The elusive notion of “a level playing field”

“Level playing-field” has become one of the most commonly used phrases in international trade. It has been used for example, between the United States and China in their current series of trade disputes.   It crops up regularly between the United Kingdom and the European Union in the context of negotiating a long-term economic and trade agreement now that the UK has formally left the EU, including the initial salvo of  negotiating positions exchanged between the two sides, where it embraces “a balance of rights and obligations”. The EU has also adopted the concept as part of its broader approach to trade, and in particular the use of trade remedies.

But “level playing field” is actually one of the vaguest and least helpful terms in the trade lexicon.  This article considers the range of ways in which the concept has been interpreted, and some of the underlying fallacies.  It discusses how, in an imperfect world, countries have got together to establish a reasonable framework for fairness in international trade, and how that framework is now at serious risk.

Theory and practice

So what is a “level playing-field”?  Broadly, the term implies that the participants in a trading system or agreement enjoy in all respects equal terms of access to, and treatment in, each other’s markets.  This may embrace not only market access conditions and standards for traded goods, but also equal or equivalent regulatory treatment and standards for service providers.

Trade practitioners use the term in a wide variety of ways, for example to denote or demand:

• that the partners in a trading relationship should apply the same tariff levels (including zero tariffs) to their mutual trade in specific categories of goods.  Such an approach also extends to the traditional form of tariff bargaining whereby the partners exchange reciprocal reductions in tariffs and other trade restrictions that are of equivalent value, though not necessarily affecting the same classes of goods;

• wider market access, for example that the partners should apply the same or equivalent quality standards, licensing and border access procedures to each other’s production of and trade in specified goods;

• bans on exporters dumping products in partner markets at sub-economic prices, as well as prohibition of Government subsidies for exports of specified products. In such cases long-established World Trade Organisation (WTO) rules legitimise the imposition by importing countries of special import charges to nullify the damaging impact of the practices perceived as unfair;

• that international trading countries operate monetary and fiscal policies so as to stimulate domestic consumer demand, so as to reduce damage to productive industries in countries to which they export, and avoid the accumulation of trading and financial surpluses which are perceived as unfair;

• consistent principles for regulation of service sectors so as to promote development of and trade in efficient services contributing to the wellbeing of consumers;

• that major international corporations spread their research and development activities across the various markets in which they operate so as to facilitate the transfer of technology and stimulate development in a manner perceived as fair;

• governments act together to devise and enforce methods of environmental protection so as to spread the associated burdens and costs in an equitable manner among producing and trading countries;

• national overseas development policies which encourage the fair and effective economic development of developing countries and enhance their share in trade and economic welfare.

Many of these aims are already reflected to varying degrees in the current international trading system which has evolved over a period of some 75 years since World War 2 and is enshrined in the extensive structure of rules and procedures built up by the WTO.  The “level playing field” concept thus embraces a rag-bag of different but related concepts falling into the general category of “free and fair trade”.

A further, crude version is sometimes invoked to demand that trade between partners be “balanced”, in the sense that the volumes, or more properly the value, of trade in both directions should equivalent, not product-by-product, but in aggregate.  Unrealistic as this looks, the idea is influential particularly in America.

A clash of titans

The current series of trade disputes between the United States and China – sometimes lumped together as a “trade war”, but in reality highly selective and targeted – rest in differing degrees on several of the “level playing field” concepts listed above.  They also seriously infringe established WTO rules, in particular regarding the use of tariffs for punitive purposes, and unilateral increases in tariffs without offering compensating market-opening in other sectors.  At the same time the US has made proper use of WTO procedures to challenge alleged dumping and subsidisation of exports by China.

When he took office in the US in 2017 President Trump inherited longstanding concern about the huge and growing surplus which China was running in its merchandise trade with the US, and the impact of Chinese exports in hollowing out whole areas of US manufacturing industry (particularly in basic and old-established industries like steel and engineering).

The approach of previous US administrations had been (i) to urge reform of monetary policy in China in order to stimulate domestic demand and relieve some of the intense pressure on Chinese industry to prioritise earning from exports; (ii) bearing in mind the continuing heavy involvement of the Chinese state in industry, to make use of WTO provisions to challenge dumping by Chinese industries and unfair government subsidisation of exports; and (iii) to back this up with unspecified threats of further action.

Manifestly none of this worked, and the US trade deficit with China went on growing.  President Trump, as already noted, ignored the long-negotiated legal and political restraints embodied in the WTO rules and first threatened, then in 2018 imposed, swingeing tariffs on large quantities of US steel and aluminium imports, principally from China but from other sources also including some European countries.  Heavy tariffs were imposed on many other categories of goods imported from China, all under the umbrella of a general demand for a level playing-field in US-China trade.

Some two years on from those actions, a partial accommodation (it can’t really be described as a trade agreement) was reached between the two sides in late 2019.  China agreed to open its markets to increased volumes of US-origin goods.  The US agreed to modify some of its special tariffs on imports from China, but very far from removing them all.

This partial cease-fire is an advance but is very far from solving the longstanding disputes between the US and China, let alone from creating a level playing field, however that may be interpreted. While the US’s bilateral trade deficit with China shrank in 2019 compared to its record high level in 2018, it remains substantially higher than when President Trump took office. Moreover, part of this drop is explained by the US simply switching to other countries for imports: the deficits with the EU and with Mexico ran to record levels in 2019.  Finally, as discussed below, all this comes at the price of severe damage to the long-established and mutually accepted rules and safeguards of the WTO, on which smaller economies depend for a measure of protection against bullying by the big traders.

Trade in the real world

The range of interpretations attached to the “level playing field” concept demonstrates the practical impossibility of turning it into a reality.  In its extreme theoretical form it presupposes that the partners concerned will have parallel economies, with equivalent access to raw materials, technology, services and finance; similar levels of education, technical training and skills; and markets that are exactly comparable in terms of infrastructure, financial resources and consumer preferences.  Perversely, if such a fantasy could be realised it would render unnecessary any need for trade, as countries concerned would be able to produce and sell everything for themselves within the confines of a closed national economy.

But the world is not like that.  The fundamental driver of trade is comparative advantage, which operates for the wellbeing of the countries who engage in trade. The simple first lesson of economics is that a country produces and exports what it can make better and more cheaply than others, and imports from them things which they in turn can make more efficiently and economically. Such advantages depend on the hard facts of geology and geography, coupled with the unpredictabilities of human, animal and plant evolution and behaviour, not to say of climatic trends and the vagaries of the weather.

These facts underlying international trade in goods are still fundamental, despite the fact that trade negotiations these days are very much more about product and service standards, access to markets and licensing systems than they are about tariffs and quotas.

Liberal trade vs. public protection

In practice governments disregard comparative advantage in its purest, theoretical form and impose various degrees of restrictions which they perceive as necessary for the encouragement and protection of their own national enterprises and, of course, of citizens.  There are two main types of such protection:

• “Traditional” protection in goods trade. Tariffs are imposed as a measure of protection for domestic producers against price competition from imports, to protect important areas of domestic production or to provide a degree of economic leeway for newly-developing industries to establish themselves first in the domestic market and then internationally.  There is a point – hard to define and probably different in each case – beyond which reasonable protection becomes protectionism (damaging and widely condemned in international trade rules).

• Measures that are taken with a broader public interest objective in mind, but which nevertheless have trade effects. On the domestic level, standards and regulatory systems are established to protect consumers from physical or economic harm, and may also have the not entirely unwelcome side-effect (in domestic eyes) of discouraging imports. On the wider international stage there is a host of agreements established for protection of the public.  From the first signature of the General Agreement on Tariffs and Trade (GATT) in 1947, international agreements have included clauses permitting individual countries to derogate from their open trade obligations in order to enact measures to protect public policy, health, safety and national security.  Dedicated international agreements, some of them under the umbrella of the United Nations, now seek to coordinate and improve standards worldwide in matters like public, plant and animal health, labour standards, electronic and communications standards, vehicle standards, pollution and, crucially, greenhouse gas emissions.  All such agreements have far-reaching trade impacts, and the WTO recognises them as factors to be taken into account in its trade adjudications, together with its own established and detailed Agreements on Technical Barriers to Trade and on Sanitary and Phytosanitary (plant health) Measures, both of which set standards for such regulations and at the same time prohibit their use as trade barriers.  In services, regulatory and licensing systems similarly protect consumers against abuse, but may also be so framed as to give preference to domestic suppliers.   At the same time, countries do not wish trade priorities to undercut their attempts to pursue public policy objectives.  The balance is difficult to strike, and the reduction of carbon emissions is a vivid example.

All such initiatives by national governments, whether in goods or services sectors, are explicitly justified by higher objectives such as protection of the public, even though they may run contrary to comparative advantage.  In many service sectors international negotiations, particularly but not exclusively within the WTO’s General Agreement on Trade in Services (GATS), have achieved wide-ranging international agreements.  These seek to maximise the protection given to consumers while reducing the incidence of unfair discrimination against foreign-based operators who can offer efficient services at economic rates.

Trade policy as a political tool

The “level playing-field” concept has been further confused in recent years by the growing tendency of governments to use trade measures for non-trade ends.  At its crudest, this can be a brutal exercise of national muscle – “Support our political or military objective in country X or you aren’t going to get a trade agreement with us.”  Most countries refrain from such a blatant approach, though in the US the Trump Administration flirts with it.  There have  however been various examples of groups of countries getting together to impose trade sanctions in the case of grave international emergency or national aggression, for example in recent years against Russia over the annexation of Crimea, against Iran over nuclear policy or against Syria over its civil war.  Sanctions in such instances have however been justified by UN Security Council resolutions and/or by resort to the national security exceptions in the WTO and other Agreements.  Unilateral imposition of trade sanctions for punitive or non-trade purposes is generally deplored.

Widening the scope of trade agreements

It is customary now for new formal agreements – bilateral investment treaties (BITs) and regional trade agreements such as FTAs – to contain binding provisions on matters of major principle such as citizens’ rights and broader human rights, gender equality, labour standards, employment of child labour and environmental standards.  The reasons for covering them range from growing awareness of the intrinsic global importance of environmental standards and human rights, to the ulterior motive of seeking to raise labour standards, and therefore costs, in partner countries (meaning essentially the developing world) so as to reduce competition from imports – an example perhaps of the level playing field gone wrong.

Lessons learnt

What lessons emerge from this analysis, in particular from the various overlapping and conflicting interpretations of “level playing field”?  Historically, the idea is not new.  What we now see as disastrously misguided policies, like the protectionist Corn Laws in Great Britain (high import tariffs on grain imposed following the Napoleonic Wars to protect the interests of the major country landlords, and abolished amid much acrimony in 1846), or the high tariffs widely adopted by industrialised countries to protect their industries against international competition during the Great Depression of the 1930s, were based on distorted ideas of “fairness”.

Recognition of the ruinous effect of such policies was one of the stimuli for the Conference at Bretton Woods in the USA in 1944, set up as a far-seeing initiative to consider the prospects for the post-conflict world economy.  Its achievements included establishment of the International Monetary Fund (IMF) and the World Bank, and formulation of the disciplines of the GATT which in 1995 was finally expanded into the WTO. The trend that was started with the first signature of GATT in 1947 has continued, unevenly and often bumpily, through several “rounds” of detailed international negotiations to build a structure of disciplines to restrain countries from engaging in beggar-my-neighbour policies.

Currently, though, this accepted system of internationally accepted principles and rules is under great strain in the wake of the financial crisis of 2008 and subsequent events.  Year by year for several years the WTO has noted increasing numbers of trade restrictive measures introduced by member countries.  In particular, the US flagrantly disregards the WTO rules in its bilateralist disputes with China and other trading partners.  Further, US policy is working actively to undermine the WTO as an institution through ignoring its disciplines on the introduction of tariffs and crippling its respected and widely-invoked dispute settlement system.  The US currently refuses to agree to the appointment of new judges to the WTO’s Appellate Body as seats fall vacant, so that the Body cannot now assemble a legal quorum of judges.  The system continues to function at the initial level of dedicated panels established to consider complaints, but major disputes which would normally be expected to be adjudicated on appeal against initial panel findings cannot at present be authoritatively determined.

These developments are ominous for a system which has no coercive powers and depends upon international consensus and shared principles.  Where the biggest lead, it is only too likely that others will find excuses to follow.  Playing fields that are scarcely level now will become much lumpier in future.

On the worldwide scale, the current wrangles between big economic players over the proper form and coverage of trade policy are bound to have deleterious consequences for the developing world, as rich governments’ disposition to implement constructive international development policies, and aid funds available for this, progressively decline.

Where does the world go from here?

So what is feasible by way of a negotiated “level playing field” in international trade?  We can rule out exact equivalence in trade between individual countries or within regional groupings in terms of geographical locations, climate, access to resources, technology and human capital.  These things can never be evenly spread, even between neighbouring states.  Reasonable-looking government initiatives to protect the interests of citizens may turn out to have complex ulterior motives arising from explicit or implied protectionism, and of course from seeking political advantage in domestic politics.

WTO or WTO plus?

The most that we can hope for therefore is that trading countries individually and jointly will operate industrial development and trade policies which are realistically based on the resources of all types that are available to them both domestically and in their international economic relations.  The way to do that is to devise a fair and open system of rules which all participants can access, which recognises such basic differences, and is based on agreed and transparent principles and procedures.  Trade would not be usable as a tool or weapon to secure other geopolitical objectives.

This ambition of a “level playing field” looks much like the current WTO, but the WTO cannot now carry the weight of implementation which is now required of it day by day, implementation not only of the rules of international trade which it has itself developed, but of a range of other international priorities deriving from other agreements that affect trade.  The WTO is still the best and fairest forum available in which weaker traders can stand up against unfair pressure from the big players, but it needs support from expert bodies which operate outside its core expertise of trade and can define areas of reciprocal treatment between nation states and groups on such wider issues.

This may point to the establishment of new international technical bodies whose work can be closely integrated with that of the WTO.  It is time for practical trade politicians to take a close look at the international fora available to them for handling trade and trade-related issues

UK-EU post-Brexit

Turning to the UK’s parallel search for a comprehensive long-term agreement on relations with the EU, which has to be concluded before the end of the Withdrawal Agreement transition period on 31 December 2020, senior Ministers insist that the Government’s intention is to detach the UK from the standards and regulations obtaining in the EU Single Market.  Prime Minister Boris Johnson explicitly rules out a formal FTA on the ground that that would entail acceptance of at least some EU regulations, so a “looser” relationship would be sought, perhaps on the lines of the EU-Canada Comprehensive Economic and Trade Agreement. This would be ostensibly to permit the UK to engage in free and untrammelled trade in wider international markets, but given the imprecise nature of the Government’s stated intentions, the suspicion must be that the aim is simply to be and look as un-European as possible.  The EU responds by setting out specific things which the UK would have to accept in order to achieve any form of agreement including, for starters, access by EU fishermen to UK waters.

To illustrate starkly how matters currently stand, the UK Government’s initial statement of negotiating objectives with the EU, delivered in a written statement to Parliament on February 3 2020, consists of six pages of objectives, loosely drafted in general terms and printed in large type.  The European Commission’s response, delivered the same day to the 27 EU member states as part of a proposed Council mandate for negotiations with the UK, comprises 25 closely-typed pages of detailed sectoral and topic-by-topic objectives.  2020 will be a difficult year in the bilateral relationship.

UK ministers remain adamant that the UK will not align its future regulatory systems with the EU, and will not accept EU regulation.  Meanwhile, regardless of whatever new provisions are written into UK law, and whether ministers like it or not, every UK person or enterprise doing or seeking to do business in the EU will in future have to comply with every relevant condition or regulation obtaining in that market, which takes 45% of UK total exports.  The EU Single Market, working within the multilateral WTO system, is for all its imperfections and incompleteness probably the nearest thing which the world has so far achieved to an economic level playing field.  The UK has elected to plough its own furrow deeply across that field; but it needs to be careful lest it gets its excavator stuck halfway.