The function of trade remedies – trade remedies are sometimes considered by academic economists as protectionist and working to the disadvantage of importing industries/consumers.
It is possible that, in the past, especially prior to the WTO, trade remedies were used in a protectionist manner. Today, trade remedies are a critical part of the rules based global trading system created by the WTO in 1995. Backed up by effective WTO dispute settlement procedures (anti-dumping (AD) has been the most active area of WTO dispute settlement), trade remedies support free trade by providing mechanisms to deal with dysfunction and distortions in global trade.
There is no global competition policy (as there is within the EU where no trade remedies are necessary) and trade remedies are the only mechanism that exists to deal with distortions to world trade and markets. It can be argued that if trade remedies work well, in principle, they should correct market distortions so that the market can be closer to the ‘free trade’ outcome i.e. they support free trade (creating a ‘level playing field’) rather than providing protection to domestic industry. In this regard, trade remedies complement the current UK government’s general approach and the new industrial strategy.
In addition, trade remedies also have a function of providing a safety valve facilitating domestic constituency ‘buy-in’ to trade liberalisation. The great success of the WTO would not have been possible without the possibility to use trade remedies.
There are three types of trade remedies permitted by the WTO agreements:
Anti-dumping (AD) is by far the most common trade remedy. It is regularly used by all major economies, including countries traditionally seen as export oriented such as Japan, South Korea and China. Dumping is defined as the situation where the export price is below the domestic price (the latter must fully cover cost of production so a price below COP is always dumped). In order to adopt measures, the dumped imports must cause material injury to domestic industry.
Countervailing duty (CVD/anti-subsidy) investigations have been much less common, although their use has dramatically increased in recent years. The reasons for lower use of CVD are a) more complicated and less established calculation methodologies compared with dumping b) the fact that subsidy investigations involve the investigation of a government whilst a dumping investigation only investigates the commercial information of exporting companies c) the fact that general subsidies cannot be addressed. In order to be a subsidy there must a financial contribution and it must be specific (i.e. to an industry or a region). In order to adopt measures, subsidised imports must cause material injury to domestic industry.
Safeguard investigations do not involve ‘unfair trade’ and consequently the WTO requirements for safeguard measures are more stringent (e.g. sudden, sharp, and significant increase in imports, unforeseen developments, serious injury, more time limited etc). Unlike AD/CVD measures, which are adopted on a country/company specific basis, safeguards can only be imposed against all sources of imports. Recent years have seen an upsurge in the use of safeguards by developing countries. Safeguards provide quick and effective protection with no requirement to undertake complex calculations of dumping or subsidy margins. The fact that they restrict imports from all sources makes them politically more difficult.