2 March 2021

Against protectionism: the UK is offering the innovative solutions the international trade system needs

By Special Trade Commissioners

We have collectively worked in the areas of international trade, competition, customs and regulatory issues for at least 30 years each, and were interested to see proposals from the UK’s Trade and Agriculture Commission.

Having invested our professional lives in these topics, and representing multiple countries around the world, as well as a number of international institutions, we are always very interested in novel and innovative trade policy proposals. We are particularly interested in policy proposals emanating from the UK because in trade policy terms, we have never seen a major G7 nation adopting independent trade and domestic regulatory policy afresh after 40-plus years applying the Common Commercial Policy of the EU.

While we do not wholeheartedly endorse all of the proposals in the report, we do highlight a few of them that we find to be worthy of further discussion and handled in the right way, could in our view make a major contribution to international trade policy.

The most important of these is the UK’s proposed import policy and the three pillars on which it is built.

What is the problem the proposed UK mechanism is seeking to solve?

There are two major problems in international trade which are increasingly manifesting themselves and creating a number of frictions. 

First, increasingly behind the border barriers and anti-competitive market distortions (“ACMDs”) have replaced tariffs as the preferred method of protection in many areas. In our view, the global trading system has not been able to deal with this reality appropriately.

Secondly, a number of issues outside of the traditional trade remit have been brought into the trade agenda. These include issues like labour and the environment, and now, climate change. This has renewed calls for border tax adjustments or dual tariffs on an ex-ante basis. This is in sharp tension with the WTO’s long-standing principle of technological neutrality, and focus on outcomes as opposed to discriminating on the basis of the manner of production of the product. The problem is that it is too easy to hide protectionist impulses into concerns about the manner of production, and once a different tariff applies, it will be very difficult to remove. The result will be to significantly damage the liberalisation process itself leading to severe harm to the global economy at a critical time as we recover from Covid-19. The potentially damaging effects of ex ante tariffs will be visited most significantly in developing countries.

How TAC proposals on import policy attempt to solve the problem

The TAC has proposed the following mechanism to deal with some of the issues outlined above.

It proposes a tariffication of distortion mechanism which could be used in trade policy to deal with situations where countries agree to lower their tariffs but protect their markets and give their producers an artificial edge by distorting their markets. The result of the mechanism is a tariff based on the scale of the distortion which operates like a trade remedy. The mechanism can also be used offensively where a country is preventing market access by the UK by the market distortion, or defensively where a distortion in a foreign market leads to excess exports from that market. The below mechanism shows how this can be applied defensively. Offensively, we could envisage provisions on distortions in trade agreements that discipline their use and allow dispute resolution when they are applied in violation of the agreement.

Defensive Mechanism

An aggrieved country would have to show:

  1. A market distortion (i.e. deviation from an agreed standard in an FTA or an internationally agreed nor, rule or standard at large, consistent with SPS and TBT rules).
  2. Impact on competition
  3. Excess exports as a result of the distortion
  4. Damage to its producers.

In addition to the cases above, an ACMD could result from the deliberate derogation from a country’s own law in order to promote trade or competitive advantage.

The questions to be resolved would be as follows:

  1. Is there an international standard which covers the issue?
  2. Is country X deviating from that standard for trade or competitive advantage?
  3. Is there an effect on trade and competition? To match other GATT provisions, this could be an equality of competitive opportunity test.
  4. Are there excess exports from Country X into country Y as a result?
  5. Are country Y’s producers adversely affected and can you prove both damage and causation?
  6. If yes to all, then the tariffication mechanism can be applied.

Unlike the UK-EU TCA rebalancing mechanism with which it has some similarities, the tariff would be calibrated to the scale of the distortion and would apply only to the product category in which the distortion is occurring. The advantage of this over a more conventional trade remedy is that it is based on cost as opposed to price and is designed to remove the effects of the distorting activity. It would not be applied on a retaliatory basis in other unrelated sectors.

The TAC proposal is to use this mechanism to deal with distortions in order to maintain a commitment to zero tariffs and zero quotas in agriculture, a notoriously difficult piece of trade liberalisation but crucially important for international trade. The mechanism is clearly intended to do the heavy lifting to ensure that where countries derogate from commitments made in FTAs, or ultimately internationally for the WTO and do so for trade and competition advantage, there is a real mechanism to discipline them through the application of a tariff. But the TAC proposal also looks at the offensive agenda and how disciplines on anti-competitive market distortions can be used to limit trade barriers in other markets as part of the UK’s FTA agenda.

We find this mechanism to be highly commendable as a way of dealing with defensive issues without the dangers of an ex ante dual tariff and the protectionist concerns that could result. We note additionally that such an approach has a much wider potential application beyond the UK.  

Potential to use the ACMD Mechanism offensively to deal with government distortions that block UK exports

The TAC report also notes that behind the border barriers and ACMDs have the capacity to damage UK exports and therefore suggest that a similar mechanism or set of disciplines could be used offensively. Certainly, where the ACMD is being used to protect a particular domestic industry, using the ACMD mechanism to apply a tariff for the exports of that industry would help, but this may not apply where the purpose is protective, and the industry does not export much. In this case, it would be important to ensure that UK FTAs include disciplines on these ACMDs which if breached could lead to dispute settlement and the potential for retaliatory tariffs for sectors in the UK’s FTA partner that do export. This is certainly normal WTO sanctioned practice, and could be used here to encourage compliance. It is clear from the experience in dealing with countries that engage in ACMDs for trade or competition advantage that unless there are robust disciplines, mere hortatory language would accomplish little or nothing.

We also see such a mechanism as operating much more widely than just UK trade policy. This could be a much more nuanced solution to the current US-China dispute which would not be as damaging for global trade as national security based tariffs but would recognise the fact that the impact of Chinese market distortions on global trade is severe. We also think this type of mechanism could feed into the work of the trilateral group on market distortions in the WTO and be a complement to existing measures allowed under the Agreement on Subsidies and Countervailing Measures.

It is precisely this type of problem solving and innovative thinking that the international trading system needs as it faces a range of challenges that threaten liberalisation itself and the hard-won gains of the post war GATT/WTO system itself. It represents UK leadership that has been sought after since the decision to leave the EU.

Signed by members of the Special Trade Commission.

Alden Abbott, Former General Counsel of the US Federal Trade Commission

Grant Aldonas, Former Under Secretary of International Trade, US Department of Commerce, Bush Administration

Peter F. Allgeier, former acting USTR and former US Ambassador to the WTO

Meredith Broadbent, Former Chairman of the US International Trade Commission

Lars Karlsson, Former head of the Swedish Customs agency and former Director of World Customs Organisation

Alan Oxley, Former GATT Council Chairman, Former Australian Ambassador to the WTO, Founder of the Cairns Group of Agricultural Exporting countries

Eduardo Perez-Motta, Former Chairman of the Mexican Competition Commission, and Former Mexican Ambassador to the WTO, Former Chairman of the International Competition Network

  1. Srinivasa Rangan, Luksic Chair Professor of Strategy and Global Studies, Babson College and former member of the Competitive Advantage of India project at the Harvard Business School to advise the Government of India on economic reforms

Francisco Sanchez, Former Under Secretary of International Trade, US Department of Commerce, Obama administration

Tony Smith, Former Head of UK Border Force, and Former DG of Canada Borders

Hugh Trenchard, Senior Adviser to Her Majesty’s Government on Japanese Financial Services

John Weekes, Former GATT Council Chairman, Former Canadian chief trade negotiator and Canadian Ambassador to the WTO

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Columns are the author's own opinion and do not necessarily reflect the views of CapX.