Trade Compliance Center

ICELAND TRADE POLICY REVIEW SUMMARY - 2000

PRESS RELEASE

PRESS/TPRB/125

25 January 2000

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

WTO's full membership in the Trade Policy Review Body (TPRB).

These documents and the proceedings of the TPRB's 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 WTO's 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

Iceland's 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 government's 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 TPRB's discussion and the Chairman's 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 d'Ivoire (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).

TRADE 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.

Economic Environment

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.

Trade Policy by Measure

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.

Trade Policies by Sector

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.

Trade Policies and Foreign Trading Partners

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.

TRADE 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 kr?nur 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 kr?nur. 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 Government's 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, Iceland's 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 Government's 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.