Dirty Laundry in Global Competition

U.S. consumers love choices. According to CNET, there may be as many as 150 different models of washing machine you could buy in the U.S. market. Some are front-loading versus top-loading. They hold different sized loads and use different amounts of water. Some take longer per load than others. Some have auto soap dispensers and some are even “smart” enough to let you tell Amazon’s Alexa to “start the wash”. It’s competitive, but what happens when some competitors want relief from competition from fairly traded products in their segment? They can turn to a little-used trade remedy called a “safeguard”.

Safeguards are designed to help domestic producers adjust to competition, but there at least four reasons they don’t help the American consumer. We are about see how the current administration will approach this crossroads. Two high profile Section 201 investigations are active now: earlier this year, Whirlpool filed a petition on large residential washing machines, and Suniva, Inc. filed a petition on solar panels. By early 2018, the administration will make some decisions on a course of action in each case.

Political Response to Private Agitation

For 70 years, the U.S. and other economies have made major reductions in barriers to trade. Liberalized trade has been an engine for global economic growth and a boon to consumers, in part because open markets intensify competition. But increased competition can lead to political backlash.

The U.S. Congress created the safeguard in Section 201 of the Trade Act of 1974, in order to mitigate the economic disruption associated with greater foreign competition. Section 201 authorizes the President to implement temporary import barriers — for example, raising the tariff on imported goods — on products that are threatened or injured by increased imports. The idea is to offer some relief by making it harder for imported goods to compete, while the domestic industry or aggrieved firm makes a “positive adjustment” to better cope with competition.

Front Loading Protection

Safeguards are permitted under WTO rules, but they are in tension with its core disciplines, which seek to maintain agreed-upon levels of market openness. As Christopher Hitchens once said of hypocrisy, safeguards are “the compliment vice pays to virtue.” Safeguards are a political remedy not justified by economic principles and the broader consumer benefits of market openness.

If fact, no Section 201 investigations have been pursued since 2003. From 1975 through 2002, the US International Trade Commission handled 73 investigations (roughly 3 per year), and recommended action in 34 of those cases. Why did Section 201 safeguards fall out of favor? Since 1994, six U.S. safeguards were challenged in the WTO’s dispute settlement body, and all six were ruled inconsistent with our GATT 1994 obligations. Bottom line, current U.S. law appears in need of reform before safeguard remedies can withstand challenges from trading partners.

Coming Clean – Four Ways Consumers Could Lose

1) Mixed Load: Firms protected by safeguards may benefit, but many other domestic interests can suffer harm under that safeguard. Take solar panels. Low-cost (fairly-traded) imported panels expanded the market and created the need for many more installers. The industry now employs 260,000 Americans, 85 percent of whom are not in manufacturing. If safeguard tariffs make panels more expensive, there will be less demand for installation and fewer installers.

2) Spin: The imports in safeguard cases are fairly traded. If a similar “injury” was a result of domestic competition, no government remedy would be available at all. Korean washing machine producers Samsung and LG have been investing in U.S.-based production. With regard to the current Section 201 case, LG issued a public statement saying that,“Soon, competition in the washer market will not be about domestic vs. foreign production. It will be about competition among washers made in the United States, in Ohio, Kentucky, Tennessee and South Carolina.”

3) Delicates: There is scant evidence that domestic firms that receive safeguard protection make sufficient changes to alter their competitive position. In the three most recent completed actions—on lamb meat, wheat gluten, and steel line pipe—all three industries continued to decline in the years after the safeguard was terminated. Meanwhile, safeguard actions can strain international relations. The 1999 action on lamb alienated two key U.S. allies, Australia and New Zealand, after their producers invested massive amounts of time, energy, and capital into developing the U.S. consumer market for lamb.

4) Soak: Reliance on the safeguard mechanism can open the door to pure protectionism. Considering the two investigations in progress, if the President acts on the petitioners’ behalf, how long will it be before other firms who are facing tough but fair competition will ask for similar remedies? Then, how likely is it that other economies will refrain from using similar measures? No one knows for sure, but it could end badly for consumers, other firms in the supply chain, and the trading system itself.