Sometimes the (Trade) Remedy Is Worse than the Disease

10/09/2017 03:21 pm ET

Over the last several weeks, Brits have received a crash course in the use and abuse of so-called "trade remedies," which include tariffs imposed in response to import prices that are deemed too low (anti-dumping duties) and to foreign government subsidies (countervailing duties). Recent preliminary decisions by the U.S. Commerce Department threaten to impose massive tariffs -- almost 220% in the subsidy case and close to 80% in the dumping case -- on sales of Bombardier airplanes in the United States. The decisions are not yet final, but they are causing an uproar already. Theresa May has been actively lobbying the Trump administration on behalf of her Northern Ireland constituents, because Bombardier has a factory there.

While this specific case is getting all the attention, there is a broader issue with trade remedies. Airplanes may be a high-profile product that generates media interest, but these cases happen all the time. A government press release in the Bombardier case notes that "[f]rom January 20 through October 5, 2017, the Commerce Department has initiated 65 AD and countervailing duty (CVD) investigations." After Brexit, the UK will have an opportunity to take action beyond simply lobbying in one notorious case: When it gains control over its trade policy, any system the UK adopts should put constraints on the abusive trade actions that occur with trade remedies more generally.

As part of its exit from EU institutions, the UK will be setting up a brand new national bureaucracy of its own, covering a wide range of policy areas. In trade, one of these new government agencies will be the UK Trade Remedies Organisation. This agency will have a mandate along the lines of the following: "to protect domestic industry against unfair and injurious trade practices.” What this means in practice is that the agency will have the authority to impose tariffs in response to dumping and subsidies.

This development is completely unsurprising. Trade remedies are permitted under the rules of the World Trade Organization (WTO), and most governments have domestic institutions that carry out similar functions. Nevertheless, the continued spread of trade remedies is frustrating: The problem they are supposed to address is exaggerated, and the response is flawed.

With regard to dumping, when people hear this word, they may assume that it means something like the predatory pricing that antitrust/competition policy deals with. In reality, though, dumping calculations do not assess actual predation, often rely on dubious facts or methodologies, and are mainly an excuse for protectionism. Any actual unfair pricing practices related to foreign goods can be taken into account by domestic competition policy laws; special anti-dumping laws for foreign goods are not needed.

As for subsidies, they are a real threat, but a better response is to address them directly in complaints at the WTO, under its Agreement on Subsidies and Countervailing Measures. National countervailing duty laws are subject to the same political pressures that distort anti-dumping measures, and WTO Members are actually quite good about complying with adverse panel or Appellate Body decisions. If the goal is to police global subsidies and get them removed , rather than just impose a new tariff, the WTO may be the better forum.

But despite the shaky economics, the politics of this issue is clear, and it is no surprise that the UK is going along with the crowd. In doing so, however, it should avoid the mistakes others have made. Experience from around the world shows that government agencies often use their discretion in implementing these laws in a protectionist manner. Therefore, it is important at the outset to establish rules ensuring that the policies are applied as sensibly as possible.

For instance, sometimes a duty that is less than the amount of the dumping or the subsidy would be enough to remedy the economic injury caused, in which case a smaller duty can be applied (the "lesser duty rule"). In addition, there could be a "public interest" test that weighs the purported harms of dumped or subsidized imports against the wider benefits to the public of cheaper goods. In a policy paper on its future trade policy, the UK government suggests that it is planning to apply these principles, which is a good sign.

Beyond the general issue of how to apply trade remedies, there is also the specific question of whether to apply them as between the UK and the EU. Currently, because of the UK's membership in the EU, there are no such tariffs on UK/EU trade. A post-Brexit UK/EU trade deal should maintain the situation.

There may be calls from industry groups to apply these tariffs on trade between the UK and the EU. Brexit negotiators should resist any such demands.

Adding trade remedy tariffs to the UK/EU relationship will have extremely negative consequences. Any industry that is facing competition from imports has an incentive to look for pricing patterns that can lead to a finding of dumping, or to look for government programs that constitute subsidies, and then file a complaint. Even the mere filing, without a conclusion of dumping/subsidization and injury, places a burden on foreign companies to hire lawyers and defend themselves. And the actual tariffs imposed can be so high as to stop trade in particular products almost completely.

Moreover, the UK/EU relationship would be permanently soured through recurring claims of cheating. Constant allegations of unfair trade are bad for overall relations.

For those who are skeptical that something like this is politically feasible, note that there is precedent in other countries' FTAs. Australia and New Zealand have excluded anti-dumping measures as between each other; so have Canada and Chile.

Many people assume, or hope, that UK/EU trade will be tariff-free after Brexit. However, if trade remedies are available, it will not be. Instead, there will be frequent litigation to decide whether to impose tariffs -- sometimes very high ones -- on specific products. That will be extremely disruptive for UK/EU trade relations. The UK Brexit negotiators should make it a priority to save UK/EU trade from the scourge that is trade remedies. (And while they are at it, they could also push for the exclusion of trade remedies from other FTAs they negotiate in the coming years, in particular with receptive countries such as Australia and New Zealand.)

Beyond these country-specific exclusions, the UK should adopt a trade remedy policy with sensible constraints on it, and then apply it in a restrained manner. There is discretion built in to the use of trade remedies. The UK trade remedy authorities must use this discretion wisely, and keep trade remedies from being treated as an open-ended avenue for protectionism. Boeing's use of trade remedies against Bombardier should be a wake-up call about the flaws in the current system. The UK has a chance to be a reformer, and should take this opportunity to promote the free trading "global Britain" that its leaders are touting.

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