Defence measures take the form of a temporary tariff and are supposed to correct a distorted import price and raise it so that the European producers do not have to compete against under-priced products. The most widely used instrument is an anti-dumping duty to impose some restraint on companies behaving in an anti-competitive way.

Unfortunately, this comes at a price. By increasing tariffs, it is a measure that also raises prices for consumer durables and other input goods imported for European industry, which often means a welfare loss for society as a whole.

Today, though, there is a new reality that increases the risk of opting for trade defences. The very word “defence” creates an image of a nation state that is commercially connected to the rest of the world only via traditional trade. In today’s globalised world characterized by foreign direct investments, off-shoring and outsourcing that can hardly be the case. We have global supply lines in which goods are developed in one country, manufactured in another and assembled in a third.

Traditional bi-lateral trade patterns have been replaced by a complex web of international commercial relations. The sheer complexity of the globalised economy makes it uncertain who a trade defence measure will actually hit. To aim an anti-dumping measure against an Asian manufacturer may instead inflict most of the damage on a European producer because the physical manufacturing part of production that is re-located is often only a small part of the total value added.

Many would say that these problems are the price to pay for ensuring that companies do not engage in anti-competitive behaviour. But the majority of trade defence measures are probably not directed against anti-competitive business practices, at least not in the sense of EU competition law. 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 another, more fundamental criticism of the way Europe’s trade defence mechanisms are misused. That is when they are resorted to even out natural comparative advantages, that a competitor may enjoy. International trade is by definition a competition between companies on an uneven playing field. Some companies have to pay excessive taxes, others operate out of tax havens. Some find it easy to recruit top notch engineers, whereas for others the abundance is cheap labour.

These problems and opportunities have much to do with where in the world companies operate. Are they based in Europe, in a developed country or in an emerging market in Asia? The legal and economic framework a company operates within sets the conditions for which it is able to compete in the world market, and is an essential part of the comparative advantages all trade is based on. To create a completely level playing field is impossible and nobody advocates it. Many politicians and business leaders, however, focus on the differences that they find most troublesome, and nowadays they find that the playing field is tilted in favour of China.

The bottom line is that the EU really should not, under the guise of countering unfair trade, restrict competitors from exploiting natural comparative advantages just because we cannot compete with them. When we do so we have to accept increased prices and thus lower welfare. And what will happen when our trade partners seek to even out our own comparative advantages? European companies could yet find it harder to get market access overseas, and then a vicious circle of protectionism would develop.

Author: Henrik Isakson, Member of the Swedish National Board of Trade

21 April 2008

Source: www.neurope.eu