Motives for Using Trade Defense Instruments in the European Union

Abstract

The European Union is one of the most active users of antidumping and antisubsidy measures (trade defense instruments or TDIs) worldwide. Traditionally, TDIs have been characterized as the international trade analogue of internal market competition policies, addressing predatory and other price-distorting and anti-competitive business practices of firms and market-distorting measures of foreign governments (whether for 'strategic policy' or mercantilist objectives). The economic literature, however, is quite overwhelmingly negative towards the way TDIs have been used and indeed calls into question whether there is any defensible policy rationale for their existence. This judgment is based on analyses of why, how and with what effect TDIs have been used. Since TDIs do not involve a motive test, motive must be inferred from patterns of use. As a result, numerous theories have emerged as to the de facto role of TDIs – as 'surge' protectors, buffers for macroeconomic shocks, retaliatory threats to safeguard market access abroad, domestic political economy grease for trade liberalization and so forth. This lack of clarity leads to many real problems. For trading firms, it creates uncertainties about the rules of the road for market access, which can have a chilling effect on trade. For governments, it results in an ad hoc quality to policy decisions. For public discourse, it contributes to the often confused, acrimonious and emotive nature of the debate about 'unfair' trade. This paper contributes to the literature by developing an enhanced framework of analysis for why TDIs are used and applying it to recent European experience. The analytical framework we propose infers motive from context, including the policy context (competition and industrial policy concerns, communitarian motives), business cycle and exchange rate dynamics, the trade policy context of cases (retaliatory TDI applications), and the competitiveness context (revealed comparative advantage for EU compared to target country). We find that the strongest case for TDI is based on an implicit 'insurance' role. The EU, like other WTO Members, in liberalizing access to its market under conditions of imperfect information and an absence of appropriate insurance markets, de facto uses TDI as a form of insurance policy to deal with disruptive pressures. This perspective on TDI reconciles trade liberalization with the occasional recourse to protection. The fact that TD has been the main instrument of this insurance policy, rather than the provisions in the WTO intended for the purpose (safeguards and renegotiation of commitments), appears to reflect weaknesses in the design of these latter instruments.

Keywords: trade remedies, anti-dumping, anti-subsidy, European Union

JEL Classification: F13, F14