The European Parliament and the member states are about to launch trilogue negotiations on the modernisation of trade defence instruments, a package of reform measures launched almost four years ago. Christofer Fjellner asks whether one of the reforms’ central planks, lifting a so-called lesser duty rule, will really offer more protection to EU industries.
The European Parliament is about to start negotiations with EU member states on a more than three year-old reform proposal on Trade Defence Instruments – TDI – or trade remedies. Trade defence measures are among the most controversial elements of trade policy. And rightfully so.
With tariffs and quotas bound in the WTO, introducing anti-dumping and countervailing duties or, in rare cases safeguards, are the only way to achieve higher protection for industries under certain circumstances.
We have to remember that trade defence is the least bad option when sufficient and enforceable international competition rules are missing. How to construct trade defence instruments is indeed tricky.
There are sometimes discussions on the need for trade defence instruments to be strong but not protectionist. I do not believe those discussions will turn out to be very meaningful. In our international agreements, both in the WTO and through bilateral agreements, we have accepted that both parties shall be able to counter subsidies and dumping that cause proven harm to the home industry through duties.
In the EU, there is also an extra requirement that holds that it has to be in the Union’s interest to introduce a duty, taking into account the consequences for importing industries.
Legally, trade defence instruments are not a tool of protectionism. But if they are not carefully applied in accordance with EU law and the WTO rules, to face proven dumping or subsidies, they can indeed be a tool of protectionism. There are cases such as EU duties on Chinese ceramic tiles and on biodiesel from Argentina where the anti-dumping tool has served as a policy for protectionism rather than correcting real dumping.
Little extra protection from lifting EU ‘lesser duty’ rule
The most controversial point in the European Commission proposal is no doubt the so-called lesser duty rule that the WTO recommends but does not demand to be used.
Today, the EU always applies the rule but the Commission wants it to be removed under certain circumstances. In essence, it says that duties should be lower than the difference between the dumped or subsidised price if the duty level will suffice to remove the injury to the domestic industry.
I generally believe that the lesser duty rules makes sense. An anti-dumping or countervailing duty should serve to remove the injury dumping or subsidies cause, it should not serve to restrict trade.
But evidence shows that the duties imposed under the lesser duty rule often substantially reduce trade flows. Steel products are often subject to trade defence measures and cause much political concern, in light of a global and in particular Chinese overcapacity in the steel sector. Looking at recent cases of EU duties against steel, we see that imports affected by countervailing measures dropped between 85 and 99 percent after the imposition of duties.
For those who want more protection, focus on removing the lesser duty rule should probably not be the first priority. After all, lifting it might not achieve much more protection. Yet for us who have fought to keep the lesser duty rule intact it should also be a reason to consider if keeping it makes much of a difference in keeping trade flows open for importers. Of course there is a caveat: lifting the lesser duty rule will in many cases make duties prohibitively high.
Economics tells us the marginal value of a good and this applies to imports as well. If a duty comes prohibitively high without offering much protection, the cost for downstream industries can be considerable for valuable inputs. This is especially true for a product that is perhaps only produced in the EU and the country affected by the duty and there is little or no spare capacity in the EU sector. In such a case, production in our downstream industries might even risk coming to a halt.
The criminal justice system in the United States imposes sentences of some 500 years for grave offenders even though a shorter time in prison would do the job of keeping society safe from criminals just as well. The US also imposes duties of 500 percent even though a much smaller duty would do the job of protecting the affected industry from harm just as well.
When re-designing the EU’s trade defence instruments, the aim must be to find a sensible solution that actually levels the playing field. We should not aim for trade defence instruments that stop trade flows altogether.
Christopher Fjellner is a Swedish MEP (EPP). He is rapporteur on the above reform of EU trade defence instruments.
Fjellner is a regular columnist at Borderlex.