Protectionism unlimited

The growing world financial crisis has created a new desperation in developing countries to push out exports. The situation has simultaneously put greater pressure on the industrial nations to protect their domestic market for domestic suppliers.

STEEL and bananas may be an unlikely pair, but together they are signalling the fragility of the post-Uruguay trade regime. Few people can deny that the Uruguay trade agreement was the result of a tenuously constituted compromise within the developed industrial triad, consisting of the United States, the European Community and Japan. Carefully drafted concessions by each of them on commodities varying from agricultural products and wine to automobiles and electronic goods provided the base on which countries across the globe were tied together in what was a new framework for freer international trade. In the process the agreement legitimised international inequality by equating the trade obligations of the developed and developing countries.

Those were of course different times. World trade was gathering momentum and the prospect of a turnaround in world growth was bright. This together with greater liquidity in the international financial system, which allowed developing trade liberalisers to finance their trade deficits easily, seemed to provide a new mechanism that could keep the world economy ticking.

The situation has changed substantially. The contraction in much of Asia consequent to the financial crisis there and growing evidence that that crisis is not merely spreading to other parts of the world but affecting world growth quite severely, has created a new desperation in developing countries to push out exports. The worry has also put greater pressure on the industrial nations to protect their domestic market for domestic suppliers.

These developments have had two consequences. The first consequence is an effort on the part of all nations, especially the developed ones, to use loopholes in the Uruguay Round agreement, especially the clauses permitting anti-dumping duties, to resort to protectionist measures. This is reflected in the case of steel.

The second consequence is a tendency on the part of the World Trade Organisation to rule ambiguously on disputes over trade in 'sensitive' commodities (like bananas), which allows individual countries to flout the spirit, if not the letter, of the agreement.

In the U.S., the United Kingdom and the countries of the European Community (E.C.), the steel industry has been clamouring for protection against unfair competition from units in Asia and Eastern Europe. With worldwide recession having rendered some capacity idle, competition has intensified and world steel prices are plunging.

According to the Iron and Steel Statistics Bureau, a London-based monitor of the industry's health, excess capacity in the industry amounts to 250 million tonnes, or a quarter of world steel production. Much of this over-capacity (around 100 million tonnes) is in Eastern Europe and the former Soviet Union which were major steel producers in the past. Asia, afflicted by a financial crisis more recently, is burdened with another 70 million tonnes, while the countries of the E.C. (50 million tonnes) and the U.S. are better off.

However, when markets rule, a situation of excess supply triggers a price decline. Producers from Korea to Brazil have cut prices by between 10 and 25 per cent, and supplies have been diverted to the relatively more buoyant markets in the U.S. and Europe. Faced with such competition, producers in the developed countries are proving unequal to the task of defending their existing markets.

In Europe, steel imports reportedly rose by 75 per cent in the first half of this year, eroding the traditional market of major producers in the region. Similarly, steel imports into the U.S. are estimated to have risen to a record 30 million tonnes last year, and accounted for 50 per cent of domestic production in August. With recovery proving elusive in Asia, and other regions succumbing to the crisis, matters have only worsened in more recent times. These developments have combined with a collapse of export markets for developed country producers in Asia and elsewhere.

European exports to Asia fell by 50 per cent over the first five months of this year and, according to OECD (Organisation for Economic Cooperation and Development) figures, U.S. exports to China, Taiwan, Japan and Korea fell by 80 per cent over the last year. Trade is proving to be the mechanism through which the crisis in Asia, Eastern Europe and Latin America is being transmitted to the U.S. and Europe. As a result, profits are falling and large lay-offs are proving unavoidable.

In the circumstances, those countries which helped fashion a freer trade regime when it worked in their favour are unwilling to accept the consequences of enforcing the rules of the market. Rather than see these developments as an inevitable consequence of the competition unleashed by a freer trade regime, steel producers in developed countries are attributing the current situation to "dumping" by producers in Asia and the countries in transition, or to sale in some markets at prices below those charged at home or in third-country markets.

Further, in a throw-back to arguments which suggest that the entry of new capacity into the industry should have been regulated, American and European steel-makers are arguing that Asian producers had created "too much capacity".

The implication is that trade notwithstanding, late entrants into the steel industry should not create capacities that could target the developed country producers. Developing countries should open their markets to competition from abroad, but they should not create capacities that threaten the home markets of developed country producers. Such arguments are reflective of the worst face of the new protectionism.

The use of the "dumping" charge is not without cause. In the many loopholes that the developed countries left for themselves in the Uruguay Round agreement, was the anti-dumping clause, which allows countries to invoke anti-dumping relief in the form of import restrictions on grounds of market disruption or distress caused by unfair exports from abroad. The Uruguay Round did of course establish an institutional framework to settle disputes over the validity of anti-dumping claims. The new anti-dumping code defines detailed rules and procedures for dumping investigations by national agencies. But despite this framework, dumping calculations are still seen as being "flexible".

Further, the code does not provide for a full review by the World Trade Organisation (WTO) of national anti-dumping findings. Its disputes panels can only examine whether national authorities followed proper procedures and whether the evaluation of facts was unbiased. They cannot review the facts marshalled in an anti-dumping case or check the calculation of a dumping margin. Thus exporters assessed as resorting to dumping by a national agency have little chance of getting the assessment overruled by a WTO disputes panel. In the event, the anti-dumping clause is a convenient protectionist tool within an agreement ostensibly guaranteeing a freer trade regime. And when producers complain of dumping they are demanding protection.

What is surprising is the alacrity with which governments are responding to this demand. In the U.S., in the wake of an alleged deal with the United Steel Workers of America, a steel union which helped draw support for the Democrats in the recent elections, President Clinton declared that the United States would not tolerate attempts to "flood" its markets with low-cost imports, especially of steel. He warned foreigners to "play by the rules", making it quite clear that any competitive threat to the U.S. is a violation of his set of rules.

U.S. Secretary of State William Daley has, with Clinton's support, already declared that complaints from steel producers and unions will be heard expeditiously. But as The New York Times noted, if concessions are granted to the steel industry, makers of auto parts, machine tools and semiconductors would be quick to follow with their demands. At the first sign of increased competition, the U.S. presidency has clearly declared its intention to violate its past commitment to freeing international trade as well as its implicit commitment that in return for IMF-monitored good behaviour, crisis-ridden countries in East Asia will be allowed to export their way to recovery.

The real danger is of course that other countries in Europe and even Japan could follow the leader, resulting in competitive protectionism that sets off a collapse in world trade. Eurofer, the European Confederation of Iron and Steel Industries, has issued a formal complaint to the European Commission over cheap imports of hot-rolled coil from Bulgaria, India, Iran, Serbia, South Africa and Taiwan, among others. In a feeble effort to combat that, the U.S. is justifying its support for the new protectionism by arguing that Europe and Japan are not sharing the burden of cheap exports from Asia and Eastern Europe.

In a Transatlantic Business Dialogue meeting, U.S. Vice-President Al Gore and Commerce Secretary William Daley demanded that the E.C. should open its market even more to imports from Asia. Even though the European Union Trade Commissioner Sir Leon Brittan and other representatives denied allegations that their trade regime was more restrictive, such allegations reflect the fact that the stand-off on trade has now gone beyond the U.S. and the E.C. on the one side and Japan on the other.

THE growing tensions between the U.S. and the E.C. and the virtual impotence of the WTO as an organisation has come through in a symbolic dispute over a commodity as innocuous as bananas. The E.C. allows privileged access to bananas exported from former British and French colonies in Africa, the Caribbean and the Pacific, discriminating against imports from Latin America and America's own banana distributor, Chiquita Brands. The WTO's disputes settlement panel ruled against the E.C. on the matter last year based on a complaint by the U.S. But displaying its ineffectiveness against the large players in world trade, the WTO's tribunal did not specify how the E.C.'s banana regime had to be altered.

In response, the E.C. made some cosmetic changes which left the U.S. unsatisfied. It has now threatened to resort to trade measures of its own and has drawn up a list of E.C. exports that are liable to face sanctions. Such comical conflicts over what are almost insignificant commodities reflect both the unwillingness of the world leaders to go along fully with the current trade regime and the powerlessness of the WTO when they violate international trading norms.

For developing countries like India, these developments in international trade indicate that there is no reason why they should silently accept the inequity implicit in the new trade regime. But having chosen to increase its dependence on capital and technology from the developed countries, India is finding it increasingly difficult to press ahead with measures that violate WTO norms in the national interest. All it can do is to succumb to international pressure in areas like product patents and exclusive marketing rights, and follow the leaders when they violate the spirit and letter of the new trading regime.

Not surprisingly, the Indian Government has been quick to impose anti-dumping duties against a range of steel imports that have damaged the domestic industry. But other industries that suffer a similar fate as a result of imports from the U.S. and the countries of the E.C. cannot look forward to similar support. "Efficiency" is promoted, it appears, only when competition stems from the metropolises of the western hemisphere.