Time to rethink trade defence mechanisms
Wednesday, 19 August 2009
Pradeep S Mehta
It is high time the WTO used its whip, instead of whistle, against unfair use of trade defence measures before the onslaught of protectionism escalates into full-fledged trade wars.
In the face of the enduring economic crisis, virtually every country, other than the poor ones in the world are backtracking to protectionism. In the name of shielding the domestic economy from being robbed of jobs, governments of developed and developing countries alike are resorting to, at best, populist autarkic policies. With this rat race for protection, the global free trade regime will be gradually pulled back into the vortex of trade barriers from which it has been struggling hard to recover for the past several decades. It is time for the World Trade Organisation (WTO) to bear on such measures with a greater voice.
Given the perception that trade defence measures built into its rule-based system are increasingly being misused as an excuse for protectionist measures, it may be unfair to blame the multilateral trade body for not acting. Many of these policies are not technically violations of binding commitments made by its members. For instance, 'buy local' campaigns and work visa regulations etc., may not be challenged on grounds of breach of commitments per se, though they are unfair trade practices by all means.
Practitioners of protectionism circumvent the legal reach of the WTO by taking advantage of flexibilities allowed by the system for dealing with contingencies or by circumventing the rules. Little can be done to lock in flexibilities, elegantly known as measures of administered protection and may commonly be referred to as the WTO-compliant trade measures. In fact, the furore for more and more flexibilities is only gaining currency in the Doha Round negotiations.
Out of the agreements on safeguards, anti-dumping and countervailing duties -- the central provisions for administered protection -- anti-dumping is by far the most popular instrument, simply because invoking it is a lot easier. Noted trade economist, T. N. Srinivasan has, however, christened it as a toxin. An anti-dumping initiation requires only a low threshold level of injury, has no compensation clause for wrong indictment and cannot be retaliated by the aggrieved parties. The annual tally of anti-dumping initiations in 2008 jumped up by more than a quarter compared to the previous year. While all of this might not necessarily have occurred as a reaction to the economic crisis, the most frequently used instrument is the most painless one is not a coincidence.
Choosing between anti-dumping and safeguards as contigency trade blocking measures according to covenience at free will, is a deplorable situation, since they are meant for two distinct types of contingencies respectively. Though the former should only be applied as a punitive action against below cost pricing and the latter as a safety valve. More often than not, the cases eligible (and not eligible) for both measures are almost indistinguishable, giving a choice to the applying country. Evidently, the design of these instruments is not so foolproof.
As far as evading rules is concerned, the WTO is apparently even more helpless seeing that today's trade bureaucrats are exceptionally innovative and very often comically imaginative when it comes to cooking up 'legitimate' reasons for meddling with free trade. In May 2009, the US Customs and Border Protection (CBP) kicked off import restrictions on switchblade knives citing 'health and public safety concerns'. That admissibility of pocket knives with spring-assisted opening mechanics is suddenly found life-threatening in a country with the most liberal civilian gun-rights in the world is certainly touching. Touching still, the pubic security conscious customs authority also pacified panic-sticken domestic producers by assuring them that the rule would not apply to knives already in usage or that are manufactured domestically. What could be more patriotic than letting citizens get hurt by only nationally made weapons.
More often than not, it is the affected domestic industry which eggs the government to take up trade defence measures against imports because they cannot stand healthy price competition.In recent cases also in May, 2009 in India on taking safeguard action against imports of steel, paper and auto parts, the government heeded the pleas of the user industry and postponed action.
From outright import bans on grounds of national security and public health to tactical currency devaluations, conditionalities dictated to bailed out sick businesses, government procurement clauses, corporate accountability and information disclosure norms, consumption subsidies, other direct and indirect non-tariff barriers (NTBs), myriad methods are generously used to practise favouritism towards domestic manufacturers with hardly any objections raised in international trade treaties. Such barriers are applied not only in goods trade but also in other areas of cross border investments and the services trade. By employing these oblique methods, governments hope not to be dragged into embarrassing trade disputes.
In order to make headway in stopping protectionism from escalating into trade wars, instruments for administered protection must be reclaimed for the purpose they are designed. Reforming these instruments to squeeze out casual users in the near future may not be practical, though this agenda should not be left off from the plans for the long run. Moreover, doing so is only likely to force protectionist measures to use imaginative ways of evading rules.
One way out of this predicament could be that of diplomacy. Publicising trade distortive measures adopted worldwide would tease away defaulters to some extent. Already there are informal initiatives like online info-banks on trade barriers and awareness campaigns led by NGOs (worldtradealert.org). But the WTO should not waste an opportunity if it can put any formal diplomatic pressure on its members to voluntarily restrain themselves from protectionist practices so that the rhetoric of loose formations like Group of Eight (G-8) and Group of Twenty (G-20) may get converted into action. This should not be hard and may only take as much to remind the global leaders to live up to the promises they have made in the past. While doing so, it may also be worthwhile to remind them of how much time and effort it has taken to push trade liberalisation this far. At this critical juncture, we would not like to take two steps back after taking one forward.
(The author is the Secretary General of CUTS International and can be reached at psm@cuts.org. Atul Kaushik and Joseph George of CUTS also contributed to this article)
It is high time the WTO used its whip, instead of whistle, against unfair use of trade defence measures before the onslaught of protectionism escalates into full-fledged trade wars.
In the face of the enduring economic crisis, virtually every country, other than the poor ones in the world are backtracking to protectionism. In the name of shielding the domestic economy from being robbed of jobs, governments of developed and developing countries alike are resorting to, at best, populist autarkic policies. With this rat race for protection, the global free trade regime will be gradually pulled back into the vortex of trade barriers from which it has been struggling hard to recover for the past several decades. It is time for the World Trade Organisation (WTO) to bear on such measures with a greater voice.
Given the perception that trade defence measures built into its rule-based system are increasingly being misused as an excuse for protectionist measures, it may be unfair to blame the multilateral trade body for not acting. Many of these policies are not technically violations of binding commitments made by its members. For instance, 'buy local' campaigns and work visa regulations etc., may not be challenged on grounds of breach of commitments per se, though they are unfair trade practices by all means.
Practitioners of protectionism circumvent the legal reach of the WTO by taking advantage of flexibilities allowed by the system for dealing with contingencies or by circumventing the rules. Little can be done to lock in flexibilities, elegantly known as measures of administered protection and may commonly be referred to as the WTO-compliant trade measures. In fact, the furore for more and more flexibilities is only gaining currency in the Doha Round negotiations.
Out of the agreements on safeguards, anti-dumping and countervailing duties -- the central provisions for administered protection -- anti-dumping is by far the most popular instrument, simply because invoking it is a lot easier. Noted trade economist, T. N. Srinivasan has, however, christened it as a toxin. An anti-dumping initiation requires only a low threshold level of injury, has no compensation clause for wrong indictment and cannot be retaliated by the aggrieved parties. The annual tally of anti-dumping initiations in 2008 jumped up by more than a quarter compared to the previous year. While all of this might not necessarily have occurred as a reaction to the economic crisis, the most frequently used instrument is the most painless one is not a coincidence.
Choosing between anti-dumping and safeguards as contigency trade blocking measures according to covenience at free will, is a deplorable situation, since they are meant for two distinct types of contingencies respectively. Though the former should only be applied as a punitive action against below cost pricing and the latter as a safety valve. More often than not, the cases eligible (and not eligible) for both measures are almost indistinguishable, giving a choice to the applying country. Evidently, the design of these instruments is not so foolproof.
As far as evading rules is concerned, the WTO is apparently even more helpless seeing that today's trade bureaucrats are exceptionally innovative and very often comically imaginative when it comes to cooking up 'legitimate' reasons for meddling with free trade. In May 2009, the US Customs and Border Protection (CBP) kicked off import restrictions on switchblade knives citing 'health and public safety concerns'. That admissibility of pocket knives with spring-assisted opening mechanics is suddenly found life-threatening in a country with the most liberal civilian gun-rights in the world is certainly touching. Touching still, the pubic security conscious customs authority also pacified panic-sticken domestic producers by assuring them that the rule would not apply to knives already in usage or that are manufactured domestically. What could be more patriotic than letting citizens get hurt by only nationally made weapons.
More often than not, it is the affected domestic industry which eggs the government to take up trade defence measures against imports because they cannot stand healthy price competition.In recent cases also in May, 2009 in India on taking safeguard action against imports of steel, paper and auto parts, the government heeded the pleas of the user industry and postponed action.
From outright import bans on grounds of national security and public health to tactical currency devaluations, conditionalities dictated to bailed out sick businesses, government procurement clauses, corporate accountability and information disclosure norms, consumption subsidies, other direct and indirect non-tariff barriers (NTBs), myriad methods are generously used to practise favouritism towards domestic manufacturers with hardly any objections raised in international trade treaties. Such barriers are applied not only in goods trade but also in other areas of cross border investments and the services trade. By employing these oblique methods, governments hope not to be dragged into embarrassing trade disputes.
In order to make headway in stopping protectionism from escalating into trade wars, instruments for administered protection must be reclaimed for the purpose they are designed. Reforming these instruments to squeeze out casual users in the near future may not be practical, though this agenda should not be left off from the plans for the long run. Moreover, doing so is only likely to force protectionist measures to use imaginative ways of evading rules.
One way out of this predicament could be that of diplomacy. Publicising trade distortive measures adopted worldwide would tease away defaulters to some extent. Already there are informal initiatives like online info-banks on trade barriers and awareness campaigns led by NGOs (worldtradealert.org). But the WTO should not waste an opportunity if it can put any formal diplomatic pressure on its members to voluntarily restrain themselves from protectionist practices so that the rhetoric of loose formations like Group of Eight (G-8) and Group of Twenty (G-20) may get converted into action. This should not be hard and may only take as much to remind the global leaders to live up to the promises they have made in the past. While doing so, it may also be worthwhile to remind them of how much time and effort it has taken to push trade liberalisation this far. At this critical juncture, we would not like to take two steps back after taking one forward.
(The author is the Secretary General of CUTS International and can be reached at psm@cuts.org. Atul Kaushik and Joseph George of CUTS also contributed to this article)