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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
Prompted by geostrategic rivalry and the war in Ukraine, COVID-19 and the climate transition, trade policy is increasingly being weaponized. This trend towards protectionist capture and retaliation is self-sabotaging and bad for growth. But there is another way.
In this hard-hitting book, Ken Heydon offers alternatives to the trade weapon: the need for diplomatic carrots to accompany the sanctions stick; for resilience in supply chains rather than self-sufficiency through ill-advised reshoring and friend-shoring; for multilateral WTO remedies to rule breaking rather than unilateral penalties in the name of national sovereignty; and for direct action on environment and public health goals rather than the blunt tool of trade restriction.
But, to restrain the damaging subordination of trade policy to other ends, governments must address the discontents of trade and do better at helping losers, adjusting to technological change and making the case for open markets. At stake are three decades of income gains from globalization and the ability to deal effectively with the climate transition and the next pandemic.
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Veröffentlichungsjahr: 2023
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Table of Contents
Cover
Title Page
Copyright Page
Tables, Figure and Boxes
Tables
Figure
Boxes
Abbreviations
Acknowledgements
Preface
Introduction: Free Trade’s Winners and Losers
The arms
The incomplete and vulnerable disciplines of the WTO
The tariff
Non-tariff measures
The second best agenda of the preferential trade agreements
Incomplete coverage
Preferential rules of origin
Regulatory confusion and capture
Trade creation and diversion
The transformation of ‘trade’ and its conduct within the global value chain
When a threat is all that’s needed
The discontents: the gains from trade
Winners and losers
The role of interests and protectionist capture
The trade weapon and the risk of self-harm
Governments’ misguided pursuit of advantage
Notes
1 Sanctioning Aggression
Sanctions and domestic support: the players and their aims
Why sanctions fail: market power, the burden of pain and conflict expectations
Nuclear programmes on the Korean peninsula: two contrasting sanctions cases and the lessons to be drawn
South Korea (1969–76)
North Korea (1987–present)
Iran nuclear sanctions: beware unintended consequences
Sanctions against Russia for the invasion of Ukraine: not the key factor
Partial sanctions enforcement
The impact on Europe
The impact on Russia
China as a sanctions target: the case of the Uyghur
Sanctions effectiveness: summing up
A better way: some implications for policy makers
Distributing the pain
Giving target citizens a voice
Reducing the target’s expectation of conflict: carrots and sticks
Closing thoughts
Notes
2 Arming the Global Value Chain
How the global value chain works
The fear of supply-chain vulnerability
The pitfalls of de-linkage and re-shoring
American export controls on China: mainly self-harm
Industry policy and the subsidy war: more self-harm
China–ASEAN supply-chain links: a case study against decoupling
Re-shoring: not the end of globalization, but still a matter for concern
A better way: some implications for policy makers
Diversification, regionalization and the pursuit of friend-shoring: a hazardous second track?
Pointers on the right path to resilience: the domestic policy focus
Engaging with autocracies within the global value chain: ‘trading with the enemy’?
Closing thoughts
Notes
3 Trade Self-Defence
Trade remedies: a dominant and protectionist force
Anti-dumping and the special case of China
Growing unilateral, power-based use of the trade weapon: in the name of sovereignty and national security
The United States
The European Union
The price of unilateral application of trade defence
The United States: the Trump tariffs
The European Union: the new battery of trade remedies
The Anti-coercion Instrument (ACI)
The International Procurement Initiative (IPI)
Foreign Subsidy Instrument (FSI)
Level Playing Field (LPF)
The Updated Enforcement Regulation for Trade Disputes (ER)
A better way: some implications for policy makers
A more holistic domestic policy approach to trade defence
Regional cooperation and the use of competition policy
Restoring the judicial authority of the WTO
Do WTO rules lack democratic consent?
Are WTO rules democracy-undermining?
Do WTO actors fail to practise democratic political ethics?
Closing thoughts
Notes
4 Battling for the Greater Good
Damaging use of the trade weapon
The climate transition
Trade, technology and the climate transition
Carbon border taxes
Technology denied
Hobbling the role of trade
The COVID-19 virus
Impediments to trade
A better way: some implications for policy makers
The climate transition
Fossil fuel subsidies
Fostering trade that helps the transition
The COVID-19 virus and beyond
Closing thoughts and the last word to Jan Tinbergen
Notes
5 Arms Control: Restraining the Use of the Trade Weapon
The trade weapon will never be totally disarmed
Pursuing alternatives to use of the trade weapon
Restoring trust in the trading order: addressing the discontents
Helping those who lose
Adjusting to trade shocks and technological change
Strengthening the advocacy of open markets
Reviving the WTO
Acting regionally
Trade peace for our time?
Notes
References
Index
End User License Agreement
List of Tables
Intrduction
Table 1: The armoury of the major traders
Chapter 2
Table 2: ASEAN’s value-added exports incorporated into other countries’ exp...
List of Illustrations
Chapter 3
Figure 1: Anti-dumping and the business cycle
Guide
Cover
Table of Contents
Begin Reading
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The Trade Weapon
How Weaponizing Trade Threatens Growth, Public Health and the Climate Transition
Ken Heydon
polity
Copyright Page
Copyright © Ken Heydon 2024
The right of Ken Heydon to be identified as Author of this Work has been asserted in accordance with the UK Copyright, Designs and Patents Act 1988.
First published in 2024 by Polity Press
Polity Press
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Cambridge CB2 1UR, UK
Polity Press
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Hoboken, NJ 07030, USA
All rights reserved. Except for the quotation of short passages for the purpose of criticism and review, no part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher.
ISBN-13: 978-1-5095-5755-4
ISBN-13: 978-1-5095-5756-1 (pb)
A catalogue record for this book is available from the British Library.
Library of Congress Control Number: 2023934606
by Fakenham Prepress Solutions, Fakenham, Norfolk NR21 8NL
The publisher has used its best endeavours to ensure that the URLs for external websites referred to in this book are correct and active at the time of going to press. However, the publisher has no responsibility for the websites and can make no guarantee that a site will remain live or that the content is or will remain appropriate.
Every effort has been made to trace all copyright holders, but if any have been overlooked the publisher will be pleased to include any necessary credits in any subsequent reprint or edition.
For further information on Polity, visit our website: politybooks.com
Tables, Figure and Boxes
Tables
Table 1 The armoury of the major traders
Table 2 ASEAN’s value-added exports incorporated into other countries’ exports
Figure
Figure 1 Anti-dumping and the business cycle
Boxes
Box 1 The UK and the China threat: the perils of a semiconductor sanction
Box 2 Global dependence on critical Russian raw materials
Box 3 The Supply Chain Resilience Initiative: it’s the domestic economy, stupid
Box 4 Trade Policy Review of China: a mixed bag
Box 5 Trade law and COVID-19-related export restrictions: plenty of wiggle room
Box 6 Freer trade does not mean deregulation: US and EU treatment of Google
Box 7 The thoughts of Chairman Xi at the Twentieth Congress and what might have been
Abbreviations
ACI
Anti-Coercion Instrument (EU)
APEC
Asia-Pacific Economic Cooperation
ASCM
Agreement on Subsidies and Countervailing Measures
ASEAN
Association of Southeast Asian Nations
BRICS
Brazil, Russia, India, China, South Africa
CAP
Common Agricultural Policy (EU)
CBAM
Carbon Border Adjustment Mechanism (EU)
CEPR
Centre for Economic Policy Research, London
CEPS
Centre for European Policy Studies, Brussels
CPTPP
Comprehensive and Progressive Trans-Pacific Partnership
CRISPR
clustered regularly interspaced short palindromic repeats
DPRK
Democratic Peoples’ Republic of Korea
DSA
Digital Services Act (EU)
ECIPE
European Centre for International Political Economy, Brussels
ER
Enforcement Regulation for Trade Disputes (EU)
FDI
foreign direct investment
FSI
Foreign Subsidy Instrument (EU)
FSRU
floating storage and regasification unit
FTA
free trade agreement
G7
Canada, France, Germany, Italy, Japan, United Kingdom, United States
G20
group of twenty nations
GAO
Government Accountability Office (US)
GATS
General Agreement on Trade in Services
GATT
General Agreement on Tariffs and Trade
GMO
genetically modified organism
GVC
global value chain
ICT
information and communications technology
IEA
International Energy Agency
IMF
International Monetary Fund
INSEAD
Institut européen d’administration des affaires
IPEF
Indo-Pacific Economic Framework for Prosperity
IPR
intellectual property right
IRGC
Islamic Revolutionary Guards Corps (Iran)
ISEAS
Institute for Southeast Asian Studies, Singapore
ITC
International Trade Commission (US)
JCPOA
Joint Comprehensive Plan of Action (Iran)
LNG
liquefied natural gas
LPF
Level Playing Field (agreement) (EU–UK)
MC12
twelfth WTO Ministerial Conference
MFN
most favoured nation (treatment)
MIT
Massachusetts Institute of Technology
MPIA
Multiparty Interim Appeal Arbitration Arrangement
mRNA
messenger ribonucleic acid
NAFTA
North American Free Trade Agreement
NATO
North Atlantic Treaty Organisation
NBER
National Bureau of Economic Research (US)
NT
national treatment
NTM
non-tariff measure
OECD
Organisation for Economic Co-operation and Development
PTA
preferential trade agreement
QR
quantitative restriction
RCEP
Regional Comprehensive Economic Partnership
ROK
Republic of Korea
ROO
rules of origin
SCRI
Supply Chain Resilience Initiative
SOE
state-owned enterprise
SPS
sanitary and phytosanitary measures
SWIFT
Society for Worldwide Interbank Financial Telecommunications
TBT
Technical Barriers to Trade
TiVA
trade in value added
TRIPS
Trade Related Aspects of Intellectual Property Rights (Agreement)
TSMC
Taiwan Semiconductor Manufacturing Company
UNCTAD
United Nations Conference on Trade and Development
UNSCR
United Nations Security Council Resolution
USMCA
United States–Mexico–Canada Agreement
VPN
virtual private network
WHO
World Health Organization
WTO
World Trade Organization
Acknowledgements
Some of the ideas in this book have been a long time brewing. I would like to thank a number of people for helping them mature: Steve Woolcock and the graduate students on our course at the LSE; Patrick Messerlin and students at Sciences-Po; former colleagues at the OECD Sébastien Miroudot and Przemek Kowalski, whose thoughts on the supply chain were especially helpful; and Gary Banks for his insider observations on trade policy formulation and advocacy.
I thank particularly Peter Drysdale and Shiru Armstrong at the Australian National University for giving me the chance to write, and draw on, pieces for the East Asia Forum.
My heartfelt appreciation goes to Louise Knight and Inès Boxman at Polity for their insights and commitment in turning a manuscript into a book. Thanks too to two anonymous readers for their constructive suggestions on things I thought were clear, but which obviously weren’t.
And, as always, I pass my very special thanks to Katharina, for making it possible.
Preface
The past decade has seen a marked increase in the weaponization of trade in the form of targeted government interference with imports and exports and widespread resort to state-funded subsidies – all applied unilaterally or invoked in the name of goals that go beyond trade. The evidence is there to see – the stockpile of G20 import restrictions has grown more than tenfold since 2009 and continues to grow. And the increased frequency and complexity of distortive subsidies is – according to a collective report by the IMF, World Bank, WTO and OECD – bringing significant discord to the trading system. By strengthening the headwind against globalization, this is truly a collective own goal.
What has made weaponization possible? The simple answer to this question is the availability of specific weaponry in the trade armoury and the willingness of people to see it used. Despite over eighty years of multilateral trade negotiations and the plethora of preferential trade agreements – now covering over half of world trade – there remains considerable scope to use both tariff and non-tariff measures as a weapon. And the fact that trade opening creates losers as well as winners means that there is little objection to using trade restrictions to pursue other goals, whether the protection of human rights or the strengthening of scientific capability; most Europeans, for example, now have a positive view of protectionism.
The increased pursuit of those other goals is the result of longstanding concerns about national sovereignty combining with intensified geopolitical rivalry between America and China and heightened concerns about supply-chain vulnerability, now turbocharged by the disruptions from the COVID-19 pandemic, the war in Ukraine and the challenges of the climate transition. As a result, we are seeing the trade weapon invoked in four interrelated and mutually reinforcing campaigns:
to sanction aggression – whether cross-border, as with Russia’s invasion of Ukraine, or internal, as with China’s treatment of its Uyghur minority – in the interests of peace and human rights;
to arm the global value chain in pursuit of increased self-reliance, as sought recently by the leaders of two countries among the greatest beneficiaries of open markets, France’s Emmanuel Macron and China’s Xi Jinping;
to execute trade remedies in the exercise of self-defence, as with Donald Trump’s – and now Joe Biden’s – steel and aluminium tariffs, imposed unilaterally and invoking – somewhat improbably – threats to national security; and
to ‘serve’ science in the interests of the environment and public health, whether via damaging restrictions on trade in key solar energy components or on the vital inputs to COVID vaccine manufacture.
In making clearer what we mean – and don’t mean – by the trade weapon, care will be taken in these pages to see this growing and stark problem in its true perspective. Not all restrictions on trade constitute weaponization: there has to be unilateral application or an ulterior motive that goes beyond trade; and the trade weapon will not always be wielded with the intention to harm, as it may be seen as essentially a defensive arm. Care will also be taken to address the complexities of this subject: though our narrative starts with sanctions against Russia, this is not a strictly linear story. And there is an important difference in how we view our four motivations, in that, for sanctions against aggression, it is a case of doing them better, while for the other motivations it is, rather, a question of pursuing a totally different course of action.
So, who are the main protagonists in the weaponization of trade? Just about everyone, though this is essentially a big power phenomenon. Use of the trade weapon, as we will see, is system-neutral and wielded in autocracies as well as democracies – witness Russia’s retaliation against Ukraine war sanctions or China’s massive subsidy support of its state-owned enterprises. But the principal concern here is with the threat to the multilateral trading order when its custodians, the liberal democracies, act against the system they themselves created. For we need more, not less, liberal internationalism.
Weaponizing trade – with the ever-present risks of retaliation and protectionist capture – is bad for the world economy, as it diminishes and distorts the benefits of international flows of goods and services. Those benefits come not only from the stimulus to innovation that occurs when a firm – particularly one close to the technological frontier – is able to export and so operate in a bigger and more competitive market but also, crucially, from the improvement in domestic productivity that import competition brings. American, French, German and Japanese car makers, for example, all benefit from both effects. Open economies – giving full rein to comparative advantage – are richer overall and more productive than closed economies.
It follows that use of the trade weapon – whether in the form of US penalty tariffs on steel and aluminium imports, China’s restrictions on the import of COVID vaccines and treatment, or EU carbon border taxes – always brings self-harm to the user. But co-option of the trade weapon is not only bad for global growth and development, it is also either counterproductive or, at best, ineffective in the pursuit of other goals. Fortunately, in each of the four campaigns of trade weaponry, there is a better way.
In this book, we’ll examine each of those better ways, one by one: the need for diplomatic carrots to accompany the sanctions stick if Vladimir Putin and Kim Jong-un were really going to change their ways; for resilience in supply chains via sound domestic policy, not increased self-reliance through ill-advised re-shoring and friend-shoring; for multilateral WTO remedies to rule breaking, not power-based penalties in the name of national sovereignty; and for direct action on environment and public health goals, not the blunderbuss of trade restriction.
But to restrain the damaging subordination of trade policy to other ends, governments, as well as seeking alternatives to use of the trade weapon, must address the discontents of trade. This means doing better at helping losers from trade opening, adjusting to technological change and making the case for open markets, not least by showing how use of the trade weapon brings harm to the user as well as to the target. All this will be taken up in the concluding chapter.
First, though, to set the scene, we need to consider what metal the trade weapon is made of, how the discontents of free trade help make its use so common, and why, in fact, free trade can be a force for good and should be encouraged. Without that encouragement, we are putting at risk three decades of global growth and development and the ability to deal effectively with the next pandemic and the climate transition.
Introduction: Free Trade’s Winners and Losers
The pursuit of self-reliance through weaponized trade – whether by blocked Huawei access to US technology or subsidy-fuelled re-shoring in chip production – while not spelling the end of globalization, is seriously weakening the gains from trade while imposing a hefty, and mounting, bill on taxpayers.
Use of the trade weapon, in the form of targeted government interference with imports and exports and widespread resort to state-funded subsidies, has increased markedly in the past decade. It has done so because entrenched concerns about national sovereignty have combined with heightened geostrategic rivalry, notably between America and China, and worries about supply-chain vulnerability, turbocharged by the disruptions of the COVID-19 pandemic, the war in Ukraine and the tensions of the climate transition. The focus of this book will be on the four linked motivations1 – or the four campaigns – for using the trade weapon.
The imposition of trade sanctions against aggression across or within borders is the first campaign to be addressed. Sanctions are a key element in the vicious circle at the core of this book, because sanctions disruption fuels fear of supply-chain vulnerability and favours the pursuit of increased self-reliance and global de-linkage, the second campaign. That pursuit of greater self-reliance, in turn, weakens trade disciplines embodied in the World Trade Organization (WTO), fostering unilateral, power-based ‘trade defence’ measures in the name of national sovereignty and national security, the third campaign. And unilateralism in trade defence, in its turn, by further enfeebling the trading order, helps encourage the fourth campaign, the co-option of the trade weapon ostensibly to help, but in fact harming, other, science-related, arms of policy in the service of the environment and public health.
But this account needs some nuance. What do we mean exactly by ‘the trade weapon’? Of particular importance, care is needed to see this growing problem in its true perspective, not to overreach. Not all restrictions on trade constitute weaponization. The bulk of trade restrictions imposed in accordance with the multilateral anti-dumping rules of the WTO would not constitute weaponization.
For trade to be considered weaponized, one of two conditions needs to apply. The first is that trade restrictions are imposed unilaterally as an exercise in power, outside the disciplines of the WTO. The fact is, however, that unilateral trade measures, particularly in America and Europe, are on the rise. A second condition for weaponization is that there is an ulterior motive invoked that goes beyond trade. But again, the fact is that, while there is less and less support for the principle of a liberal trading order, those restricting trade nevertheless still commonly, and increasingly, do so by seeking cover under the invocation of goals that go beyond trade (and that cannot be justified under WTO exceptions). This means that, in effect, a large and growing body of trade restrictions do in fact constitute weaponization and, crucially – by virtue of protectionist capture – an augmentation and consolidation of the distortions to international flows of goods and services.
In practice, many examples of trade weaponization described in this book meet both of our two criteria. The Trump (and now Biden) steel tariffs, the European Union’s Carbon Border Adjustment Mechanism, and China’s import restrictions on COVID vaccines and treatments are all, as we will see, effectively protectionist but are invoked, respectively, and however questionably, to promote national security, the climate transition and national sovereignty. And all three are implemented under the authority of national legislation, outside WTO disciplines.
The trade weapon will not always be wielded with the intent of harming others. It may be seen as an essentially defensive tool. Brexiteers were motivated not by a desire to harm the European Union but, rather, to secure other goals, such as defending and promoting the Anglosphere. Restrictions on trade in gene-edited products are designed not to harm others but, ostensibly, to protect public health. The effect, however, of using the trade weapon will be to harm others, even if that is not the intent. Moreover, as we shall see, all four motivations for using the trade weapon described here do in fact embody an intent to impose harm, whether on, respectively, perceived aggressors, geostrategic rivals, sovereignty-infringing rule-breakers or suspected environmental free-riders.
Care is also needed to address the complexities of this subject, not to oversimplify. Though our narrative here starts with sanctions against Russia for its invasion of Ukraine, this is not a strictly linear story. Rather, the four motivations for weaponizing trade fuel one another more randomly.2 The weaponization of trade did not begin in February 2022. Historically, the sanctions weapon goes back, at least, to the ancient Greeks. And, in practical terms, there is an important difference between the four uses of the trade weapon described here. For the three uses other than sanctioning aggression there is a better way than weaponizing trade, an alternative. And that alternative should be used. For sanctioning aggression, however, it is rather a question of how to make sanctions more effective.
This differentiation among the four uses of the trade weapon is not being advanced as a moral question. Clearly, there is a moral argument in favour of sanctions against aggression – such as that of Russia against Ukraine. But a moral argument can also be advanced, with disputable degrees of plausibility, for the other uses of the trade weapon: that denying China access to tech products in the global value chain is justified by the systemic threat China presents to Western values; that unilateral, power-based trade defence measures are morally justified when others breach commonly agreed rules; and that it is morally correct to impose import restrictions on products of environmental free-riders that put at risk the climate transition.
The case here for treating the policy implications of sanctions against aggression differently from other uses of the trade weapon is the fact that it is simply unrealistic to expect countries to forgo the use of sanctions in situations where human rights are being systematically denied.
So, what is it that draws our different uses of the trade weapon together? What do they have in common? It is the fact that, in purely pragmatic terms, these are the four dominant cases of targeted government interference with imports and exports and widespread resort to state-funded subsidies applied unilaterally or invoked in the name of goals that go beyond trade, but which are bad for trade, bad for growth and ineffective in attaining these other goals.
Critically, the weaponization of trade has been made possible – and that is the main focus of this introduction – because the arms are there and because people are happy for them to be used. The arms of trade weaponry, as we’ll see, retain their potency because, notwithstanding the work of multilateral trade negotiation under way since the mid-twentieth century, the disciplines of the WTO are still incomplete and open to abuse, and the provisions of the 355 preferential trade agreements that are now the main game in trade diplomacy are inherently discriminatory. And people are ready for the trade weapon to be used because the presence of losers from market opening fuels the criticism that liberal trade policy is the major source of economic and social disruption.
Going back to basics – as we will here – shows that that criticism – and the trade weaponization it facilitates – is unfounded, and costly. The sixteen steel-using jobs lost in America for every steel job saved by US penalty tariffs will testify to that.
The arms
It may well be argued that both tariffs and non-tariff measures – the arms of the trade weapon – have been significantly reduced by the series of multilateral trade liberalizing ‘rounds’ since the mid-twentieth century and by the plethora of preferential trade agreements that have been signed since the 1990s. While this is true, the trade weapon is still highly potent. And it has been made more so by the broadening of the notion of ‘trade’ and by the advent of the global value chain.
The incomplete and vulnerable disciplines of the WTO
The tariff
The tax on imported industrial goods imposed at the border, the tariff, has seen a pronounced reduction in the past seventy-five years, with the average rate falling from some 40 per cent to under 5 per cent. This was achieved under the auspices of the General Agreement on Tariffs and Trade (GATT), founded in 1947 in the aftermath of two world wars and a global depression and driven largely by America and the support of the US Congress for reciprocal trade liberalization.
The GATT 1947 embodied non-discrimination in international trade. This was codified through the most favoured nation (MFN) principle (Article I) and national treatment (NT) (Article III). The MFN provision required that any favourable treatment, such as a reduced tariff provided to another – most favoured – nation, had to be extended to all contracting parties. National treatment required that all products imported into a country be treated the same as similar nationally made products, while nevertheless leaving governments scope to regulate.
Tariff liberalization under the GATT was to be achieved through mutual concessions that ensured ‘global’ reciprocity – meaning an overall balance of benefits as opposed to the narrower idea of reciprocity between specific sectors. Multilateral rounds of negotiation offered a means of ensuring that ‘concessions’ in areas of ‘defensive’ interest could be traded off against reduced tariffs in areas of ‘offensive’ interest.
Of the ensuing negotiating rounds, three stand out: the Kennedy Round (1963–7), the Tokyo Round (1973–9) and the Uruguay Round (1986–9), which, together, brought the average tariff on industrial goods down to less than 5 per cent. So, one could be excused for asking ‘well, what weapon?’
Part of the answer to that question lies in two features of the tariff regime which mean that the average tariff conceals situations where the tariff is more onerous. First is the fact that low average tariffs mask large differences across product sectors. Because of the presence of tariff peaks, applied to particularly sensitive products, some 10 per cent of international trade in textiles, apparel and motor vehicles is subject to a tariff of 15 per cent or more (UNCTAD 2016). Secondly, tariff-induced distortions to international trade persist because of the scope for tariff escalation, whereby higher tariffs are imposed on consumer (finished) products than on intermediates and raw materials, thus favouring processing industries closer to consumers.
Beyond these two effects, it is often said that a principal reason why tariffs retain their potency as a tool of the trade weapon lies in the difference between bound and applied tariffs. Undertakings to reduce tariffs via GATT negotiations have been made in respect of bound tariffs: the upper threshold that countries undertake not to exceed. Actual applied tariffs, however, are almost invariably lower than the bound rates, meaning that countries retain the possibility – or the threat – of raising tariffs up to the ‘legal’ limit. In fact, this is largely an emerging economy phenomenon. As we see in table 1, both India and Brazil have a pronounced gap between bound and applied tariff rates. But for middle-sized players such as Australia and Canada the gap is less pronounced. And for the trading majors, the United States, the European Union and Japan, and indeed for China, there is little or no gap. In fact, the principal reason why tariffs retain their potency as a trade weapon is the possibility – and practice – of countries to exceed their bound rates – sometimes ‘illegally’ but much more frequently by exercising their legal right, within the WTO, to use – as something of a misnomer – non-tariff measures.
Table 1:The armoury of the major traders
Tariffs bound rate
Tariffs applied rate
Anti-dumping measures (products)
31 Dec 2020
Countervailing measures (products)
31 Dec 2020
Australia
9.7
2.4
68 (58)
11 (21)
Brazil
31.4
13.3
146 (115)
3 (18)
Canada
6.5
3.0
96 (105)
29 (97)
China
10.0
7.5
110 (71)
6 (17)
EU
4.9
5.1
105 (186)
18 (86)
India
50.8
15.0
219 (414)
11 (33)
Japan
4.6
4.4
1 (336)
—
Korea
17.0
13.6
40 (34)
—
USA
3.4
3.4
406 (416)
140 (473)
Source
: WTO, ITC and UNCTAD (2021).
Notes
: Tariffs represent the average tariff for all products. Products affected by anti-dumping and countervailing measures are at the HS 6 digit level.
But, first, the irregular use. A relatively recent and widely publicized example of this came in 2018 when the Trump administration – unilaterally invoking US domestic law – imposed tariffs on the import of steel and aluminium that were far above US bound rates.
Much more widespread, however, and totally within WTO rules, is the practice of imposing penalty taxes (in effect tariffs) as a defence against injurious activities by trading partners. The imposition of such penalty taxes falls within the broad range of so-called non-tariff measures.
Non-tariff measures
The scope of non-tariff measures (NTMs) matches the rather open-ended nature of their descriptor, covering quantitative import restrictions (quotas); barriers to public procurement; subsidies (domestic and export); a group of measures (triggering penalty taxes) variously described as ‘commercial instruments’, ‘trade defence instruments’, ‘trade remedies’ or ‘contingent protection’ and including anti-dumping measures, anti-subsidy countervailing action and safeguard action; and a set of measures covering regulatory requirements in areas such as public health and environment protection.
It is commonly said that, notwithstanding the continued relevance of the tariff, non-tariff measures have gained in relative importance. So, for example, we see that, while the United States and the European Union have relatively low tariffs on the import of motor vehicles from one another (2 per cent and 8 per cent respectively) the tariff equivalent of their non-tariff restrictions on motor vehicles is much higher (between 19 per cent and 27 per cent, depending on the methodology used).3 A similar discrepancy is evident in transatlantic trade in metals, chemicals and electrical machinery.
This, however, is something of a sterile debate, given the important role played by the tariff in the ‘non-tariff’ area of trade defence (explored in chapter 3). But what is noteworthy is the extensive range of non-tariff measures, giving rise to a risk of multiple use.
Countries wishing to use the trade weapon to restrict imports often use a range of arms to accomplish this objective. The plethora of NTMs makes this eminently achievable. For example, restrictive sanitary and phytosanitary (SPS) conditions, strict technical barriers to trade (TBT) rules, non-automatic licensing and complex rules of origin may all be applied to the same product. When one impediment is satisfied or negotiated away, another may arise to take its place, thus frustrating market entry. This situation is often referred to as the whack-a-mole problem.
The existence of multiple NTM arms for the same product also creates problems for economic analysis, trade negotiation and policy making. While it may be possible to assess the total market distortion resulting from a set of NTMs, it may not be possible to measure the relative distorting effects of different measures and thus to establish priority when negotiating trade deals or setting trade policy priorities.4
Of the various GATT rounds mentioned earlier, only the Uruguay Round made a serious attempt to discipline non-tariff measures by introducing a ‘traffic light’ system to deal with subsidies, classifying aid as banned (red), potentially trade distorting and subject to countervailing action (amber) and permitted (green).
The reform process is, however, far from complete. This is particularly the case for trade in agriculture, where a recent report by the IMF, OECD, World Bank and WTO notes that, despite the longstanding mandate to establish a ‘fair and market oriented agricultural trading system’ while considering such non-trade concerns as food security and the environment, agreement on most issues remains elusive (IMF et al. 2022).
International reform efforts have been singularly unsuccessful in reducing resort to countervailing measures, as evident from table 1. Even more striking, the use of anti-dumping measures has continued unabated. This is particularly pronounced in the case of the United States, which at the end of December 2020 had 406 active anti-dumping measures in effect, covering no fewer than 416 products.
As indicated earlier, not all trade restrictions constitute weaponization. However, many of them do. And the sheer scale of distortions to trade gives an idea of the potential for unilateral and opportunistic resort to trade weaponry.
As touched on earlier, trade remedies are a particularly strong potential tool of the trade weapon as they carry the threat of an offsetting import tax (against alleged dumping and subsidies) that breaks the GATT commitment to both tariff binding and non-discrimination. We will look at this in more detail in chapter 3.
At the present time, a staggering one-quarter of imports in the world must comply with requirements for licences, quotas or other quantity control measures, representing half the value of total global imports (WTO, ITC and UNCTAD 2021). The potential to use quantitative restrictions (QRs) is the ultimate trade weapon, as QRs, unlike the tariff, totally preclude trade. QRs apply equally to exports, where they are permitted by Article XI of GATT 1947. In fact, the GATT has considerable built-in flexibility in the form of various exceptions to the rules that, in effect, can serve to strengthen the arms of the trade weapon. As Stephen Woolcock has observed, the range of exceptions mean that, rather than a charter for free trade, the GATT is best described as a system of managed trade liberalization (Woolcock 2012). The principal exceptions articles in GATT 1947 – which, not surprisingly, feature strongly in our discussion of the motivations for using the trade weapon – are as follows:
Article VI provides for the application of anti-dumping duties on imports that cause or threaten injury to a national industry and are sold ‘unfairly’ or at a price less than its normal value. It also provides for countervailing duties to offset the effects of a trading partner’s subsidies.
Article XI provides for export prohibitions (crucial to the discussion of sanctions in
chapter 1
) or restrictions temporarily applied to prevent or relieve critical shortages of foodstuffs or other products essential to the exporting country.
Article XII provides for import restrictions to safeguard the balance of payments.
Article XIV permits a temporary exception to the principle of non-discrimination in the application of import restrictions.
Article XVIII allows countries in the early stages of development to grant tariff protection required for the establishment of a particular industry and to apply quantitative restrictions for balance of payments purposes.
Article XIX provides for safeguard measures, whether tariffs or quotas, when an unforeseen surge in imports causes or threatens serious injury.
Article XX provides a general exemption from GATT rules for measures necessary to protect human, animal or plant life or health (particularly relevant to the discussion of environmental and public health goals in
chapter 4
).
Article XXI permits a contracting party to take any action it considers necessary for the protection of its essential security interests (relevant to the discussion of self-defence in
chapter 3
).
Article XXIV offers an exemption from MFN treatment for customs unions and free trade areas.
The General Agreement on Trade in Services (GATS) has a comparable set of exceptions and flexibilities, including, under Article XII, the allowance of trade restrictions in the event of serious balance of payments or external financial difficulties. In addition, the GATS has exceptions linked to the way services are delivered – permitting, for example, regulation of the temporary movement of natural persons – and to specific sectors – as with prudential regulation in financial services. Finally, the GATS, under Article V, provides for the liberalization of trade in services among selected parties.
But an important qualification is in order here. The GATT and GATS exceptions, which as applied within the framework of the WTO must respect the fundamental principles of non-discrimination, coherence and proportionality, do not in themselves constitute the weaponization of trade. Their existence, nevertheless, can provide a supposed legal basis, or pretext, for weaponization. As we will see, this is particularly the case with GATT articles VI, XI, XX and XXI. A case in point is the ‘anti-dumping’ action taken against Australian barley and wine by China in 2020, widely seen as being invoked – weaponized – as punishment for Australia’s call for an independent inquiry into the origins of the COVID-19 virus.
The GATT and GATS (in, respectively articles XXIV and V) also provide for the conclusion of preferential trade agreements. That leads to our next question: Why has the proliferation of these arrangements not disarmed the trade weapon?
The second best agenda of the preferential trade agreements
There are now 355 preferential trade agreements (PTAs) in force throughout the world, accounting for over a half of global trade. Should not the accumulated benefits of such a wide range of trade liberalizing accords severely weaken the trade weapon? In fact, less than one might expect, for four principal reasons: incomplete coverage, complex rules of origin, regulatory confusion and trade diversion – each providing opportunities for the weaponization of trade.
Incomplete coverage
Particularly sensitive products or services are frequently excluded from the trade liberalizing measures within PTAs. Compared with multilateral liberalization, plurilateral PTAs offer parties the opportunity to focus on carefully selected partners with whom it is possible – by a process of mutual accommodation – to liberalize selectively, albeit over a wide range of issues. PTA parties are thus able to exclude from liberalization commitments sectors that are politically sensitive and usually highly protected, while at the same time avoiding MFN commitments and associated concerns about free-riding by third parties.
For example, the PTAs of trading entities with strong protection of the farm sector, such as the EU or Japan, commonly have more restrictive provisions on agricultural trade. The opportunity then exists to impose restrictions by invoking goals that go well beyond trade, such as the preservation of traditional cultural values.
