Trade Remedies: A Case of Rising Temperatures

An Address by
Ambassador Sergio Marchi
Senior Fellow, ICTSD

Annual WTO Conference
Shanghai WTO Affairs Consultation Center

Shanghai, China
December 11, 2009

Introduction
Mr President, Fellow Panelists, Ladies and Gentlemen,

It is a pleasure to be back in Shanghai, and with all of you at this annual WTO Conference. I would like to express my warmest thanks to President Wang and the Shanghai WTO Affairs Consultation Center for their kind invitation to speak to you today.

I also bring you greetings from our CEO, Ricardo Melendez Ortiz, and the rest of the ICTSD team, in Geneva.

Your Center has provided invaluable advice and assistance to government, industry, academia, and the public, in relation to the many facets of the WTO, and the multilateral trading system. Your efforts have contributed to China's integration and leadership in our global economy. I compliment you for these achievements to date, and wish you continued success.

I was asked to speak on the subject of Trade Remedies, and let me say from the very outset, that I am not an expert in this field. Nor will I try to impress you with a lengthy list of intricate details and technicalities that define this area of trade endeavor.

Instead, let me place the matter of trade remedies, which is of great concern and importance to China, in a broader context; a framework, in other words, which accounts for the challenging financial and economic times that we are living through, and the ongoing efforts of the WTO's Doha Development Agenda (DDA).

In this regard, let me focus on three inter-related points.

First, in the face of strong and biting economic head winds, and as our global village becomes increasingly more integrated, we must resist the temptations of seeking protectionist shelters, and strictly maintain a rules-based approach.

This is not easy, especially when all governments and industry are facing enormous political and economic pressures domestically, as a result of the global financial and economic crisis. World trade and investment flows have already dropped precipitously, since the economic turmoil struck last year.

Yet, an outbreak of global protectionism would cause catastrophic economic hardships in every corner of our globe. It would also severely undermine the rather historic body of work and progress that the WTO represents, while threatening its future viability.

Moreover, a protectionist detour would painfully prolong the crisis, and delay any economic recovery.

As we all know, the modern era of trade liberalization began during the Great Depression. Back then, the imposition of US tariffs in 1930, as a short term response to protectionist pressures from farm, labor and business groups, transformed what began as a recession, into the deepest economic depression of the 20th century. World trade declined by some 66 percent!

Recognizing the damage, and in the aftermath of World War II, our forefathers built the GATT and subsequently, the WTO. This institutional building was founded on an open and outward-looking vision, and on a rules framework.

Accordingly, the international community has successfully completed eight rounds of global trade negotiations, in the pursuit of bringing down trade barriers. Our work is not yet complete, and that is why Ministers and Ambassadors are engaged in Round number nine, the DDA.

While far from perfect, the cumulative impact of these liberalizing efforts has contributed significantly to the economic growth and stability of the world economy. International trade has also served as a bridge between different peoples and countries, helping to foster greater understanding between societies, and lessening the risk of insecurity that comes from a policy of isolation.

Thus, all WTO members have a great deal at stake, including and particularly China.

Today --- after 30 years of your historic policy of economic openness and reform --- your country stands as a global economic power and leader. You also invested 15 years negotiating your entry into the WTO family, which meant huge and necessary, but painful reforms at home. And more recently, you have assumed increased responsibility for the stewardship of this key multilateral institution.

In short, the WTO is the main institutional intersection for the multilateral trading system. It facilitates the national trade ambitions of its members in a coherent and orderly fashion, and helps to create the economic opportunities and growth that are central in elevating the quality of life for peoples and nations around the world.

Protectionism would severely disrupt this crucial trade traffic flow, and create chaos at that intersection. Not only would the many accidents be economically painful for countries, big and small alike, but they would also deliver a severe body blow to the very values embodied by the WTO.

So Far, So Good….but….
Since the outbreak of the global financial and economic crisis last year, countries have thus far refrained from severe, systemic protectionist measures. Furthermore, it would appear that the bold packages of government stimulus are spurring a surge in demand, adding evidence of a V-shaped recovery.

Indeed, your country's estimated 8 percent growth this year, demonstrates that China specifically, and Asia in general, has become a central locomotive in pulling the global economy forward.

But not all countries are yet experiencing an economic rebound, and the state of the global economy still remains very fragile. Unemployment and weakened financial institutions still pose significant political and economic challenges.

In short, the crisis is far from over.

Moreover, when one examines recent measures that have the effect of restricting trade, I am afraid that we cannot get complacent or congratulatory. On the contrary, the temptations have clearly revealed themselves.

WTO and World Bank reports have consistently shown that countries from all regions have moved into a more defensive trade posture, by increasing tariffs and introducing new non-tariff measures.

The saving grace is that, as the World Bank President said in a speech last month; “...so far, traditional trade protectionism has been a low-grade fever”.

But the temperature has been rising.
It is therefore vital that we remain vigilant, since even a modest slide toward protectionism could pick up dangerous momentum, cause retaliatory actions, and quickly impede the flow of international commerce.

We must be wise enough to recall our history --- when we chose to retreat from free, fair, and open trade --- and its painful lessons.

This is the only avenue for economic and trade sustainability. Protectionism is a dead end street. There are no other short cuts to global trade prosperity.

In sum, the fate of workers in Chinese tire factories is inextricably intertwined with those of poultry farmers in the US.

2. Secondly, while Trade Remedies are a legitimate part of the WTO tool box, their increasing application is a contributing factor to that rising temperature, and they run the real risk of creating a falling-dominos scenario.

After a long period of gradual decline from 2001 to 2007, the number of new anti-dumping investigations increased in 2008. WTO Members have reported the initiation of 217 new anti-dumping (AD) investigations, a 15 per cent increase over the 189 investigations initiated over the previous year-on-year period.

As well, virtually none of these investigations have been initiated by governments. They have been a response to petitions filed by the private sector, which is a clear recognition of the continued economic distress faced by companies. Regardless, if the trend were to continue and intensify, it could have the cumulative effect of weakening the economic recovery that is underway.

Furthermore, we should note that since 1995, developing countries have been the main users of anti-dumping actions. They accounted for almost 80 per cent of all initiations in the twelve-month period since October of last year. And the bulk of these investigations targeted fellow developing countries.

In regards to AD Investigations for the last year, China is the fourth largest user, just ahead of the US.

The number of initiations of countervailing duty (CVD) investigations has also increased significantly over the last four quarters. Twenty-eight CVD investigations have been initiated so far in 2009, representing a 115 per cent increase in the third quarter, compared with the same period in 2008.

Unlike anti-dumping investigations, CVD investigations are being conducted mainly by developed countries, although China (in the last year) has been the third largest user among the entire membership.

And yes, safeguard initiations are also in the same rising elevator in 2009. Initiations started to increase significantly in the fourth quarter of 2008, and they have not abated. Between the January-July period, this year the initiations surged by a factor of eight. And thus far, there have been six China-specific safeguard initiations in 2009 (up to 28 October).

Furthermore, according to the independent reporting agency, the Global Trade Alert, since June 2008 until today, there have been 47 trade defence measures (AD/CVD/safeguard) against China, raised by 16 different major economies.

Apart from the traditional trade defence measures (AD/CVD/safeguard), the agency also found that since the middle of 2008, countries have increasingly used a variety of instruments to protect their domestic markets. These included raising tariff lines, preferential treatment in public procurement, export subsidies, local content requirements, sanitary and phytosanitary measures, import bans, technical barriers to trade, and quotas (including tariff rate quotas).

China's Honeymoon Over

Given this latest storm of activity, China enjoyed a pleasant and tranquil five year honeymoon following its entry into the WTO family. During this period, trade partners refrained from challenging China in the WTO Dispute Settlement Body (DSB). But as those of us who are married know from first-hand experience, all good honeymoons come to an end! And the DSB is no different.

From 2006 onwards, China has become one of the main targets of WTO complaints. In that year, 6 of the 21 WTO cases were against China; in 2007, 4 out of 13; and in 2008, 5 out of 18. . Thus far in 2009, there has been one case taken against China.

The new bottom line is that your country is definitely on the DSB radar screen.

China started its own involvement in the DSB in 2002, when you joined the EU and other WTO members as a co-complainant against U.S. steel safeguard measures. Since then, China has participated actively as a third party in over 60 cases so far.

By the end of 2008, China had initiated three WTO disputes as a complainant, all against the US and all three concerned the application of trade remedies. In 2009 alone, China initiated three additional cases against the US and the EU.

From my standpoint, the increased defensive and offensive legal action is naturally commensurate with China's economic leadership, and its enormous trade volume. Yet, at the same time, all this activity has provided China and your legal, business and academic communities with an ideal opportunity to build a body of practical and valuable legal experience. In addition, the DSB offers a good platform for regular bilateral and multilateral consultation and notification, with a view to trying to avoid dramatic trade policy disruptions.

Moreover, some of the disputes are ironically compatible with China's determination to continuing to open up its economy and society. Losing a case is not pleasant. But, it can and does further stimulate and streamline domestic reform. From that standpoint, not all is lost.

Yet, the broad picture that emerges on the trade remedy canvass, in contrast to preceding years, is not an attractive one. The picture has clearly darkened during this time of economic duress, and it has widened significantly.

I believe there are at least two immediate dangers that must be avoided in the coming months.

Naturally, one is an incremental build-up of trade restrictions. Such a stockpile would represent a worrisome threat since it would undercut policies and efforts to restore sustained growth globally, upset trade flows, and undermine confidence in an early recovery to the crisis.

And the second, is allowing these restrictions to become deeply entrenched, which would make their eventual removal much more difficult.

In regards to the latter, a similar story rings true for the many stimulus and bail-out packages that developing and developed governments around the globe have provided. While the interventions were justified in order to prevent the further collapse of the international financial system, as well as to protect jobs and companies, over time, it runs the risk that this will create a legacy of uncompetitive industries, and sectoral over-capacity that will continue to generate protectionist pressures, even after economic activity picks up again.

Concerns have also been raised about the "buy/invest/lend/and hire local" requirements, which have officially or unofficially been attached to some of these programmes. Because of their evident nationalistic appeal in current circumstances, there is a particular danger that these campaigns could become targets for retaliation and proliferate.

And what about the many poor countries, that did not have the deep financial pockets to stimulate their respective economies and industries? How have they and their financial communities been impacted by the inequities of financial inducements?

Another area for potential trade friction involves the climate change dossier. The world's attention is fixed on Copenhagen these days, and I do hope that the Leaders find an effective consensus to combat the climate crisis we face. However, at least two major issues relating to trade have emerged.

One, includes the possible establishment of a border carbon tax driven by competitiveness concerns in OECD countries. France, for example, has warned that if countries like China and India do not commit to effectively cutting carbon emissions, the EU will impose tariffs on their products, in an effort to avoid the relocation of their businesses to less regulated jurisdictions.

The second, involves a Bill before the US Senate, which will require some foreign exporters, like Chinese producers, to purchase carbon credits in the US, in order to compensate for their carbon footprint.

Such measures have the potential to raise the level of trade tensions, and lead to more disputes. It will obviously depend how any final measure is designed, and whether the initiatives to protect the environment, also disguise a strategy of trade protectionism.

We will all stay tuned and see how this front develops.

Continued vigilance is clearly the order of the day. Remedies must be used judiciously and not carelessly. They must address legitimate trade injuries, and not be seduced by local political pressures for protection. Let us ensure that we do not deviate from this path.

3. Finally, China and the WTO Members must draw the appropriate lessons, and strengthen WTO rules and disciplines, as a benchmark against protectionism and as a response to the trade challenges of the 21st century.

I firmly believe that the best guarantee for re-establishing trade growth, and maintaining open markets and fair play for all nations --- big and small, developing and developed, rich and poor --- is through clear, predictable international trade rules.

Towards this end, it is precisely at the WTO, that the family of nations come together to negotiate and implement those very rules. And when differences arise between members, they are adjudicated objectively, by who is right and not necessarily by who has the might.

Today, in the DDA negotiations, the issues, challenges, and politics involved in new rule-making for trade remedies, as well as other disciplines, is housed in the Rules Negotiating Group.

The Long and Winding DDA Road

Unfortunately, this Group suffers from the same, general affliction that hangs over the entire DDA.

Last week's 7th WTO Ministerial Conference, in Geneva, confirmed a worrisome state of play. The most positive aspect of the meeting, I believe, was that for a change, more than 100 Trade Ministers were able to meet one another in a rather low-key, business-as-usual headquarters setting. This was a welcome change from the enormous expectations that accompanied most of the past Ministerials, when they travelled to different capitals, attracting large and mostly unfriendly crowds.

However, even the most ardent of WTO supporters and fans could not help but feel a trite pessimistic over the fact that this Ministerial provided no major decisions, no significant announcements, no uplifting declaration, no commitment for renewing and reforming the institutional governance, and no breakthrough in moving the DDA forward.

The WTO is confronting a serious and glaring vacuum of traditional, political leadership. And this poses a significant difficulty --- for both the DDA, and the organization's future agenda.

Granted, Ministers reconfirmed their objective to conclude the DDA next year. Yet, with all of the many preceding deadlines that have come and gone, what will make next year's end date any different? Who will step into the breach? Will the movement and momentum be created early enough, so as to provide Members with a realistic shot at meeting this target? And what kinds of game-changers are necessary?

On these crucial questions, the Ministerial Meeting was silent.

Thinking provocatively out loud, if this latest deadline fails, I think the WTO Members should seriously consider upping the ante. In effect, if the DDA is not settled by its 10th anniversary in 2011, they should declare the DDA mandate null and void! We need to establish some context for closure. A decade is long enough, don't you think? Not to mention, that in the meantime, the world has changed ten times over.

If this is the case, then the Membership should consider returning to Doha for the 8th WTO Ministerial Conference. After all, this is where the journey started, with such great energy and fan fare. This nostalgic ambiance, combined with a very different kind of deadline, could create a constructive crisis scenario, whereby the accompanying pressures would hopefully marshal the needed political will that has eluded us thus far.

Moving the Rules Negotiations Forward

In reference to the Rules Group, with much of the political attention focused on the market access side of the DDA equation, especially agriculture, the rules negotiations face the jeopardy of being overlooked and undervalued by the system. Indeed, should agriculture and the two other market access negotiations find traction and movement, the rules work can potentially and prematurely face a clock that has run out; possibly overtaken by a moment, when the political pressures to bring closure to the DDA, after such a long and agonizing journey, would be overwhelming.

That would be an unfortunate outcome. It is imperative that China and other leading Members ensure that the rules discourse does not get sidetracked; that they not fall too far behind the other DDA priorities.

In a world that is smaller, faster, and flatter, and where every country has an aggressive and ambitious global trade strategy, refurbishing the rules tool box is central to WTO renewal and sustainability. It is the glue that makes the organization what it is. And any weakening of this fabric would threaten the very core and personality of the WTO.

After eight years of talking, progress has come very, very slowly, and most of it in the last two years. The rules negotiations have been characterized from the start, by a stark divide. The fault lines include proposals that would impose new limits to the frequency and duration of anti-dumping investigations and duties; the issue of zeroing; whether authorities should take into account the views of domestic interested parties - such as importers and retailers; the inclusion of stronger anti-circumvention disciplines; and the establishment of benchmarks, to determine the benefit accruing to loss-making, non-creditworthy state-owned enterprises through government loans and guarantees.

Yet, after having started with some 200 different proposals, this volume of positions was eventually narrowed to about 55 issues. Today, there are some 15 key questions that attract the keen attention of most rules negotiators.

To be sure, these are the most difficult of the entire lot. And experience has shown us that the last few yards are always the most brutal. This will thus require a great deal of political will and creative bridge building.

While movement has been glacial-like, the rules football has progressively inched down that field, and the goal line beckons. There are some 25 countries that have been most interested and active in the rules negotiations, including China. It is now for this grouping of Members to summon the strength, and lead the pack into making the most important decisions and trade-offs of the rules game.

China can and should help mobilize that leadership.

In this spirit, China can also help in other ways. For example, it can work with other major economies to better articulate the public interest in the WTO. We need to go beyond negotiating modalities and mentalities. In other words, the concept of a rules-based global economic order is not negotiable. As well, despite the problems encountered by the DDA, the current rules are still working, they shall be respected, and they can be further strengthened.

In addition, China should encourage a sharing of DSB experiences among developing countries. Despite using trade remedies against each other, the strength of their bonds in regards to an agenda of industrialization and sustainable development, is greater. All countries would benefit. China would particularly gain insights from those countries which have had a longer and deeper track record, and a well developed practice of public-private partnerships as a means for defending their economic interests. Your Center can play a helpful role in this endeavor.

Finally, China must ensure that the financial and human resources it directs to specialized trade-related research and training projects, keep pace with its impressive trade growth. The legal, environmental, social and governance issues, for example, all require an increasingly sophisticated skill set.

China plays a big hand in the world of trade, and I know that it desires to continue to develop and refine that hand.

In Closing
In closing, the WTO is a valuable institution. It has many strengths, and it plays a vital role in our global village.

Ours is a village that is getting smaller by the day, and where raising the standard of life for the sea of humanity in that village is, in part, based on the economic opportunities and growth that are tied to the global movement of goods, services, capital, and people.

If the WTO did not exist, and if we wanted our global village to play by a set of trade rules, then we would have to create one.

Well, we already have one, of course. For some 80 years, our predecessors have invested much human and political capital in promoting open trade, and in building the GATT and the WTO. It is now for us and future generations, to nurture and protect the WTO.

We must also take it to the next step. We must further shape and strengthen the institution. We must ensure that the multilateral trading system can adequately addresses our changing times and meet head-on, the new political and economic realities of trade, and the pressing challenges of sustainable development.

In fact, there is nothing more dangerous than trying to stand still, or attempting in vain to go back to days gone by, when our world is racing towards the future with accelerating speed.

That means having the will to stand by a rules-based approach, when we are tempted by the formidable storms to seek the perceived safety and refuge of a protectionist shelter. It also means having the courage to make the needed institutional changes that our new times demand.

This is our challenge for the rather turbulent, yet opportunity-filled, era in which we live.

As you would all know better than I, there is a Chinese proverb that states:

Against our current economic head winds, may we rise to the challenge, and may we all choose to build windmills.

Thank you.
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Ambassador Marchi is a Senior Fellow with the International Centre for Trade and Sustainable Development, in Geneva. He also served as Canada's Minster of International Trade and Ambassador to the WTO, as well as Chairman of the WTO General Council.