Defending Europe’s economy against unfair international trade practices has long been a key element of the European Union’s external policies. It is almost an instinct among some politicians and business leaders that if competition is deemed unfair, the European Commission should marshal new trade defenses. But what are Europeans defending against, and what are “unfair” trade practices anyway?

In the absence of international competition regulations to prevent predatory pricing and other anti-competitive activities, trade defenses are a second-best option. By far the most widely used instrument are anti-dumping duties aimed at imposing some restraint on companies that behave in an anti-competitive way. But, by increasing tariffs, prices also rise, which often means a welfare loss for society as a whole. This fact has long been ignored by firms seeking trade defence. What is new, however, is that the firms themselves might not gain from trade defense.

The very word “defense” creates an image of a nation state that is commercially connected to the rest of the world only via traditional trade. For such a state, all imports would truly be foreign goods, and its trade defenses would consequently be directed only against foreign interests.

But this is not true in today’s globalized world. Although we still have traditional trade, we also have foreign direct investment, offshoring, and outsourcing. We have global supply lines in which goods are developed in one country, manufactured in another, and assembled in a third. Capital and know-how flows across borders, so traditional bilateral trade flows have been replaced by a complex web of international commercial relations.

This has major implications for trade defense. If your mobile phone was assembled in India, but developed and designed in Finland, is it an Indian or a Finnish product? When European corporations outsource labor-intensive manufacturing to low-cost countries but keep the rest of the production process in Europe, they greatly complicate matters for anyone trying to evaluate the economics of trade defense.

To aim an anti-dumping measure against an Asian manufacturer may inflict most of the damage on a European producer. That happened in the October 2006 anti-dumping action against leather shoes, when the EU decided to impose anti-dumping tariffs against China and Vietnam. Sweden’s National Board of Trade conducted a case study of five European shoe producers in different countries and market segments to establish where the value added in their production processes was created.

Although manufactured in China and Vietnam, shoes were designed, developed, and marketed in Europe. These largely intangible production processes before and after the physical manufacturing sometimes constituted 80% of the value added. In other words, shoes from China were 80 percent European! For less expensive shoes, with lower sums invested in the intangible parts of the production process, this figure was not as high, but still more than 50 percent. The anti-dumping measures imposed by the EU therefore hit European companies in an unintentional way.

Sectors with a higher human capital content - electronic consumer goods, for example - have much higher R&D costs than the shoe sector, so manufacturing these goods on an assembly line in a low-cost country is probably not very costly in comparison to R&D and other intangible costs. For more advanced goods, the EU value added (if the intangible part of the production process is in Europe) is quite high. Imposing trade defense against such goods, even if legally warranted, is likely to create problems for globalized European companies.

Many say that these problems are the price to be paid for ensuring that companies do not engage in anti-competitive behavior, or receive trade-distorting subsidies. But, even if the measures worked as supposed, the majority of trade defense measures are probably not directed against anti-competitive business practices. More often it is the politics of protectionism that are the crucial factor behind trade defenses. Anti-dumping measures are frequently used against products that are simply so cheap that they pose a threat to European producers, even though that is no more than fair competition.

This raises a fundamental criticism Europe’s trade defense mechanisms. International trade is by definition a competition between companies on an uneven playing field. Some companies have easier access to capital, whereas their competitors cannot get access to finance at reasonable interest rates. Some have excellent infrastructure at their disposal, while their international competitors may have to contend with constant power cuts. Some must pay excessive taxes, while others operate out of tax havens. Some find it easy to recruit top-notch engineers, whereas for others enjoy an abundance of cheap labor.

To create a completely level playing field in trade is impossible. Yet many politicians and business leaders are keen to focus on the differences they don’t like and would like to see “leveled.” In reality, what they don’t like is competition itself, and they fight it by deploying an instrument that can inflict even greater damage on themselves.

* Henrik Isakson is Senior Adviser at the Swedish National Board of Trade. © Project Syndicate, 2008

11.05.2008

Henrik Isakson  SUNDAY’S ZAMAN

Source: www.todayszaman.com

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