There is an economic basis for trade remedies
Some commentators consider that trade remedies are inherently protectionist. This view is particularly prevalent amongst many economists applying orthodox economic theory. I am a professional economist but I do not have this view. I think it's useful to declare some of my thoughts on this issue early in the blog because, in the spirit of full disclosure, this does influence the opinions that I will express in my analysis.
However, let me be clear that I do not believe in protectionism. My default position is that I do not think that trade remedies or other protectionist barriers should be used to protect inefficient industries unable to survive in a normal competitive market. However, I think that the issues can be more complex than a simple economic analysis suggests. This is particularly the case when environmental and labour rights issues are taken into account.
This post, therefore, sets out some of the reasons why I think that trade remedies play an important role in the global trade system.
The orthodox view of trade remedies
Orthodox economic analysis of international trade focuses on comparative advantage. I'm not going to go into economic theory in this short piece but I can make some observations about the influence of comparative advantage theory in terms of the context within which trade remedies exist.
Orthodox economics is strongly in favour of a liberal, free trade approach to international trade. This is grounded in the theory of comparative advantage which shows that, subject to certain conditions, countries are always better off trading with each other rather than producing all products for themselves. This holds true if one country does not have any sector where it has an absolute advantage. Traditional trade theory would show that even such a country would be better off in terms of economic welfare if it specialised in sectors where it has a comparative advantage. In an extreme case, for a country that was inefficient in producing all products, the country would be better off if it specialised in the products where it was least inefficient.
The above analytical approach has had a profound effect on UK trade policy for as long as I have worked on trade policy issues (i.e. 1987 onwards when I joined the DTI as an economist during the Uruguay Round negotiations). It cannot be denied that, as long as the right conditions apply, countries will be better off liberalising trade through multilateral or bilateral trade agreements.
However, I think there are many situations where problems arise in terms of the orthodox economic approach:
Global markets are distorted by state intervention, low environmental standards, and poor labour rights. Cheap imports benefiting from this kind of distortion may bring apparent gains in short term economic welfare but may distort longer term economic outcomes.
Free trade policies may produce a higher level of economic welfare but the benefits of this are often not evenly distributed. The UK Government levelling up agenda recognises that not all sections of society benefit.
Covid-19, the Ukraine war and recent global distribution/supply problems have highlighted economic benefits of local production that would not normally be taken into account in a typical cost benefit analysis of trade liberalisation.
The environmental costs of transporting products around the globe is not taken into account
I believe that human beings are hard wired to be creative and to make things. Manufacturing jobs may have benefits on mental health that again are not taken into account in orthodox economic analysis. (I will expand my views on this issue in an upcoming blog post).
Apart from ideological pro-market analysts, economists generally would acknowledge most, if not all, of the above issues that need to be taken into account. However, over the years many global policymakers and institutions have adopted an over-simplistic approach to free trade, tending to ignore many of the issues highlighted above.
Of course, the issues raised in the bullet points cover broader issues than trade remedies. However, they do set the context within which the role of the three main types of trade remedy can be considered. Some of the key points are developed below.
Global markets can become dysfunctional as a result of trade barriers or dysfunctional behaviour
Even for a country that is committed to free trade, one of the principal roles of trade policy is to correct dysfunctional markets. In the context of the EU, trade remedies were no longer required because the creation of an effective internal market removed most trade barriers and dysfunctional behaviour. Amongst other things, robust competition, state aid, and environmental & labour rights policies provided the right conditions for completely liberalised trade to apply.
Tariff barriers and non-tariff barriers have been dramatically reduced as a result of the GATT rounds since 1947 and the creation of the WTO in 1995. However, there are still tariff and non-tariff barriers even between many of the world’s major trading partners. There are also many subsidies and other state distortions that exist which further distort trade.
Thus, it can be argued that trade remedies, in principle, are able to correct market distortions so that the market can be closer to an undistorted ‘free trade’ outcome i.e. they support free trade (creating a ‘level playing field’) rather than providing protection to domestic industry.
Also, there can be global shocks that disturb markets to such an extent that trade remedies can be used to smooth out the impact of the shock.
Subsidised imports and countervailing duties
There is a general consensus that subsidised imports are highly damaging to the normal functioning of markets.
If imports are subsidised, such that the import price is lower than it would be in the absence of the subsidy, this could result in a misallocation of resources as importers/consumers switch away from the domestic product towards the subsidised imports.
State aid rules are critical for the effective functioning of an advanced free trade area such as the EU. Likewise, countervailing duties, imperfect as they are, are the best that we have for dealing with this issue in terms of global trade.
Dumped imports and anti-dumping duties
Whether 'dumping' is a problem is subject to considerable controversy in terms of the different opinions that exist on it. However, focusing on facts rather than ideology or rhetoric, there are some pricing practices that clearly create dysfunction in markets.
Predatory pricing is one such practice which is an integral element of competition and antitrust law. This is not controversial and is written into all countries’ competition law.
However, the definition of dumping is broader than typical definitions of predatory pricing. Clearly where import prices are at a level that would be considered predatory, there is a need for a remedy to deal with this. We can further ask whether there is a justification in addressing low priced imports in situations that would not be considered as predatory pricing?
State distortions can create systematic dysfunctional pricing that has the same negative impact as a subsidy. In this regard it can be noted that not all state distortions would fall within the definition of a subsidy contained in the WTO subsidies & countervailing measures (SCM) agreement. This is not least because the SCM agreement is limited to dealing only with specific subsidies. Thus, anti
In countries that have transitioned from non-market economies there can be considerable distortions which give exporters an unfair advantage when competing on foreign markets. State management of industries and markets has resulted in significant over-capacity in some industries, causing a major problem in distorting international trade. Anti-dumping is necessary to ensure that imports from such countries are priced fairly taking into account competitive benchmarks.
As highlighted above, in a harmonised market with minimum trade barriers and an effective competition law (e.g. EU), anti-dumping is not required. One reason for this is due to the fact that, if there is genuinely free trade protected by robust competition and state aid law, systematic price discrimination would not be possible. Arbitrage would ensure that any price difference is removed by re-importing the ‘dumped’ product to the market where exports were taking place at prices below the domestic price. Long term systematic price discrimination is, therefore, an indicator that there may be some form of barriers to trade that allow the price difference to exist. If this is the case, exporters may be able to subsidise their export price from the high domestic price which is merely a reflection of the trade distorting effects of the barrier or obstacle that prevents arbitrage from taking place.
It may be true that anti-dumping is not necessarily the perfect instrument but something is necessary and this is the best that we have. Further, it is generally accepted and used by other WTO members and it is subject to robust disciplines under the WTO anti-dumping agreement and the extensive jurisprudence that has emerged from panels and the Appellate Body. Although it probably is true historically that some anti-dumping actions around the globe have had protectionist intent, the disciplines of the WTO have helped to restrain the use of anti-dumping in protectionist ways. It is also certainly true that not all anti-dumping actions are protectionist!
The widespread use in all other major economics (even in countries traditionally seen as export oriented such as China, Japan and Korea) is evidence of its necessary role in helping global markets function efficiently.
Import surges and safeguard measures
Safeguard measures can be adopted in certain circumstances when unexpected developments result in a surge in imports. There is an economic case for such measures when the high threshold for a safeguard is a met (i.e. serious injury, unforeseen circumstances etc.) and the economic shock would result in irreparable damage to the economy.
However, like anti-dumping, safeguards have often been used in a more politicised way than anti-dumping and countervailing duties. For example, in recent years, many countries have adopted safeguard measures on a broad range of steel products. It is not necessarily clear that all of these safeguard measures are consistent with the WTO agreements. At the same time, some of these countries have adopted steel safeguard measures in order to ensure that the actions of other countries do not disproportionately affect their own market conditions. It may be possible to argue that there is some economic rationale for these measures but there may also be a strong political element to some of these measures.
The importance of a safety valve in domestic constituency ‘buy-in’ to trade liberalisation
As set out above, there are strong economic arguments that there is a role for trade remedies in a liberal, free trade economy. However, there are additional arguments that support the need for a robust trade remedy policy.
I think it can be argued that trade remedies have contributed to the success of the WTO. The WTO has achieved significant trade liberalisation and it is highly likely that the existence of the three different trade remedies has permitted countries to make generous concessions with the knowledge that they can protect their domestic constituencies when significant problems are caused by very cheap imports that cause injury. The political importance of a ‘safety valve’ to protect against significant volumes of cheap imports has been emphasised in the recent steel import crisis.
There will always be political pressure to protect domestic industry in times of economic difficulty and it is helpful that the WTO legitimises remedies based on clear standards and requirements that filter out purely protectionist actions. Trade remedies have been by
far the biggest area of disputes dealt with by the WTO’s DSU and panels and Appellate Bodies have clarified interpretations of WTO trade remedy requirements. It is arguable that this has resulted in a more moderate and legitimate use of trade remedies.
This phenomenon is described in the WTO World Trade Report 2007:
Contingency measures deal with political demands for protection, not the costs of adjustment. The introduction of contingency measures in a trade agreement may be thought of as anticipating the possibility of difficult adjustments and the political pressure for protection to which they give rise. Contingency measures provide a means to counter this pressure with a temporary reversal of liberalization. The existence of such escape clauses may allow deeper liberalization to be achieved.
The World Trade Report goes on to identify a situation where trade remedies may not be required:
What about those regional trade agreements (RTAs) which have been able to abolish trade contingent measures? These RTAs are characterized by deeper forms of integration that go well beyond the dismantling of border measures; a common external tariff and a higher share of intra-RTA trade (Teh et al., 2007). Thus, the need for contingent measures in trade agreements may also be a function of the degree of economic integration contemplated by the members. If the goal of deeper integration is shared by the political leaderships and peoples of the members, the risk of protectionist forces being able to mount a reversal of economic openness may be much less. Deeper integration is also likely to result in greater coordination, harmonization and even adoption of common regulations, policies and institutions, which allow the countries to better absorb the costs of adjustments from openness to trade.
This emphasises the degree of economic integration and the possibility for greater coordination, harmonisation, adoption of common regulations, policies and institutions as conditions that might permit the abolition of trade remedies between countries. This explains why the abolition of trade remedies on intra-EU trade has never been a controversial issue.
Trade remedies, environmental standards, and labour rights
A country that has high environmental standards and strong labour rights may face disproportionately intense competition from imported goods produced in countries that have low standards. Whilst nobody denies that there is a real issue here, the view is often expressed that there are other institutions and mechanisms to deal with such issues and that it is not appropriate for trade remedies to attempt to incorporate provisions in this area.
Of course, the WTO agreements determine what is permitted in these areas under current international trade laws. However, I believe that there are ways in which environmental and labour can be taken into account in trade remedy investigation in a WTO-consistent way.
Two initial comments can be made on this
In recent years, the EU has incorporated some environmental and labour provisions into EU anti-dumping law. I believe it has done this a way that is fully consistent with the WTO agreements.
We are moving towards an acceptance that some form of 'carbon border adjustment mechanism' is required in order to meet ambitious carbon reduction goals. This discussion is focusing on the creation of new instruments and is not proposing that carbon goals be dealt with within existing trade remedies. However, although the term trade remedy is being avoided in these debates, the truth is that we are talking about a new instrument to remedy imports whose low prices reflect low environmental standards. Such an instrument might be justified under GATT Article XX exceptions. Ultimately WTO Members may decide that it is useful to agree some common principles and effectively create a new trade remedy agreement to cover carbon border measures.