Rules That Protect Protectionism

Trade diplomacy is supposed to be a high-minded affair but in reality it can get as dirty as the playground sandpit. Everybody fights with everyone else. Everybody wants to see the other guy punished - outrageously, if possible. The biggest bullies sit in the middle bellowing "Unfair!"

This week, it is Europe's turn to claim victory. The World Trade Organisation's arbitrators have given it a shovel to brandish in the face of the US - the freedom to impose $4bn of sanctions to compensate for US tax law.

The WTO's tax decision is one thing. Other recent battles have been fought over so-called "dumping". This is the label we give when a company from one country prices a product lower in a foreign country than it does at home. Never mind that among grown-ups, this would be called competition, or gaining market share through differential pricing; dumping is illegal in many countries.

Governments have therefore long enforced anti-dumping measures to protect their countries' industries, imposing duties on imports to even up the fight. They do it even though such action tends to benefit bigger bullies and to hurt the tots - that is, those very developing nations that, in other conversations, we natter on about helping.

Lately, the battles have got so much out of hand that even the anti-dumping king, the US, is acknowledging the need for reform. The plan is to use the WTO's Doha round to end the wars; at which the tearful tots can only gasp: "At last!" The story of how we got to this point is nonetheless worth retelling, if only to note what poor environments sandpits make for fostering economic growth and international co-operation.

The US passed its first anti-dumping law back in 1916; the aim was to block exports from the cartels of war-time Germany. In 1921, the US followed with a second law, specifying duties to be levied for dumping. From the start, the putative goal of fairness was window-dressing for a not-so-fair regime of protectionism.

More recently, the effect of anti-dumping regulations has been to protect sick industries at a cost to younger ones both at home and abroad. Rather than make themselves more competitive, companies have had the option of running to the US Commerce Department to lodge a complaint that a foreign competitor is "dumping" products. The guilty party's US customer is then forced to pay cash to the US Treasury as punishment for the sin of competing.

Lately, the principal user and abuser of dumping law has been the steel industry. About half of US dumping complaints are from steelmakers, although steel makes up less than 2 per cent of US imports. To add insult to injury, the rules are rigged to allow the Commerce Department to rule that a non-US firm is dumping even when that firm charges higher prices in the US than at home. In other words, anti-dumping law does not make sense even on its own terms.

The dumping regime gives businesses an incentive to be cry-babies, rather than adult competitors. Pursuing dumping complaints in Washington is much easier for managers than confronting unions over labour costs, or taking other constructive measures.

Two years ago, the US steel lobby succeeded in tilting the dumping game even more in its own favour. Senator Robert Byrd of West Virginia managed to get an amendment passed that made the steelmaking companies themselves, rather than the Treasury, recipients of dumping penalties paid by competitors. Through this act, the senator introduced the same disease that plagues America's tort culture into the trade world.

This year, other politicians fought hard to attach to fast-track trade legislation an amendment that would keep reform of dumping off the Doha table. To his credit, Robert Zoellick, US trade representative, blocked the amendment, saying that the president would veto legislation that contained it.

Despite this victory, US dumping law continues to punish those that lack a mighty lobby: domestic companies and individuals. Such groups suffer not only because products become more expensive and less available but also as a result of the procedure itself. For example, the recent finding by America's International Trade Commission that steel producers from five foreign countries were not dumping unfairly was of scant comfort to the companies that buy steel from US producers. Many of them had already been damaged by the unavailability of foreign steel during the adjudication process.

The damage has not been confined to US consumers of imports. US exporters have suffered as well. Other nations, and the European Commission, have followed America's model and instituted their own anti-dumping regimes. Across developed nations, anti-dumping rulings have increased steadily over the decades. A report by the law firm Mayer, Brown, Rowe and Maw found that global trade protection activity hit unprecedented levels last year. India, for example, initiated 75 anti-dumping protection measures, compared with 79 by the US. Other anti-dumping "superpowers", notes the report, include the European Union, Argentina, Canada and Brazil.

So what are the prospects that Doha's diplomats will find it in themselves to end the dumping game? Worse than they might have been had America not instituted so many protectionist measures recently, says Brink Lindsey of the free-market Cato Institute. "Steel tariffs, [timber] anti-dumping actions and farm subsidies make the other players doubt whether we can practise what we preach," he says.

The US administration counters that all these domestic concessions were worth it to win the freedom to negotiate on dumping. Let it prove that it is right. Trade policy promotes growth best when it is practised by grown-ups, not pouters and sand-slingers.

© Copyright 2002 Financial Times

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