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Fairness and Free Trade

Author(s): Dani Rodrik
This year, the US and the EU must decide whether they will begin to treat China as a “market economy” in their trade policies. Unfortunately, even as the debate intensifies, the terms of the choice ensure that nothing will be done to address the world trade regime's deeper flaws.

From Project Syndicate:

The global trade system faces an important turning point at the end of this year, one that was postponed when China joined the World Trade Organization almost 15 years ago. The United States and the European Union must decide whether they will begin to treat China as a “market economy” in their trade policies. Unfortunately, even as the battle escalates over the course of this year, the terms of the choice ensure that nothing will be done to address the global trade regime’s deeper flaws.

China’s WTO accession agreement, signed in December 2001, permitted the country’s trade partners to deal with China as a “non-market economy” (NME) for a period of up to 15 years. NME status made it a lot easier for importing countries to impose special tariffs on Chinese exports, in the form of antidumping duties. In particular, they could use production costs in more expensive countries as a proxy for true Chinese costs, increasing both the likelihood of a dumping finding and the estimated margin of dumping.

Today, though many countries, such as Argentina, Brazil, Chile, and South Korea, have already rewarded China with market-economy status, the world’s two biggest economies, the US and the EU, have not. But, regardless of whether they do, antidumping measures are ill-suited to the task of addressing concerns about unfair trade – not because such concerns are ungrounded, but because they go well beyond dumping. Antidumping facilitates protectionism of the worst kind, while doing nothing for countries that need legitimate policy space.

Economists have never been fond of the WTO’s antidumping rules. From a strictly economic standpoint, pricing below costs is not a problem for the importing economy as long as the firms that engage in the strategy have little prospect of monopolizing the market. That is why domestic competition policies typically require evidence of anti-competitive practices or the likelihood of successful predation. Under WTO rules, however, pricing below costs on the part of exporters is sufficient for imposing import duties, even when it is standard competitive practice – such as during economic downturns.

This and other procedural considerations make antidumping the preferred route for firms to obtain protection from their foreign rivals when times are tough. The WTO does have a specific “safeguard” mechanism that enables countries to raise tariffs temporarily when imports cause “serious injury” to domestic firms. But the procedural hurdles are higher for safeguards, and countries that use them have to compensate adversely affected exporters.

The numbers speak for themselves. Since the WTO was established in 1995, more than 3,000antidumping duties have been put in place (with India, the US, and the EU being the heaviest users). The corresponding number for safeguard measures is a mere 155 (with developing countries being the heaviest users). Clearly, antidumping is the trade remedy of choice.

But the global trade regime has to address issues of fairness, in addition to economic efficiency. When domestic firms must compete with, say, Chinese firms that are financially supported by a government with deep pockets, the playing field becomes tilted in ways that most people would consider unacceptable. Certain types of competitive advantage undermine the legitimacy of international trade, even when (as with this example) they may imply aggregate economic benefits for the importing country. So the antidumping regime has a political logic.

Trade policymakers are deeply familiar with this logic, which is why the antidumping regime exists in its current form, enabling relatively easy protection. What trade officials have never taken on board is that the fairness argument extends beyond the dumping arena.

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