Developing an Economically Efficient American Trade Policy to Deal with Distortionary Government Subsidies: Brexit and Beyond

Alden Abbott —  27 September 2017 — Leave a comment

U.S. international trade law has various statutory mechanisms to deal with unfair competition.  Regrettably, American trade law (and, for that matter, the trade laws of other nations) has a history of being deployed in a mercantilist fashion to further the interests of American producer interests, rather than consumer interests and aggregate economic welfare.  That need not, however, necessarily be the case.

For example, instead of penalizing more efficient imports, American antidumping law could be reoriented to deal only with true predatory pricing, thereby promoting free market interests (see my proposal here).  And section 337 of the Tariff Act, directed at “unfair methods of competition” in import trade, could be employed in a non-protectionist manner that enhances market efficiency by focusing exclusively on foreign harm to U.S. intellectual property (IP) rights (see my proposal here).

Countervailing duty (CVD) law, which applies tariffs to counteract foreign government subsidies, could be a force for eliminating government-imposed competitive distortions – and for discouraging governments from conferring subsidies to favored industries or firms in the first place.  In practice, however, significant distortive government subsidies to key industries have persisted in the face of CVD statutes.  The application of countervailing duties and the raising of CVD disputes to the World Trade Organization have proven to be inadequate in curbing governments’ persistent efforts to subsidize corporate favorites, while preventing trading partners from bestowing similar largesse on their national champions.

Among the beneficiaries of major subsidies that lead to international trade disputes, the commercial aircraft sector, dominated by the longstanding Boeing and Airbus duopoly, stands out.  A recent article by trade law expert Shanker Singham, Director of Economic Policy and Prosperity Studies at the United Kingdom’s Legatum Institute, highlights the economic deficiencies revealed by the most recent battle in the ongoing commercial aircraft “subsidies war” saga.

Specifically, Singham suggests reforming countervailable subsidies with a “trade remedy law based on evaluating distortions and their effects”.  Singham’s article, “America’s Protectionism Is Damaging British Interests,” is worth a careful read:

Theresa May was recently in Canada meeting the Canadian PM, Justin Trudeau, to discuss how theyshould react to a trade case that Boeing has brought against Bombardier, Canada’s aerospace manufacturer. The case could affect 4,000 jobs in Bombardier’s Belfast facility. From Belfast, this might look like the vagaries of international trade, but the real story runs deeper.

Competition among producers of aircraft has been fierce, and has also been often accompanied by complaints about state subsidies and other trade distortions. Civil aviation is a sector that has been plagued by government interventions all over the world, and to say that the playing field is not level is an understatement.

While Airbus subsidies are its usual target, Boeing has recently turned its fire onto Bombardier, claiming that the Canadian jet manufacturer has dumped product into the US market. Boeing is citing US trade remedy laws, the price-based focus of which makes them prone to this sort of protectionist abuse.

The UK has been dragged in to the row because jobs in Belfast depend on the production of key inputs into the Bombardier plane. So just as the people of Northern Ireland are struggling with Brexit, they face a fresh concern not of their own making.

Our recently released [Legatum Institute] paper on Northern Ireland discusses the need to find ways of promoting economic activity in Northern Ireland using Special Economic Zones, among other ways of minimising the costs of Brexit. And one idea is that the people of Northern Ireland should benefit from UK-US trade agreements as we set out in our Transatlantic partnership paper.

But allowing the abuse of notoriously protectionist trade remedy laws in the US to have a completely unjustifiable and knock-on effect in Northern Ireland would not indicate the good UK-US trade relations that the Trump administration has promised.

The Prime Minister has recognised the danger, and raised the issue in a call with President Trump, as well with Trudeau this week. Voices within her own party, and the media, are calling for her to take a tougher line against Boeing to protect those jobs in Northern Ireland, and others in the supply chain across the UK.

But what could the Prime Minister do?

The case highlights the trade barrier that the trade remedies themselves pose and shows why reform is necessary. Given that new UK trade remedy laws must be developed as a result of Brexit, and the US-UK agreement, here is an excellent opportunity to deal with those government interventions that distort trade by focusing on the source of the problem – and not on pricing (as current trade remedy laws do).

For trade to be fair, we need to make sure that distortions are reduced in all our markets, and that any trade remedies we use are designed to deal with these distortions.

In the case of the production of aircraft (large-body), Boeing and Airbus have been at each other’s throats, each maintaining that the other is subsidised or supported by governments. Recently, Airbus lost a case in the WTO where it was arguing that Boeing’s Washington state incentives violated WTO rules on subsidies. That case was in response to a series of cases which Boeing had brought against Airbus. It highlights the problem of the WTO’s approach to subsidies and government support in general.

Whether the government privilege or grant is given federally or through a state, what matters is whether the cost of production has been reduced by ordinary business processes and efficiency, or whether in fact it has been reduced through government action. Viewed through this lens, very few aircraft manufacturers have clean hands.

However, while these distortions abound, bringing trade remedy cases that ignore the complainants’ own network of distortions and subsidies is patently unfair. The Boeing case has effects in Canada, but because we are in a world of competing global supply chains, these effects reverberate around the world.

All the suppliers to Bombardier, including those based in Northern Ireland, are adversely affected when US firms use the US trade remedy laws to damage trade between nations. These laws were written at a time when we did not live in a world of global supply chains, but rather a world where firms produced products in country A and sold them in country B.  They do not fit within our new world of complex supply chains.

It is high time that countries around the world ensured that their domestic policies and their external trade policies lined up. Countries such as the US cannot argue that they intend to do trade deals with the UK, if their domestic measures damage the interests of that trading partner.

In fact, the UK and the US have an opportunity here to use trade remedy measures to attack products from companies whose costs are artificially lowered as a result of government distortion, as opposed to being more competitive. Boeing’s case, however, does not differentiate between the two – which is why it is flawed.

In the UK, there is talk of using a public interest test in the application of trade remedy laws. Such a test could look at the impact of the use of these remedies on international trade and on consumers.

Theresa May has argued for industrial strategy in ways that give those of us who believe in the power of free trade and free markets pause. But in this case, the most basic industrial strategy has to be to defend UK production, such as the plant in Belfast, from the effects of distortions in other markets, and the abuse of trade remedy laws.

A trade remedy law based on evaluating distortions and their effects would prevent this. It is something the UK and US may be able to agree, and it is certainly something that the UK could lead on by example.

If the UK government seeks to protect its workers in this case, this should not be seen as a protectionist gesture.  It would be a necessary response to US protectionism. As long as countries maintain laws on their books that allow consumers to be damaged, and supply chains to be adversely affected, countries may seek to use other means to retaliate against the offender.

World trade is under sufficient threat, at the moment not to freight it down with additional and quite unnecessary challenges, such as over-vigorous use of anti-dumping laws. The UK has a great opportunity to lead this debate as it formulates its own independent trade policy.

As Singham’s article suggests, U.S.-UK free trade negotiations made possible by Brexit create the possibility for the reformulation of American CVD law to focus on actual distortions of competition.  CVD assessments calibrated precisely to the amount of the foreign government’s distortionary subsidy, applied first in the context of US-UK trade, could serve as a model for the more general reform of American (and UK) CVD law.  This in turn might serve as a template for more general CVD reform, through bilateral or plurilateral deals – and perhaps eventually a global deal under the auspices of the World Trade Organization.  Think big.

 

Alden Abbott

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I am a Senior Legal Fellow at the Heritage Foundation. I write on antitrust, domestic and international regulatory policy, and law and economics. I am an Adjunct Faculty Member at George Mason Law School.

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