GLOBAL ECONOMICS

Kathleen Macmillan and Patrick Grady
Discipling Subsidies and Antidumping
from Seattle and Beyond: the WTO Millenium Round (1999), Chapter 7.

Unfair, Unschmair

When things start to go wrong in any trade relationship, it doesn't take long for one or both parties to accuse the other of unfair trading. The Americans are masters at this game. According to them, almost everyone else in the world is an unfair trader. Canadian exporters have been tarnished with that label more than enough, usually when we get any sort of competitive leg up on our neighbours to the south.

A case in point is government subsidization. Many members of the U.S. Congress naively believe, despite some evidence to the contrary, that U.S. firms don't benefit from government subsidies. On the other hand, they will steadfastly maintain that any success a foreign producer experiences is entirely attributable to support it receives from its home government. It is exactly this kind of reasoning that has given rise to a veritable arsenal of unfair trade instruments in the United States, some of which permit the government to take unilateral action against perceived injustices in the trade arena. The prospect of facing a hanging judge and jury rolled into one has terrified more than one foreign government into agreeing to "voluntarily" limit exports to the U.S. market. Now how is that for fair trading?

The other tactic for intimidating unfair traders is to threaten an antidumping action. Dumping is trade speak. It happens when an exporter sells goods at a lower price in a foreign market than it charges at home, or at a price that does not cover the full costs of production. Up until recently, the United States, Europe and Canada were the biggest users of antidumping actions. It was our dirty little secret. Now that new members of the WTO have discovered this versatile and effective tool for shutting out foreign competition, developed nations are thinking reform. The thought that a developing nation might end up passing judgement on whether our exporters are acting unfairly offends our own sense of fair play.

Pejoratives like "unfair" don't help advance the cause of trade liberalization much. What is "unfair" to one party can seem perfectly "fair" to another. So far, it has been mostly in the eye of the beholder.

Clearly, good rules are needed to preserve the integrity of the international trading system. Firms that receive government subsidies and act in an anti-competitive fashion should be prevented from taking customers away from their competitors who play by the rules. By the same token, exporters themselves need to be guarded from ill-founded allegations of "unfair trading" that are merely a guise for good, old-fashioned protectionism. Much progress was achieved in the Uruguay Round of trade negotiations but plenty more remains to be done.

As with other areas of the trade agenda, it will pay to be realistic too. Some see trade remedies as the price we must pay for the tremendous progress achieved on other fronts, most notably in reducing tariff and non-tariff barriers. Countries might be more reluctant to abandon more traditional and arguably, more damaging types of protection if they believe that they will be left powerless to deal with unfairly traded goods that hurt their own producers. While there might be something to this argument, we should let someone else make it. Canada can not afford to be too accepting when it comes to trade remedies. Otherwise we let our omnipotent partner to the south off the hook. We must continue to take the high road and press for reform whenever we have the chance, beginning with the Millennium Round.

The Uruguay Round Agreement on Subsidies

The Uruguay Round made substantial progress in disciplining the use of trade-distorting subsidies. Moreover, in providing a mechanism to resolve disputes over unfair trade, it made the rules in this area much more enforceable.

The WTO Agreement on Subsidies and Countervailing Measures contains clear definitions of what a subsidy is. To be considered a subsidy, the following conditions must be met:

The Agreement then categorizes subsidies into three classes. Trade practitioners often use the traffic light metaphor of red, amber and green light subsidies as a characterization. Red light or "prohibited" subsidies are export subsidies and subsidies that require the use of local content. Prohibited subsidies must be removed. At the other end of the spectrum are green light or "non-actionable" subsidies. Regional development, R&D, environmental and other generally available subsidies are classified in the green category. All other subsidies fall into the amber category. Amber subsidies are "actionable" which means that they can be challenged if they cause material injury to the domestic industry of another member in its own market or serious prejudice to the interests of another member in a third country market.

The alternatives available to a WTO member that wishes to challenge a foreign subsidy practice depend on the type of subsidy and the harm that it causes.

Prohibited subsidies - the most heinous kind of subsidies - are subject to abbreviated dispute settlement procedures. If a measure is found to be a prohibited subsidy, the dispute settlement panel can require the subsidizing Members to withdraw the subsidy immediately.

Unlike the situation for red light subsidies where their mere existence only has to be established, amber light subsidies are subject to an injury test. Members who challenge an amber light subsidy first must demonstrate that the subsidy falls into the actionable category and, second, must show that it causes them economic harm. Economic harm is usually established by demonstrating that the subsidy caused prices to fall or sales to be lost to the subsidized goods.

Actionable subsidies can be subject to a countervailing duty action or a serious prejudice action, depending on whether they affect a challenger's home market or they affect the challenger's sales into a third market. If subsidized imports cause material injury to domestic producers, a countervailing duty can be imposed. It is threat of countervailing duties, for example, that has caused Canadian softwood lumber exporters to limit their shipments to the U.S. market.

Subsidized goods that are hurting sales into a third market can be challenged on serious prejudice grounds. This was an option open to Canada in challenging the Brazilian government's subsidy to its regional aircraft industry. A countervailing duty action was out of the question since Canada was not importing the subsidized Brazilian aircraft itself. However, the Brazilian subsidy was displacing sales of the competing Canadian product into the U.S. and European markets and causing serious harm in the process.

It almost goes without saying that the Uruguay Round's other achievement was that the WTO's dispute settlement provisions apply to disagreements over subsidies. Generous provision is made for consultations aimed at reaching mutually agreed upon solutions. However, if consultations fail, the end result is a final and binding determination. This gives the subsidies rules teeth.

The Canada - Brazil Dispute over Subsidies to Regional Aircraft

The recent Canada-Brazil battle over subsidies to regional aircraft provides an interesting glimpse into the workings of the WTO Agreement on Subsidies and Countervailing Measures.

Bombardier, the world's third largest civil aircraft producer has long been concerned about subsidies provided by the Brazilian government to its home-grown Embraer corporation, Bombardier's chief competitor in the regional aircraft business. After years of arm-twisting, Bombardier was finally able to persuade the Canadian government to challenge the Brazilian subsidy programs at the WTO. What ensued was an ugly, hard-fought battle that, despite windings its way through all the WTO dispute settlement processes, still looks far from over.

What rankles Bombardier so is Brazil's PROEX program. PROEX provides a 3.7 percentage point interest-rate "buy down" to foreign purchasers of Embraer aircraft that, in the view of the WTO panel and supported by the WTO appellate body, constitutes a prohibited export subsidy. While Brazil maintains that PROEX is merely to overcome the disadvantages of being a developing country, in actual fact the subsidy payments are applied to the foreign buyer's own financing costs even if it already has a AAA credit rating. The PROEX subsidy can amount to some $1 million on the price of a $16 million aircraft, providing Embraer with a massive advantage in the marketplace.

Outraged by Canada's challenge, Brazil launched an attack of its own. It charged that Canada subsidizes its aerospace industry and breaks a host of WTO rules in the process. The first government programme the Brazilians challenged was the Technology Partnerships Canada (TPC) program, a retread of the old Defence Industry Production Program (DIPP) that provides royalty-based financing to Bombardier, Pratt and Whitney and a handful of other high tech manufacturers. Brazil also complained that loans made by Export Development Canada and using Canada Account money to support aircraft exports amounted to prohibited export subsidies.

The WTO panel ruled that Canada's research and development assistance under the TPC program constitutes an export subsidy. In smaller economies like Canada's, high-technology industries can end up exporting virtually all of their production. This is the case for aircraft where the Canadian market is very small. Subsidies to these industries can, for all intents and purposes, look an awful lot like export subsidies, even though that was not the objective of the government in designing the programs. Annoying as this is, it is a relatively small matter to modify TPC to bring it into compliance with WTO requirements. Not so for PROEX, however, which was dealt a mortal blow by the WTO panel.

The Brazilians love a good fight and were not prepared to admit defeat on this one. We Canadians are a much more reticent lot and refuse to gloat, even in the face of victory. The WTO's decision was clear: PROEX must be immediately abolished, TPC must be fiddled with. Canada scored a big triumph at the WTO. Although, try to tell that to members of our national press who delight in accentuating the negative.

Canada has to remain vigilant to ensure that we did not win the battle only to lose the war. Indications are that Brazil is busy finding creative ways to continue providing PROEX subsidies. The complexity of this type of market transaction and the level of secrecy required make it most difficult to keep track of what a competitor is doing. The WTO needs complete information to convict. Once burned, Brazil is unlikely to be as forthcoming in the future. Often, by the time the information is available, the sale is already lost.

The Canada-Brazil wrangle and other recent disputes over subsidies have highlighted some shortcomings in the WTO rules. These will have to be addressed in the next round of negotiations.

Subsidy Issues for the Millennium Round

The Uruguay Round left some subsidy issues for the next round of negotiations. The Agreement calls for a review of its provisions on amber and green light subsidies. This provides negotiators with an opportunity to strengthen the subsidy disciplines by expanding the list of actionable subsidies.

The next round of negotiations also provides a chance to address issues related to notification, transparency and enforcement. The more we know about the programmes in place in other WTO countries, the less potential there is for trade-distorting practices.

Dumping on Antidumping

The last round of trade negotiations made a step back for one form of trade remedy. Not only did the Uruguay Round leave the decades-old antidumping code essentially unchanged but it extended its reach. Prior to the Uruguay Round, the antidumping code applied to only a small group of GATT countries, mainly developed nations. Now, by virtue of the WTO Agreement on Antidumping, this beast is accessible by all Members.

Economists don't think much of antidumping measures. To them, it is quite natural for firms to want to price differently in different markets. It is just a case of adapting to local competitive conditions. When demand is weak it also makes sense to sell goods at less than fully allocated costs. This sort of thing is done all the time within a national market. What is perfectly normal behaviour for domestic firms is potentially illegal for exporters. If foreign firms engage in these practices, they can be hit with dumping duties and driven out of markets.

There are some situations where there are legitimate justifications for putting a stop to dumping. One such situation occurs when predatory pricing is occurring and the exporter is intent on destroying domestic producers to gain a monopoly for itself. The trouble is that the antidumping regime is poorly equipped to determine or not whether predatory behaviour is really going on. Most competition regimes, including those in Canada and the United States, would do a much better job.

Another situation where antidumping protection is justified is to deal with the effects of trade restrictions in the dumper's home market. Sometimes import restrictions prevent the normal process of arbitrage that works to equalize prices between the exporter's and importer's market. This arose when the Canadian sugar industry was swamped by low-cost dumped and subsidized sugar imports from the United States and Europe in the early 1990s. The U.S. essentially prohibits imports of sugar. What's more, the U.S. provides generous subsidy programs and price support schemes that generate massive surpluses in production. The American surplus sugar entered Canada in vast quantities, threatening to destroy the Canadian industry. Canadian refiners could not retaliate by exporting sugar into the U.S. to take advantage of high prices there. The only option was to pursue a countervailing duty and antidumping case.

Arguably, the U.S. and Europe should never have been able to support their domestic sugar growers in such a trade-distorting fashion. Sadly, however, the agricultural area is one where trade rules are still very permissive. Unless and until better rules are developed to discipline the harmful combination of import restrictions and domestic price support, antidumping actions will remain a weapon many WTO members will be unwilling to relinquish.

The truth is that few antidumping actions can be justified on the grounds of predatory pricing or import restrictions in the exporter's home market. Most are examples of plain old-fashioned protectionism in action. The prospect of being hit by an antidumping complaint is terrifying to exporters. Just ask the Canadian steel industry about the millions and millions of dollars they have spend in the past decade defending themselves in U.S. courts and administrative tribunals.

To say that the gains from trade are not fully realized when an antidumping regime is in place is a massive understatement. What then is the alternative?

Safeguards

One possibility for steering WTO Members away from using antidumping actions is to encourage them to pursue safeguard cases instead.

Safeguard or emergency actions are another form of trade remedy. As trade remedies go, however, they are somewhat less atrocious. Unlike countervailing and antidumping actions, Members pursuing a safeguard case do not need to prove that the imports were traded unfairly. All that has to be established is that import volumes have been so high or increased by such an extent that they are causing serious injury to the domestic industry. If so, some kind of temporary import restriction can be imposed.

The trouble is that WTO Members do not much like safeguard actions. Safeguard actions have a higher injury standard than antidumping actions. Since more hurt has to be demonstrated, it is harder to put safeguards into place. Also, the WTO Agreement requires countries imposing safeguards to compensate the exporting country.

Members will not substitute safeguards for antidumping actions unless changes are made to the Antidumping Agreement to make it less appealing to use. One possibility would be to raise the injury standard. Another would be to make the antidumping protection more temporary.

Competition Policy Offers Some Hope

Competition laws in most developed nation are well-equipped to deal with situations of predatory pricing and abuses in dominant position "lawyer-speak" for monopolists behaving badly. The good thing about competition policy measures is that their preoccupation is with protecting the state of competition, not with protecting domestic producers. Freeing markets from anti-competitive influences should mean lower prices and more choices for consumers.

Regrettably, competition policy is probably too far-fetched an alternative to antidumping, at least for the time being. The best evidence of this is that even Canada and the United States cannot agree to pursue the idea. Protectionists, particularly of the U.S. Congressperson variety, are rather attached to antidumping measures. Detractors point to differences in the two competition policy regimes, some real, some imagined. They also worry about the loss of sovereignty that would result from harmonizing rules and standards.

If Canada and the United States, with our many similarities and the good will that exists between us, refuse to dump antidumping, what are the prospects for multilateral reform? The answer is not very good.

Many WTO Members have quite rudimentary competition regimes. Some lack them altogether. Until Members have confidence in their own regimes and those of their trading partners, we will be stuck with antidumping.

Competition policy is an important item on the Millennium Round agenda in its own right. Work is already underway in to better coordinate and cooperate competition policy regimes internationally. The OECD has an active work plan in this area. The WTO Working Group on Trade and Competition has been busy selling the message to developing countries that competitive market structures are conducive to growth and wealth creation. Canada is engaged in bilateral discussions with a number of countries on cooperation and information exchange. Competition policy measures already form part of some WTO Agreements, notably the Agreement on Basic Telecommunications.

The multilateral game plan is very long term in nature. The idea is to start slowly by affirming the basic principles of transparency, national treatment and most-favoured-nation. Next, efforts will be made to promote better cooperation and communication through the sharing of information and through technical cooperation. Ideally, measures to encourage WTO Members to enforce their own competition laws would be desirable, as would some dispute settlement mechanism. Down the road, more ambitious objectives, such as harmonization and replacement of antidumping regimes might be tackled.

Conclusion

We will probably never be entirely rid of unfair traders or of those who unfairly hound their trading partners on that basis. The only hope for lessening their effects is to address the issue on several levels. First, we need stronger disciplines on the use of unfair trade measures such as subsidies. This accomplishes two objectives. First, it reduces the use of trade-distorting practices which is good for the integrity of the international trading system. Second, stronger disciplines might make it easier to convince Members to lessen or even abandon their use of trade remedies. The argument is that better policing of unfair trading practices will make the high-powered weapons both unnecessary and downright dangerous to leave lying around.

At the same time, we need to promote the idea of competition policy as a replacement regime for antidumping measures the least endearing of all the trade remedies. The odds of actually achieving this during the Millennium Round are remote at best. However, better coordination and cooperation in the use of competition laws is a noble objective in its own right. The high degree of interplay between trade, investment and competition issues make a natural in terms of Millennium Round priorities.

Canada should never lose its sense of innocence and purpose when it comes to reforming the global use of trade remedies. Despite being both a charter member and a frequent flyer of the antidumping and countervailing duty club, the truth is we been more hurt than helped by trade remedies. We should be prepared to gladly curtail our use of these weapons in exchange for the United States' agreement to do so. Getting the rest of the world on-side would be an added bonus. Our negotiators should aim high in this area. Who knows, maybe their children will live to see the realization of their dreams.

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