Thursday, July 12, 2012

Trade Disputes of WTO (Steel & Wheat)

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Introduction


There are many benefits for countries to trade with one another. International trade could increase the wealth of the countries, in terms of GDP and GNP and improve the quality of products and services. Together with regional integration, the countries will enjoy economic and political benefits. Economic benefits could be like reducing or removing tariff and non-tariff barriers that will encourage free flow of products and services and improves the factors of production among the countries. These benefits will directly stimulate the countries’ economic growth as they start to specialise in the products and services that they can produce most efficiently. For political reasons, countries believe that economic interdependence will make them feel stronger where they are able to voice their positions if they are in the same regional economic bloc, thus enhancing their ability to influence the economic policies of the other countries. It also creates incentives for political co-operation. This in return will reduce the potential of violent confrontations from other countries. With so many benefits of engaging in international trade, more countries are opening up their markets to welcome foreign investments and trade.


Because of the growing importance of international trade, International Monetary Bank (IMF) and World Bank are created. The main objectives of IMF are to ensure a stable fixed exchange rate among the countries, oversees the monetary policies of the countries, promote international monetary cooperation and facilitate the growth of international trade by lending money to countries that have trade deficits. Through these years, it also designed rescue packages (short term loans) for countries that have temporary financial hardships. The World Bank helped other countries (like developing countries and third world countries other than US) to support and recover their economy by funding them. World Bank’s main task is to lend money to these countries either by using its name to sell bonds on behalf of these countries that provide a channel for global capital market to these countries or using the subscriptions from wealthy countries and lend the money, with relatively low interest rates, to these needy countries.


Government intervention in trade is where the government makes trade policy that will influence domestic and international trade. Government intervention can be classified in terms of economic and political reasons. For economic reasons, the governments who are trying to promote free markets and free trade in their countries will implement measures like lowering trade tariffs, trade barriers and corporate taxes, encouraging foreign and domestic investments and trade. Government intervention is essential to increase the national competitiveness of the country. The economic goal of the government in implementing trade policy is to enhance the economic well being of its people like increasing their individual real income. For political reasons, government would not allow certain industries to liberalise and privatise as it might affect the sovereignty and the national defence of the country. These industries could be like the media sector, utility sector and the high-tech sector.


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The degree of government intervention in trade policy varies among countries. It depends on the individual government choice of economic growth policy, the degree of fear in trade retaliation by other countries, domestic industrial policy and cultural inheritance of the country.


Trade disputes arise due to the differences in the making of international trade policy among countries. For example, the making of an international trade policy in Country A may be beneficial to Country B but at a disadvantage to Country C. Thus, a trade dispute occurs when Country C is unhappy with Country A in making that trade policy. Country C may retaliate by raising trade barriers or trade tariffs on goods and services of Country A’s.


Due to the arising trade agreements and trade disputes among countries, World Trade Organisation (WTO) is established in 15. Now, it has 144 member countries. Since its establishment, it has solved almost 50 cases of trade disputes. The main objective of WTO is to administer the trade agreements among its member countries and improve the welfare of the citizens of the member countries. WTO plays a part in monitoring the national trade policies and as a forum for trade negotiations among its member countries.


When a trade dispute arises, WTO encourages the dispute countries to settle their disagreement through consultation the dispute will be channelled into a dispute settlement process. The trade agreements and commitments of the affecting member countries will be interpreted and WTO will try to persuade affecting member countries to amend their trade policies in a way that will conform to one another. In this way, WTO helps to lower the risk of member countries in spilling their disputes over into political or military conflicts.


Trade Dispute over Steel Tariffs


The European Union (EU), supported by Brazil, Japan and Korea, had been unhappy over the United States (US) decision to impose temporary tariffs of up to 0 per cent for three years on most imported steel with exemption from this action virtually to all developing countries. EU had claimed that US was in contradiction with its commitment to free trade. Free trade requires lowering trade tariffs and not imposing tariffs like in the case of imported steel in US. US, instead of promoting free trade, had decided to impose temporary tariffs on imported steel.


EU had raised this issue to WTO. EU had requested a dispute settlement panel and charged US for violating the WTO’s Safeguards Agreement. This was the first step that EU had taken to bring a legal challenge against US steel measures. The WTO Safeguards Agreement allows countries to protect an industry temporarily if it could demonstrate harm from imports of competing countries. The points that EU had raised against US steel tariffs were lack of increased imports, absence of injury, flawed causal link between imports and injury to local enterprises, disproportionate remedy and violation of parallelism requirement.


Despite US steel import had fallen steadily since 1, US had claimed that its trade restrictions complied with the WTO rules as steel import rose for two years after the economic crisis in 17 and remained above pre-crisis levels. EU had increased its steel import by 18 per cent since 18 while US steel import had fallen by one third.


EU had claimed that it had affected its steel industry and workers. EU had demanded compensation from US in the form of lower tariffs on other products that could worth US$bn annually. If US were to reject this demand, EU would either retaliate by imposing sanctions on US exports within three months after US applied the tariffs or under the WTO rules, EU could demand trade compensation 60 days from US by showing that they had been affected by their measures. EU would impose tariffs on a list of US products, ranging from textiles to Tropicana orange juice that would wound specifically certain states’ trade in US.


US had responded to EU challenge by stating that it was legal for them to do so under the provision of WTO Safeguard Agreement which allowed countries to impose temporary import tariffs on industry that could have caused or threatened certain damages to the domestic industry for three years. Thus, EU had no right to retaliate immediately.


With regards to this trade dispute over steel tariffs, both parties (EU and US) had insisted their actions were consistent with WTO rules. Despite several rounds of consultation and negotiation, little progress was made through the whole process. The main measure that both parties took was to impose tariffs on one another. Both parties were leading to tit-for-tat protection, which was definitely a lose -lose situation.


The main political reason why US wants to implement steel tariffs is that US is very concerned of its national security ever since the September 11 terrorism act. US government is attempting to find ways to protect its country and prevent terrorism from happening again in its own soil and other countries too. US government is also afraid of losing its sovereignty over the steel industry. The steel industry is considered as one of US sensitive and protective industries. Steel is the main raw material needed for the manufacture of weapons and equipments that are used during the war. Thus, it is a strategically important industry to US government, especially after the September 11 terrorist attack. Through the years, US government has spent quite a huge portion of its budget on its defence1 and does justify the reason of why the US government would want to implement such safeguard measure on steel.


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1 We can see that US has budgeted to spend, in financial year 00, an estimated amount of US$1. billion on its new security challenges after the event of September 11th.


Source http//www.mbe.doe.gov/budget/0budget/content/highlite/highlite.pdf


In addition, there is one more point that we have to take into account in evaluating the political reasons of US government intervention in the steel industry. The present US president has owned his president position with the help of the steel producers whom have supported and voted him during the president election. Thus US president has claimed that he has not forgotten the efforts of his supporters, which is in this case, the steel producers. When the steel producers sought help from the US president to protect the steel industry, the US president found it difficult to reject their request. Thus, he has faced a certain pressure from this interest group as he could not reject their demand, considering the help received from them previously during his election campaign.


As for the economic reasons of why US wants to implement steel tariffs, the US government mainly wants to stimulate economic growth and generate jobs for its people. Despite the fact that free trade could stimulate economic growth, large increase in import of steel could cause dramatic consequences and severe injury to the steel industry. The steel producers have felt the threat and competitive pressure from other countries that have a lower cost of production in steel. They have feared that there may be a loss of market share in its domestic market where their competitors’ steel will be offered to the market at a much lower price than theirs. That would gradually lower their real income and eventually increase the loss of their jobs.


On the other hand, for the economic reason of EU intervention on the issue of the safeguards measure is that EU will be experiencing a loss of export steel trade to US. This will lower the real income of its steel producers where US is making it unfair for EU steel producers to export their steel into US. It can also be considered as an unequal and unfair treatment towards EU steel producers and a bias for US domestic steel producers. Some may even see it as a kind of discrimination. For the main political reason of the reason why EU would intervene is that EU felt that US has no legal justifications in implementing such measures under the WTO Safeguards Agreement. EU had decided to take action by seeking a dispute panel from WTO and hence if US were not to withdraw its measures, EU would retaliate by imposing tariffs, which equals an amount equivalent to the amount gained to US, on the import of US products to EU.


Trade Dispute over Safeguard Measure on Import of Wheat Gluten


US had imposed a definite safeguard measure on the import of wheat gluten with effect on 1 June 18. It was a quantitative restriction on the import of wheat gluten with exemptions to some countries like Canada.


With regards to this issue, EU had claimed that US had acted inconsistently with Articles I and XIX of the General Agreement on Tariffs and Trade 14 (the GATT 14), and with Articles .1, 4, 5, 8, and 1 of the Agreement on Safeguard. Thus, EU had requested a dispute settlement panel and charged US for violating the WTO’s safeguards agreement and demanded US to withdraw this measure immediately.


EU had also claimed that it had the right to rebalance the safeguard measure imposed by US ( years after US imposition) under the safeguards agreement. The reason was that US was supposed to give an equivalent concession to EU for imposing this safeguards measure, which was at a disadvantage to EU. If its demand were to be declined by US, EU would retaliate by imposing a trade quote on the import of corn gluten from US.


The Appellate Body had felt that US did act inconsistently with its obligations in the safeguards agreement. The main reason was that US had declined to evaluate the overall relationship between the protein content of wheat and the price of wheat gluten. At the same time, US had refused to disclose its investigation to the Appellate Body. It was a strong supporting factor for US if it wanted to implement this measure successfully without obstructions from members of WTO. Thus, the dispute panel had ruled US to be contrary to its obligations under the safeguards agreement and appealed US to bring its safeguards action into conformity with the safeguards agreement.


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In its request for the establishment of a panel (Source WT/DS166/, 4 June 1, http//www.wto.org), the European Communities also claimed that the United States had acted inconsistently with Article 4. of the Agreement on Agriculture. The Panel found that the European Communities had abandoned this claim Ibid. para. 8.1.


US appealed to this ruling and did not withdraw its measures. EU had claimed that it would retaliate by withdrawing equivalent concessions from the US in respect of imports of corn gluten. However, a WTO dispute panel has again ruled against US using the Safeguards Agreement to impose trade tariffs.





With regards to this wheat gluten dispute, the main economic reason of why EU reacted strongly on US safeguard on import of wheat gluten is that EU is the primary user of wheat gluten and it has also used export subsidies to ban the use by third parties.


For political reasons, EU asks for compensation over its loss in trade from US over its safeguards measure on import of wheat gluten as it has felt that it is not right and legal for US to implement such measures.





As for the economic reasons that justify US government are that US farmers may be relying too heavily on international market for their sale of wheat gluten. Thus, with the increasing competition from other countries, like Argentina and Brazil, with lower cost of production and environment standards than theirs, they might feel threatened that they might lose their market share in the international market as other competitors are selling their goods at a much lower price than theirs.


Well developed countries like US have a higher standard of living where people are asking a lot of things from the agriculture productions. Thus, well interpreted, stable laws and standards (environment and labour laws) are established where US farmers have to comply, as expected by the society, in order to ensure good quality of agriculture or manufactured goods to be produced. Thus, US farmers have to bear more and higher cost in water, worker safety, welfare, tax and environmental factor.


However, for less developed countries, they could not afford to implement such standards in their countries. The main reason is that the cost of implementing and maintaining these standards would be too expensive for them to bear. Cost of production will be higher in US as they have to pay an extra of eight percent of tax on wheat produced, higher labour cost and US farmers do invest their capital in technology in order to find ways to be more efficient in their industry.


This situation has further worsen by climate changes in US, anti-dumping, other countries lack of enforcement in existing agreements, trade distorting subsidies and abusing of intellectual property rights laws where other countries might copy their innovative ways of growing the crops. It will leave US farmers at a disadvantage because all these reasons will force US farmers to lower their wheat gluten price and hence reducing their income and quality of the wheat gluten. In extreme case, US farmers may lose their jobs to the competitors. To the US government, they feel that their US farmers are very efficient and innovative in their farming techniques. They also consider themselves as one of the world’s best agriculture country, thus they might feel that it is worthwhile to protect the wheat gluten industry.


With all these economic reasons at a disadvantage to US farmers, they have appealed to the US government for help. For political reasons, US government may face political pressure from the interest group, which is the US farmers in this case, to help in protecting jobs and the wheat gluten industry. Also, as US is quite a liberalised country, US farmers may protest or even go on strike if their request to the government is not fulfilled. This might disrupt the country’s peace and order. It might also cause injury or even death to the protestants during a strike too. It will also bring fear to its people. I feel the political reason that US government would support in this safeguards measure over the import of wheat gluten is that they might want to continue to win the support of this interest group who have voted them in the past elections. US government might want to repay them for voting by doing things that favours the US farmers.


Conclusion


We have discussed two cases of trade disputes between US and EU in this assignment. The steel dispute is still a on-going case while EU has won the wheat gluten case over US.


The main political reasons that have been mentioned earlier, of government intervention are retaliation, pressure from various interest groups, national security, maintaining of country’s peace and order and sovereignty over the industry. The economic reasons are concerned with government trying to protect jobs and real income of its people, probable loss of market share, increased market competition, standards obligation and factors of production.


When the government decides to raise the trade barrier of a certain industry, they should understand that it would prevent inter-country trade. This results in the isolation of the market for this particular industry which is less competitive and with a large price differential as compared with the foreign and domestic markets.


I feel that US government would consider imposing tariffs on steel, rather than other policy instruments because US government may have savings in foreign currency exchange rate where there will be lesser hedging cost due to lesser foreign import of steel. There will also be an increase in revenue that is to be received from the increased steel tariffs for the government and it is inexpensive to collect tariffs too. The effects of imposing steel tariffs are that there will be lesser competition in US steel market and it will cause a decrease in demand for foreign steel, causing domestic steel prices to rise too. This will increase the number of more domestic steel producers, causing domestic supply of steel to rise. There will be an income redistribution where consumer will spend their money on domestic steel and government will receive revenue by tax collected from domestic steel producers. This is also the similar case for US government to impose quotas on the import of wheat gluten.


Despite that the US government and the domestic producers of steel and wheat gluten will gain from these policy instruments of tariffs and quotas, there will be net welfare loss. The main sufferer will be the US residents as they have to pay more for the products than they are supposed due to the lack of foreign competition in the market. In addition, it is not easy for the residents to understand and identify the exact reasons for the use of quotas on imported wheat gluten.


In evaluating the effectiveness of US government intervention in international trade, I feel that the safeguards measures implemented on its steel and wheat gluten industry may be effective on the short run where the jobs of US steel producers and wheat gluten producers could be saved temporarily due to these measures. However, on the long run, they may lose out to their competitors eventually. The reasons are that they are over-protected by US government which may hinder them (rather than to say that the government is helping them) to be more productive, cost effective and efficient in producing their products. All these measures neither increase US producers’ competitive advantage nor uphold US pledge to promote international trade and free market. Another side effect of US government intervention is that US consumers will suffer. Without foreign competition, US consumers will have to pay more for the product than they are supposed to pay.


With regards to the welfare of US consumers, I would recommend US government to use policy instrument like subsidies instead on these two cases as it can protect the market share of domestic production and it has a more restricted negative effect on the consumers.


The lessons that can be learnt with respect to the effectiveness of US government intervention in international trade are that there may be more trade conflicts to be occurred between US and EU which may not be beneficial for both parties. In the worst scenario, these trade conflicts may induce trade war or even political war between them. Given US power and influence in WTO and other countries, US and its producers may feel that it is a win-lose situation (where US wins as it can saves jobs and its domestic industries while EU loses as it has its international trade and profit reduced) for both trade disputes if it were able to implement these measures successfully. However, I feel that it is not the case of what US may think of. I think that it is a lose -lose situation for both trade disputes that have been mentioned earlier regardless of the outcomes. The reason is that with WTO as the regulator and all those rounds of consultations, debating and finding evidence against each other between both parties, it is only a waste of time, resources and effect in evaluating whether it is right and legal for US to implement all these measures. US will lose out eventually in its domestic industry in the long run even it really able to implement those measures while EU may not be getting anything in return if it loses in the debate or US insists in implementing those measures. It will only worsen the trade relationship between them and might hinder any future potential opportunities in trade cooperation between them.


I personally do not agree with US intervention and its measures in the two cases as it defeats the purpose of US in joining WTO of promoting free trade and lowering trade tariffs and its claim of being one of the world most free and open markets. I feel that US should think of other ways in improving its domestic industry to be more competitive, using other policy instruments, stimulate growth in other potential industries or invest in industries in countries where the cost of production is low.








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