction of the fishing fleet. This management system has undergone a number of reforms since its introduction to rectify or eliminate various shortcomings, which have delayed the achievement of its objectives.
25. Every vessel with a commercial fishing permit was allocated a permanent "quota share". The quota share is unchanged from one year to the next, unless the vessel owners have given notification of changes due to combination of quota shares or their transfer. There are no restrictions on the transfer of quota shares between licensed fishing vessels registered in Iceland.
26. Recent years have witnessed a rapid growth in sales of both permanent quota shares and annual quotas. This has led to increasing efficiency and stability in the sector. Viable enterprises have chosen to invest in harvest rights rather than other forms of investment. Harvest rights have been transferred to those parties, which exploit them most efficiently, and it has proven easier for parties in financial straits to close down their operations without having to declare bankruptcy.
27. Trading in quotas for different species has encouraged firms to specialise in processing of particular species and thereby increase efficiency. In mixed fisheries the transfer of quotas has allowed vessels to adjust their quota composition to the actual species composition of the year's catch.
28. In most cases there is a direct relationship between fishing operations and processing. The same firms largely own vessels and processing plants. The system of issuing quotas to individual vessels rather than companies has therefore not disturbed the earlier equilibrium that had been established between fishing and processing interests. Shifts are more likely to occur in the activities of different fishing communities and regions, although clauses in the law grant local parties a first option to buy vessels or their annual quotas if their sale to other communities has been agreed. Considerable changes in the relative importance of local and regional fishing activities have nonetheless resulted from quota trading. However, it has been the Governments view that it is a natural development that fishing and processing should move to the places most suitable for undertaking them and that both fishing and fish processing continue to develop steadily.
29. A profitable fisheries sector is vital for the Icelandic economy. It will be ensured by long term fisheries management with the aim of sustainable growth of the fishing stocks. Therefore the fisheries policy plays an important role in keeping the economy in good shape. The current quota system has succeeded in its goal of keeping the catch to within specified limits and the fisheries sector on the whole has shown increasing profits in recent years.
30. The Government priorities for responsible fisheries for the future are:
(i) To ensure and maintain maximum long-term productivity through responsible exploitation of all marine resources;
(ii) To ensure that all decisions are based on the most reliable biological and economic information and conclusions available at any time;
(iii) To ensure that individuals and enterprises in the Icelandic fisheries sector have clear and generally applicable, non-discriminatory guidelines to follow, providing them with a positive working environment which will strengthen the sector's competitive position internationally.