NZ Herald, 1 June 1999

We would be deluding ourselves if we think President Clinton's decision on the fate of New Zealand and Australian lamb exports to the United States will not be made according to political considerations.

The decision will have more to do with whether domestic protectionist pressures prevail over international credibility than whether free trade should be forsaken for so-called "fairness" to American lamb producers.

The fact that the Americans will ultimately be able to dress up the decision as one based on fairness to domestic producers and within the letter (if not the spirit) of the World Trade Organisation Final Agreements serves to highlight some of the "back doors" to protectionism which are still open under the WTO final act.

The back doors are the agreements on anti-dumping and safeguards (which supercede similar provisions in all previous Gatt agreements). Whether President Clinton's decision ultimately fits within one of those protectionist loopholes will possibly be a matter to be determined by the WTO later this year or next, depending on whether New Zealand or Australia takes the matter to the organisation.

The fact that any such determination will not be straightforward is testament to the generality of the safeguards agreement. Anti-dumping and safeguard measures are fondly referred to in the United States as "trade remedies." They are, the protagonists argue, necessary to protect American domestic producers against "unfair" trade.

"Unfair" in this context means unfair to domestic producers. The interests of other groups, most notably consumers, are irrelevant. Even further from consideration are the interests of foreign producers and the international interests associated with free trade and efficient allocation of resources.

In broad terms, anti-dumping measures can be applied against imported products if they are introduced at a lower value than their "normal" selling price in the country of origin. The justification is that there is something inherently unfair about some products being sold more cheaply overseas than domestically.

The reasons for the price differential (often just a response to different market considerations) are irrelevant. The best example of a New Zealand export industry which has fallen victim to the arbitrary application of such measures is kiwifruit, which has for many years been subject to an anti-dumping order and anti-dumping levies in the United States.

Safeguard measures go a step further. To apply them, it is not necessary even to show any price undercutting. All that need be shown is that a certain product is being imported in such increased quantities and under such conditions as to cause or threaten to cause serious injury to the domestic industry.

The generality and subjective nature of the test and the risk of it being applied arbitrarily are matters of concern. On the positive side, the application of safeguard measures is subject to constraints that do not apply to anti-dumping measures, notably a vague requirement for the public interest to be considered and, more importantly, a requirement that the measures are applied only "to the extent necessary to prevent or remedy serious injury and to facilitate adjustment."

The intention is that safeguard measures are temporary, to enable a domestic industry to adjust to an unforeseen and increased volume of imports. The justification for them is that the domestic industry may be a formative or fledgling industry which needs temporary protection from increased imports to better establish itself.

If the safeguard measures applied are quantitative (quotas) rather than tariffs, they cannot restrict imports below the average level of the past three years for which statistics are available, unless it can be shown that a different level is necessary to prevent or remedy serious injury.

The United States International Trade Commission has recommended imposing a 20 per cent tariff on imports above 1998 levels, reducing to 10 per cent over four years. Indications are that the measures ultimately imposed by President Clinton will not exceed this recommendation.

On that basis, the New Zealand Government appears to be backing off its earlier threat to take the matter to the WTO. It is likely that any measures applied by the Americans will be challengeable through the WTO on the basis that the imports are not causing or threatening to cause serious injury to the American lamb producers.

New Zealand and Australian lamb producers contend that their involvement in the American market is more likely to benefit American producers than cause injury.

This contention is based on the perceived growth potential of the lamb market there from a low base (per head lamb consumption is very low by comparison with other western countries) and the marketing initiatives being undertaken by New Zealand and Australian exporters to build the market.

To back this up, New Zealand and Australian lamb exporters have offered to make significant contributions to a joint marketing budget aimed at increasing the American lamb market, which in relative terms far exceeds their respective market shares.

The "serious injury" threshold in the WTO Safeguard Agreement is relatively high and requires a "significant overall impairment in the position of a domestic industry." There must be doubt that there is a "serious injury" threat for the American lamb producers as evidenced by the fact that a group of sheep farmers representing up to 50 per cent of the domestic market came out in support of the antipodean exporters.

Those producers welcomed our offer of jointly funded promotion for lamb and noted that tariffs would benefit only the United States Treasury and not provide the help the industry needs.

Depending on the ultimate nature of any measures imposed, they will also be challengeable to the extent they exceed what is required to prevent or remedy the alleged serious injury and to facilitate adjustment by the American domestic producers.

The jury remains out on the genuineness of the American commitment to free trade and whether it extends beyond a commitment to promote the interests of its exporters.