Beware the “Unfair Trade” Trap in Any Brexit Deal

Simon Lester

Understandably, the Brexit talks are hung up on big questions such as the UK’s trade relationship with the EU Single Market and what to do about the Irish border. Tariffs, the traditional focus of trade policy, have played only a small role in the debate. UK-EU tariffs are already at zero, so the typical trade negotiating exercise of phasing out tariffs on particular products has not been followed. The apparent assumption that any Brexit deal will maintain zero tariffs is reassuring.

But this assumption may only apply to ordinary tariffs. There is also a special category of “trade remedy” tariffs that apply to so-called “unfair trade”, and the approach of a Brexit deal to these tariffs has been less clear. Brits received a crash course in the use and abuse of “trade remedies” last year, when there was the prospect of the United States imposing tariffs on Bombardier aeroplanes in amounts close to 300% — although, ultimately, the US agency responsible decided not to impose them.

Trade remedies include tariffs imposed in response to import prices that are deemed too low (anti-dumping duties) and to foreign government subsidies (countervailing duties).

With regard to dumping, when people hear this word, they may assume that it means something like the predatory pricing that competition policy usually deals with. In reality, though, dumping calculations do not assess actual predation; they often rely on dubious facts or methodologies; and they are mainly an excuse for protectionism. Any actual unfair pricing practices related to foreign goods can be taken into account by domestic competition policy laws; special anti-dumping laws for foreign goods are not needed.

As for subsidies, they can be a source of market distortions, but a better response is to address them directly in complaints at the WTO, under its Agreement on Subsidies and Countervailing Measures. National countervailing duty laws are subject to the same political pressures that distort anti-dumping measures. If the goal is to police global subsidies and get them removed, rather than just impose a new tariff, the WTO may be the better forum.

Nevertheless, trade remedies are an established part of domestic trade policy. Prior to Brexit, the UK relied on the EU to carry out trade remedies. Now, the UK is setting up a Trade Remedies Organisation of its own to oversee a domestic trade remedies regime.

That takes us to Brexit, where negotiators need to decide what to do with this issue in the context of UK-EU trade. Are tariffs on this trade going to remain at zero for all products, or will an exception be made for trade remedies? This exception would mean that high tariffs could be imposed on UK-EU trade in response to vaguely defined “unfair trade.”

There may be calls from industry groups to make trade remedies available for UK-EU trade. But Brexit negotiators should resist any such demands.

Adding trade remedy tariffs to the UK-EU relationship will have extremely negative consequences. Any industry that is facing competition from imports has an incentive to look for pricing patterns that can lead to a finding of dumping — or to look for government programmes that constitute subsidies — and then file a complaint. Even the mere filing, without a conclusion of dumping/subsidisation and injury, places a burden on foreign companies to hire lawyers and defend themselves.

And the actual tariffs imposed can be so high as to stop trade in particular products almost completely. Average tariffs for developed countries range from 3-5%, depending on how they are measured. As the Bombardier case demonstrated, however, trade remedy tariffs can reach astronomical levels.

Moreover, the UK-EU economic relationship would be permanently soured through recurring claims of cheating. Constant allegations of unfair trade are bad for overall relations.

Many people assume, or hope, that UK-EU trade will be tariff-free after Brexit. However, if trade remedies are available, it will not be. Instead, there will be frequent litigation to decide whether to impose tariffs — sometimes very high ones — on specific products. That will be extremely disruptive for UK-EU trade relations. The UK and EU Brexit negotiators should make it a priority to save UK-EU trade from the scourge that is trade remedies.

Simon Lester is the Associate Director of the Herbert A. Stiefel Center for Trade Policy Studies at the Cato Institute.