Thought leadership from our experts

Open trade v trade protection - confusing the container ships

Australia has finalised four very important free trade agreements recently, with more on the way. At the same time, an uptick in domestic protectionism is clearly evident. The forefront of this protection has been the installation of a newly toughened anti-dumping regime.

Protective laws that reflect domestic politics

Australian manufacturing industry – indeed, domestic industries in general – had a torrid time from March 2011 to April 2013 when the Australian dollar reached all-time high levels against the US dollar and other currencies. Imports became more affordable, and Australian export prices less so. Fast forward to now, and we find that the import-restrictive policies that were designed to cure the lack of competitiveness of Australian industry are in full operation - despite the Australian dollar now having retreated 30% from its previous highs.

The anti-dumping barometer

In 2010, the Australian investigating authority published two new dumping measures as a result of first-time investigations (on a product-to-country basis). In 2011 there were five, and then 11 in each of 2012 and 2013. There have been 10 so far this year, with decisions in another six upcoming before the end of the year. Even more starkly, there have been 89 new investigations (first time investigations, margin reviews, product exemptions, sunset reviews and "anti-circumvention" reviews) initiated since mid-2013.

Lower "material injury" thresholds

A key element in making anti-dumping procedures more attractive has been the institutionalisation of a lower impression of what constitutes "material injury". The government has formally indicated to the investigating authority that material injury can arise where an industry has been rapidly expanding its market, but that has been slowed by dumping, and also where profits are not declining but there has been a loss in market share. Similarly, the government maintains that there is no minimum standard for determining whether dumped imports have a sufficient market share to cause "material injury".

Zeroing

The investigating authority has also dabbled, for the first time, in "zeroing". This practice has been uniformly overruled by Panel and Appellate Body reports of the WTO. Nonetheless, the Australian investigating authority has now expressed its view that the practice can be adopted, at least in the context of what is known as "targeted dumping", but not necessarily more generally.

Anti-circumvention

In mid-2013 laws were passed to deal with the perceived circumvention of dumping measures. Such laws are also maintained by the US and the EU but were new to Australia. These laws are always controversial, for the fact that they have no clear source in the WTO Anti-Dumping Agreement. Adding to the controversy in Australia is that one thing the laws attack is the normal business practice - engaged in within Australia after the border has been crossed - of reducing profit to compete.

Trade defence across a wider front

Another phenomenon in Australian trade protection is the variety of mechanisms that are being used in concert by domestic industries to thwart the entry of foreign-made products. These other mechanisms– standards, product safety and recalls, rules of origin, labelling, corporate defamation - are not new, but their coordination and the strength with which they are being pursued definitely is.

FTAs point in a trade liberalising way

At the same time as Australia has enforced tougher trade protection, it has engaged in a steady roll out of FTAs, and it seems that there is to be no respite for the negotiators. Malaysian, Korean and Japanese trade deals have all been inked in the past two years, and the China FTA now awaits its final touches and ratification. Seven other negotiations are underway, including one with India, and the proposed Trans-Pacific Partnership Agreement.

Strong impacts

The experience of our clients tells us that the commercial impacts of these deals should not be underestimated. The Thailand-Australia FTA, for example, has had a significant impact on multinational electronics and whitegoods manufacturers, some of whom have production facilities in Thailand, and some who don't. A 5% difference in duty at the border is multiplied into a much more significant price disadvantage at the consumer level. The fortunes of the Australian car industry, which now faces closure for a number of reasons, were not helped by duty free entry for cars from Thailand under TAFTA.

FTAs usually leave anti-dumping well alone, and even when they don't it would seem that domestic policy is still trumps. For example, under FTAs with Malaysia and Korea, Australia has promised that it does not employ zeroing, thereby contradicting what is happening at the domestic level.

Where are these trends heading?

A common criticism of FTAs is that they are better seen as managed trade agreements, rather than truly free trade agreements, with phase-ins, exclusions, opt-outs and other mechanisms designed to continue to protect key political interests of the parties. That is a criticism that could be made of any trade agreement at any level.

A different perspective is that the overriding zero tariff direction of FTAs is a positive thing for supporters of open trade, and is to be encouraged even if the results are not perfect.

Ultimately, FTAs are only part of the trade-liberalisation journey. The true drivers of freer trade will be the maturing of global production and supply chains, investment freedoms, international tax and transfer pricing rules, living standards, and competition policy. Those maturities are still some way off.