As it looks to negotiate new trade deals after Brexit, the Government must also consider the UK’s future trade defence policy. The Government has signalled that this will be achieved as part of its 'Trade Bill', as announced in the Queen's Speech.
What is trade defence?
If a country believes that imports are unfairly damaging its own producers – most commonly, by undercutting them with unfairly low prices – it can use trade defence policies to restrict imports. Normally, this takes the form of a tariff temporarily applied to the relevant imports.
For example, in 2016, when the EU deemed that China was flooding Europe with under-priced ‘heavy plate’ steel in order to increase its market share, it slapped a 74% tariff on these imports in order to keep European producers competitive.
After Brexit, will the UK need a whole new approach to trade defence?
Developing a new trade defence policy for the UK could be an opportunity for the UK to design a trade defence regime that supports its domestic producers, reduces prices for consumers (by using fewer measures than the EU), or makes the UK a more attractive country to trade with.
Not all of the trade defence measures that the EU has in place will be relevant to the protection of UK industries. But for others – such as the duty on Chinese steel – the UK Government may be under political pressure (from UK steel producers) to replicate the EU approach.
What does the Government need to set up a new trade defence policy?
The Government’s no deal guidance on trade remedies sets out its intention to establish an independent trade defence system by the time the UK leaves the EU. To do so, the UK has to undertake two tasks while Brexit negotiations are happening:
- Pass new legislation to establish a new Trade Remedies Authority that has the ability to apply trade defence measures from the day that Brexit takes place.
- Build capacity in the Trade Remedies authority to undertake investigations into unfair trade and then run investigations to decide which countries to take action against (if any).
How has the EU used its trade defence policy?
The EU has made greater use of trade defence measures over the last decade. By the end of 2012, it brought the second highest number of complaints to the World Trade Organization (WTO) (behind the USA), making it responsible for 19% of all complaints.
Many argue that the European Commission’s increasing use of trade defence measures is a sign of rising protectionism within the EU. However, others believe this confidence actually makes it easier for the EU to sign liberalising free trade agreements, knowing it can take remedial action through trade defence policies if things do not pan out as expected.
For example, in 2011 the EU was willing to sign a free trade agreement with South Korea in part because the agreement introduced a specific safeguard in case the deal resulted in an unmanageable influx of South Korean goods.
What are the different types of trade defence the UK must prepare for?
The WTO defines three types of trade defence measure:
- Anti-dumping (most common): A country is deemed to be ‘dumping’ a product if it exports the product at less than its domestic price, or exports it for less than the cost of production. If the importing country can show that this hurts its own domestic producers by undercutting them, it can take an anti-dumping measure. The EU’s 74% tariff on Chinese steel imports was an anti-dumping measure.
- Anti-subsidy: Some countries make financial payments to producers tied to levels of production or exports. If a second importing country can show that these subsidies are undercutting its own domestic producers, it can take an anti-subsidy measure. When the EU determined that US tax credits for its biodiesel industry undermined European producers, the EU put a 237 €/tonne tariff on imports from America.
- Safeguards (least common): If imports of a certain product suddenly and unexpectedly increase, a country can take safeguarding measures to dampen the impact and give its own producers time to adjust. When Thailand found that imports of ‘Hot Rolled Steel Flat Products’ were increasing faster than its domestic sector could adjust, it applied a 40% duty to the products.
For each type of trade defence – anti-dumping, ant-subsidy or safeguards – the policy response normally takes the form of a tariff on the relevant imports. This tariff has to be proportionate to the level of harm caused – the 74% tariff on Chinese steel is judged to be the tariff that is required to return European producers to the ‘normal’ level of profitability.
If proportionality is disputed, countries can take the issue to the WTO to arbitrate. The tariff is also temporary, with the WTO stating that measures should terminate within five years (barring a second investigation).
What are the limits on trade defence policy?
Because trade defence policies are protectionist, there are WTO rules limiting their use.
If one country applies defence measures that break these rules, the country on the receiving end can launch a dispute at the WTO. When China took out anti-dumping measures against Japanese steel tubes in 2012, Japan challenged it in the WTO. The WTO found that China had not passed the second test in the list above – it could not demonstrate that imports were hurting its domestic industry. China agreed to drop the measures.