June 15th 2002

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Articles from this issue:

COVER STORY: The future of Telstra

Has the PM been misled on stem cell research?

Nationals' survival depends on new agenda

EUTHANASIA: Nancy Crick - what is the real story?

TRADE: Philippines bananas could cost Australian Government millions

STRAWS IN THE WIND: Insider dopesters / Democracy at work / The new lonely crowd

MEDIA: ABC's left-liberal Twilight Zone

Handling the boat people issue (letter)

Small business and superannuation (letter)

Drug summit in Port Macquarie(letter)

Going to war over trade

LAW: ICC report tabled in Parliament

DRUGS: WA to go ahead with cannabis toleration

DOCUMENTATION: Archbishop George Pell rebuts '60 Minutes' allegations

CLONING: truth and the middle ground

OPINION: Can the GST be wound back?

EAST TIMOR: After the celebrations, reality dawns

ASIA: China convulses but won't collapse

BOOKS: 'American Muslims: The New Generation'

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Going to war over trade

by Colin Teese

News Weekly, June 15, 2002
Last week the country's main newspapers were chanting "trade war". Even that champion of orthodoxy and responsibility, the Financial Review, joined in the chorus. The target of their concern was the threat of retaliation by the European Union against the United States' protective measures against imported steel.

Many years ago Herman Goering, then at the height of his power and influence in Nazi Germany, is said to have proclaimed: "Every time I hear the word 'culture' I reach for my revolver."

I feel the same about public announcements predicting the likelihood of trade wars - especially.

The possibility of a trade war developing between the US and the EU at any time should be ranked with the possibility military conflict between the same two powers. Still less is the possibility of a trade war breaking out over the matter of US increases in the steel tariff and its effect on EU exports.

There are, in short, many more serious problems for the US and EU to fight about and if these don't draw them to the threshold of conflict (and nothing has since the EEC was created in 1956), then nothing will.

In any event, the Europeans know, even if they won't admit it, that in a trade, or any other kind of war, they could not avoid coming off second-best.

In the end, as does everything, it comes down to power.

The EU boasts about its power as a trading group, but this is largely bluster. They outrank the US only if one allows that trade between the EU member countries may be counted as international.

Technically, that may be correct, but such counting is no more valid (or valuable) in measuring relative economic strength, than if the US were to count trade between its fifty States as international.

Let's concentrate on the facts. The EU now encompasses some 380 million people (as compared with 280 million in the US); and on the EU's own assertions, its economy is about two-thirds the size of the US. Nothing more need be said about the power equation unless one believes that numbers outweigh economics.

Accepting this, where exactly does the steel dispute, as an issue, sit within the framework of overall relations between the two powers.

The US economy is worth about US$9 trillion. Losses to the EU arising from the new steel tariffs are said by the EU to be about US$300million. I leave readers to make their own percentage calculations, but the amount is trifling in the context of US (and EU) economic strength; and certainly not enough to justify any thought of trade war.

Of course the steel tariff is an irritant to relations, and any belligerent EU reaction obviously infuriates the US, but can anyone seriously suggest that either party would allow a minor trade issue to disturb wider economic and political relations that are vital to the long term welfare of each of them? And this is especially so since the World Trade Organisation has not yet found against the US on steel.

Let us then put aside any talk of "trade wars" - at least over steel - and concentrate on what is important.

[There is, in any event, another trade issue pending between the US and the EU which is much more important. That is the matter of tax concessions to US exporting companies. That issue is really important, because the WTO has already ruled against the US. Some billions of dollar are involved and it will be more difficult for the parties to negotiate a settlement. They are engaged in just such endeavours at this moment.]

Nevertheless, the dispute between the US and the EU over steel is not without importance.

Consider where the dispute now stands. EU foreign ministers representing all of the Member States meet shortly to consider the issue. They seem already to have decided the matter. They have targeted a basket of US imports amounting to about US$300 million; most of them produced in areas politically sensitive to President Bush.

The EU Trade Commissioner believes his member states have a right to impose these sanctions even though the WTO has not ruled on the matter.

Technically he is right, but we can also be certain that retaliation is not Commissioner Lamy's preferred option. He would rather that the US back off on steel, though he knows that is inconceivable. But Lamy has a political constituency to satisfy, and a problem. He has actually said so publicly.

If the EU does not retaliate against the US for breaking WTO rules, Lamy's position with the EU Member States is weakened. Next time he wants to argue against some protective measure being pressed upon him by the Member States, he will be reminded of the time he allowed the US to break them. And if the US can break WTO rules why should the EU be bound by them?

That is his dilemma.

But it also points to serious flaws in the rule structure of the WTO. In the former General Agreement on Tariffs and Trade - which has been incorporated into the WTO - the rules on dispute settlement have been cloaked in new and excessively legalistic commitments. This rigidity is at the root of the EU's dilemma.

In the old GATT the rules were more permissive, and, therefore, more flexible. The new rules have been drafted by those committed to the "free trade" ideology which believes that binding rules are the key to promoting the idea and reality of free trade.

There is another issue which is especially important for Australia. The EU can engage in this "holier than thou" attitude, knowing that whatever the size disparity between itself and the US, if it comes to the crunch, it can retaliate in kind against the US.

The matter won't be resolved in the WTO, but by the two parties to the dispute in private negotiation - because neither will want the matter resolved by a WTO panel which they may not be able to control. Some agreement will be reached which somehow can be represented as not harming other parties. But you may be certain it will result in the EU regaining most of its steel market in the US. That is the luxury of the powerful.

Under WTO rules, nothing like the same opportunities are afforded to Australia, or other small powers, when dealing with the more powerful. Any threats we make to retaliate against the US for rule breaches will not be taken seriously, because the harm we could do them is miniscule.

And as has already been shown in the dispute we had with the US over our leather exports, favourable outcomes are always possible for the powerful, by threatening retaliatory action against really important areas of our trade, e.g., beef. And such outcomes are not necessarily concluded in conformity with WTO rules.

Now of course it was true that under the old GATT, the powerful gained greater gain from the arrangement than the less strong. Nevertheless, the more flexible and less precise rules gave the weaker more room to negotiate. In Australia's case that advantage was especially helpful since we had not committed to fully opening up our domestic market to import competition.

The more we gain the benefit of hindsight, the more making that commitment seems to have been a bad idea.

  • Colin Teese

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