The UK and the EU need a new approach to trade remedies

The United Kingdom and the European Union should seek to establish bilateral independent tribunal to address claims of unfair trade and avoid trade remedies souring their future trade relationship, writes Simon Lester.

Whatever your view is on the merits of the European Union, it would be hard to dispute that it is
one of the most innovative international economic arrangements ever created. Its founders had a general vision, but it took a wide range of institutional and policy innovations during
implementation to make it all work.

Seeking institutional innovation

As the UK and the EU undertake the difficult process of undoing their relationship and developing a new one, there will be a need for some additional innovation. Trying to use traditional trade agreement obligations as a replacement for this deep and complex economic relationship will be insufficient.

One area of particular difficulty will be 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).

The term ‘dumping’ is sometimes thrown around loosely in trade policy discussions, but it has a technical meaning that involves a determination of whether the export price of a product is ‘unfairly’ low. A tariff can then be imposed to counteract the impact of this pricing. With regard to subsidies, there is a calculation of the amount of the subsidy, and, similarly, a tariff is imposed to counteract it.

The EU is one of the rare trade agreements that eliminates the use of trade remedies on internal trade. As a result, trade between the UK and other EU countries is not subject to trade remedies.

I have argued previously that tariffs imposed as trade remedies are unnecessary and problematic here, and should be kept out of the UK-EU economic relationship. This relationship would be permanently soured by recurring claims of ‘unfair trade’ by one side or the other.

Nevertheless, trade remedies are an established part of domestic trade policy and are difficult to avoid. Interest groups demand them, and it is hard to have a proper debate over their merits.

The UK has already set up a Trade Remedies Authority to oversee a domestic trade remedies regime, and trade remedies are likely to be part of the future UK-EU economic relationship.

But perhaps there is room for some innovation here that can make the situation better.

One of the issues with the imposition of trade remedies is allegations of bias on the part of the domestic agencies who oversee things. These agencies are thought by many to favour the point of view of domestic industries who complain about unfair foreign trade, and to discount the arguments of importers and foreign producers.

But what if the these bias concerns could be addressed with an institutional innovation? Perhaps
the trade remedy process could be moved to the international level, with neutral adjudicators,
rather than domestic agency officials, deciding the issues.

The WTO and NAFTA approach to resolving trade remedy disputes

As things stand now, domestic trade remedies are subject to challenge pursuant to the rules of
the World Trade Organization on these issues (the Anti-Dumping Agreement and the Agreement on
Subsidies and Countervailing Measures).

If a government does not like how its companies were treated in a domestic trade remedy proceeding, it can bring a WTO complaint against the government responsible. As part of this complaint, the determinations by domestic agencies are reviewed to see whether – loosely speaking – they were reasoned and adequate, and consistent with WTO obligations. That process is useful, but it takes a good deal of time, and given resource constraints only a few domestic determinations  are challenged each year.

In the North American Free Trade Agreement – NAFTA – there is a unique set of rules that allow the companies subject to the trade remedy proceedings to bring a complaint against the determination themselves. A NAFTA panel will be set up to review the domestic agency’s decision for consistency with domestic law.

Going further

The WTO/NAFTA approach still allows the domestic agency to hear the case first. But instead of
domestic agencies hearing the case initially, and then an international body reviewing that
decision, we could start with an international body that would take the place of the domestic
agency and examine each of the trade remedy elements: Whether dumping and subsidization took place, and in what amounts; and whether the domestic industry suffered injury as result.

To this end, an international Trade Remedies Tribunal could be established by the UK and the EU and staffed with experts who would evaluate all of these issues and render a decision.

If we take the traditional approach to trade remedies, it is sure to create tension between the UK
and the EU. Companies subject to trade remedies generally believe the foreign agency that is
imposing tariffs on them is behaving unfairly.

They see these determinations as inherently biased, and a years long process of review at the WTO is of only limited help. If, on the other hand, the initial determination was international in nature, and therefore seen as more objective, it would have more credibility.

It might seem like the wrong moment for international tribunals in UK-EU relations. The people
in the UK who support Brexit are looking to get out from under institutions such as the ECJ.

But tariffs are a special situation. There is not much appetite in the UK or the EU for new tariffs, and people are going to be surprised and unhappy that a tariff-free, quota-free UK-EU relationship
will still involve tariffs under the normal operation of trade remedies.

Thus, an independent tribunal that oversees these tariffs and ensures that they are legitimate and necessary could be acceptable here. This tribunal would not interfere with domestic regulation, as the ECJ does; it would only act as a check on tariffs.

Ideally, of course, there would be no trade remedies at all between the UK and the EU, as is the
case now. But the political realities suggest there will be. If we can limit their abusiveness, the
UK-EU relationship will be more peaceful and stable.

Simon Lester is associate director of the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies in Washington. He can be followed on Twitter.