Michael Johnson, former UK Government trade negotiator and Advisor on International Trade Policy, answers the question:

What are trade remedies, why do we need them and how do they work?

Analysis

The term “Trade remedies” is usually applied to measures that governments can implement in three specific cases of perceived abuses in international trade in goods.  These measures are provided for in three separate agreements of the World Trade Organisation, namely the Agreements on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 (commonly known as the Anti-dumping Agreement); the Agreement on Subsidies and Countervailing Measures; and the Agreement on Safeguards.

Dumping.

Dumping arises when an exporter sells goods in a foreign market below the price for “like products” (that is, essentially the same type and quality of goods) charged in the normal course of trade in the exporter’s domestic market. If it is not possible to establish a normal price on this basis, for example where goods are produced primarily for export and there is no significant domestic market, then relevant comparisons may instead be based on prices of like products exported to a comparable third country market, or on a calculation of production costs.  Authorities may also exclude from their consideration prices in the exporter’s domestic market that are deemed to be abnormally low.

Anti-dumping investigations are launched by a government of an importing country on the application of a domestic industry, which is required to provide prima facie evidence that dumping has taken place and, separately, that it has caused injury to the domestic industry.  There follows a two-stage process in which the designated authorities of the importing country investigate (a) whether dumping has taken place, and if so (b) whether there is a “causal link” between the dumping and the alleged injury.

The WTO Agreement spells out very detailed criteria and requirements according to which member governments must conduct investigations.  If (i) dumping is determined to have happened, and (ii) it is found that the dumping has caused injury to the domestic industry, governments may impose anti-dumping duties up to, but not beyond, the margin of dumping that has been determined. The “lesser duty rule” allows the authorities to impose a lower duty than the margin of dumping if this is sufficient to remedy the injury.

At any stage during the investigation process, if the authorities of the importing country have preliminary or final affirmative determinations of dumping and injury, instead of imposing duties they may at their discretion accept a price undertaking from the exporter concerned, i.e. an undertaking to increase the price of the product(s) concerned by enough (but no more) to eliminate the margin of dumping.

Within the framework of the WTO requirements, the national governments of member countries legislate individually on the precise procedures by which investigations are conducted and duties imposed; but they all have to observe the rules set out in the Agreement.  In cases of dispute between countries over the implementation of anti-dumping law (for instance, where the exporter claims that the margin of dumping has been wrongly calculated, or that an excessive rate of duty has been imposed) the dispute settlement procedures of the WTO may be invoked. However, mainly at the insistence of the United States, a major user of anti-dumping, the drafters of the anti-dumping agreement limited the scope of challenge and review under the WTO. The dispute settlement mechanism is limited to determining whether the authorities imposing duties established their findings in an objective manner. If this is the case, then their findings cannot be challenged even if there is disagreement about the actual findings

Subsidies and countervailing measures.

The WTO seeks to discipline the use of trade distorting subsidies by proscribing the use of the most distortionary ones and by allowing governments the right to counteract the effects of other subsidies by imposing remedial measures, known as countervailing duties.

In order to come under the scope of multilateral rules on subsidies, a policy instrument must meet three criteria: (i) it must be financial in nature (ii) it must confer a benefit and (iii) it must be specific to an enterprise, and industry, or a group of enterprises or industries. Once these three criteria have been met, the rules distinguish between two types of subsidy: ones that are per se prohibited; and ones that are “actionable”.

Prohibited subsidies are those that are contingent on export performance and those that are contingent on the substitution of imported inputs by domestic ones. These can be challenged through dispute settlement, and if such subsidies are found to exist, the offending member will be required to repeal them.

All subsidies that meet the three criteria, but are not per se prohibited, are “actionable”. This means their use can be challenged by another member country through dispute settlement procedures under the WTO, or through the imposition of countervailing duties But in order for them to be actionable, the complainant needs to demonstrate that the subsidies have caused it to suffer “adverse effects”. Adverse effects include injury to the domestic industry, and serious prejudice – the latter meaning that the subsidy acts to limit or displace exports of another member country. A third category of adverse effects is the nullification or impairment of benefits: the idea that the subsidising member through its actions offsets benefits (e.g. market access through tariff reductions) which other members would have been entitled to expect.

Once a subsidy is deemed actionable, a member can act against it in two ways. One is to challenge the matter under the WTO’s dispute settlement mechanism. If the complaint is upheld, the defendant is required to bring the offending policy(ies) into conformity with WTO provisions.

A second route is for the adversely affected party to impose countervailing duties on the imports benefiting from the subsidies. These may be applied on either a provisional or a definitive basis (or both successively), and must not exceed the level necessary to counteract the margin of subsidisation. Alternatively the investigating government may agree to accept an undertaking either from the government of the exporting country that the subsidy will be limited or eliminated, or from the exporter(s) that they will raise prices by enough to eliminate the effect of the subsidy.

In the UK, there has been a renewed interest in the question of subsidies in the context of industrial strategy and revivifying the UK’s manufacturing base. And in the aftermath of the EU membership referendum, as a way of mitigating the impacts of leaving the single market (for example, in the automotive sector). While the UK will no longer be constrained by EU state aid rules, it will need to abide by WTO rules. In the past, UK domestic support schemes in favour of civil aircraft, for example, have been successfully challenged. This means that if subsidies are part of the industrial policy mix, they need to be applied with care. The more generic they are and the more they target identified market failures rather than assist specific producers, the more likely they are to survive legal challenge. The UK’s White Paper on Industrial Strategy is cautious on subsidies, suggesting that WTO rules have been taken into account.

Safeguards.

The WTO Agreement on Safeguards relates to a situation where a product is being imported into a country in such increased quantities that it causes, or threatens to cause, serious injury to the domestic industry that produces “like or directly competitive” products.

The Safeguards agreement is the “third leg” of contingent trade measures permissible under WTO rules. The agreement largely reflects the experience of the 1980s, when rapid growth in exports of manufactures  from Japan and the Newly Industrialised Countries (NICS) of East Asia led major trading partners, and notably the US, to adopt “grey measures”, following pressure from domestic lobbies to restrict imports. These included “Voluntary Export Restraints”, a practice whose most visible manifestation was that car exporters, notably from Japan, “agreed” to limit exports to certain quantities.  However egregious this practice was, it did act to stimulate Japanese and other car makers, as well as makers of video cassette recorders (a new technology at the time) to invest in manufacturing capacity in Europe and North America.

Grey area measures were fundamentally arbitrary, non-transparent and trade distorting – often their effect was to increase market prices of the restricted goods and, perversely, to increase profits of the exporters. The underlying philosophy of the safeguards agreement reflected a pragmatic but systematised approach to these measures. Recognising that the political economy of trade policy created protectionist pressures, the drafters of the agreement sought to ensure that measures responding to these pressures could be subject to disciplines in the form of objective criteria that determine when they can be taken. And to ensure that any measures taken were transparent and the least trade-distorting, meaning the a preference for price-based measures over quantitative limitations.

Under the safeguards agreement, the relevant authorities of the importing country must conduct a thorough investigation that complies with procedural requirements, to determine if serious injury is found have occurred or likely to occur. Once this inquiry has been conducted, the authorities can impose either special import duties or quantitative restrictions on imports. In the latter case, they may only reduce imports of the goods in question to the average annual quantity calculated over the latest 3 years for which statistics are available.

In cases of extreme urgency measures may be imposed provisionally for a period not exceeding 200 days while a proper investigation is conducted.  In any case the duration of safeguard measures must not exceed 4 years unless it can be clearly shown that there is a need to extend the measures for one further period, which in no case may exceed a further 4 years.  Safeguard measures taken against developing countries are to be applied with a lighter touch, while developing countries that initiate safeguard measures of their own may apply them for up to 10 years.  Disputes over the proper application of the Agreement which cannot be settled by consultation are referred to the WTO disputes settlement system.

Do trade remedies work?

In practice safeguard measures, while permissible within the terms laid out in the relevant Agreement, are relatively little used, partly because of the difficulty of establishing what constitutes a “surge” of imports of a product.  Proceedings against alleged subsidies  are periodically brought by member governments under the Agreement on Subsidies and Countervailing (most prominently between the United States and the European Union over subsidies for aircraft manufacture), but while the Agreement specifies complex and comprehensive requirements as to gathering evidence from the government and companies against whom subsidisation is alleged, there are obvious practical and political difficulties in carrying this out.  The most commonly used trade remedy is anti-dumping investigations and potential duties, because it is easier for investigating authorities to extract information from a private concern that wants to do go on doing business in the importing country, and the calculation of margins of dumping is less difficult than determining margins of subsidy in the conditions of a different economy.

Of course the remedies and procedures provided for in the WTO Agreements are available equally to all 164 member countries.  In practice, though, while some developing countries have successfully used the system, it is the richer developed countries that initiate most investigations.  This is for the practical reason that the complexity of the WTO requirements and the extent of the financial information required for investigations need the assistance, through most of the process and on both sides, of expensive lawyers and accountants.  Major further costs can be incurred where a case needs to go to dispute settlement.

Trade remedies and the European Union (EU)

In the WTO Agreements the responsibility for initiating and conducting investigations into alleged abuses which may warrant action in the form of one or more of the three categories of trade remedies rests with the importing country concerned.  In the case of the EU, however, all matters relating to the conduct of international trade in goods fall within the common commercial policy of the Union so that the European Commission acts, negotiates and makes agreements on behalf of all the member states.  This includes initiating anti-dumping, subsidy or safeguard investigations on behalf of European industries or member state governments which ask for them and can justify a request for help.  It also entails taking over the defence of EU industries and/or member states against whom trade remedy actions are launched by non-EU members.  In all such cases the Commission works closely with the EU member states and industries concerned, and depends on them in large measure for the information it needs.

In late 2017, the EU implemented significant changes to its approach to trade remedies. In particular, in the area of anti-dumping, the new approach allows the European Commission to construct alternative prices and costs when working out what the normal value of a good should be in the domestic market. The approach would be implemented when the Commission finds that there are significant distortions in the exporting economy. WTO rules allow anti-dumping authorities to construct alternative measures of value in certain circumstances when price and cost data cannot be relied on. The difference between this and the EU’s approach is that the latter is based on the Commissions findings of  significant distortions.

Probably not coincidentally, the EU also issued in late December its first report into distortions in China, a frequent target of trade remedies.  What will follow remains to be seen. But the new approach, if implemented could well be challenged under WTO dispute settlement proceedings.

UK administration of trade remedies following Brexit

For two decades after accession to the European Communities in 1973 the UK Government retained in place an expert Anti-dumping Unit whose job was close liaison with the Commission on all trade remedy cases involving or potentially affecting the UK.  It gathered information where needed on behalf of the Commission, advised and assisted UK companies which were subject to investigation, and ensured that UK interests in investigations were taken fully into account.  When the UK withdraws from the EU, and subject to any transitional or implementation period that may be negotiated, it will have to be ready at once with fully-trained staff and appropriate procedures in place to administer trade remedy cases in its own right and to deal in an orderly fashion with ongoing investigations and remedies in place in the EU, including the UK.  This will need staff capable of standing up to rich and powerful foreign industries and governments as well as, where necessary, to UK industries.

Whatever agreement on future UK/EU relations is negotiated, Britain will still need to work closely and in harmony with the European Commission.  Because of the close integration of UK and EU industry, further trade remedy cases which involve both sides are likely to occur.  Unsynchronised UK and EU investigations and uncoordinated imposition of remedies would create administrative costs and disruptions to trade. The recent direction taken by the EU on trade remedies may well make coordination more difficult if the UK is minded to apply a more liberal approach to the matter.