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'Amicable Solutions' in Trade Defence. What are the Political Economic Determinants of Accepting Price Undertakings in the EU?

The Incomplete Delegation of Trade Defence and Foreign Induced Institutional Conflicts

Master's Thesis 2015 49 Pages

Economics - Foreign Trade Theory, Trade Policy

Excerpt

Table of Contents

1. Introduction: Friend or Foe?

2. Related Literature on the Determinants of Price Undertakings
2.1. Economic Approaches
2.2. Political Economic Approaches

3. The Argument in Brief

4. The Incomplete Delegation of EU Trade Defence and Three Veto-Players
4.1. The Optimal Delegation of Trade Defence
4.2. Veto-Players at Different Stages of the Trade Defence Procedure
4.2.1. Initiation
4.2.2. Investigation
4.2.3. Provisional Measures
4.2.4. Undertakings
4.2.5. Definitive Measures

5. EU Trade Defence in the Case of Solar Panels from China
5.1. Foreign Pressures on the Community Industry
5.2. Foreign Pressures on the Commission
5.3. Foreign Pressures on the Member States

6. Conclusion: The Need for Further Reform

7. Bibliography

8. Appendix

1. Introduction: Friend or Foe?

When it comes to concluding a trade defence proceeding in the European Union (EU), the anti-dumping1 (AD) and anti-subsidy2 (AS) regulations allow for three alternative outcomes: firstly, a termination without measures, secondly, the imposition of a protective duty or, thirdly, the acceptance of a price undertaking. Price undertakings are voluntary offers by foreign exporters to revise their prices so that the Commission is satisfied that the subsidization or dumping margin and their injurious effects are removed3.

While duties punish exporters because they impose the burden of an additional tax, price undertakings can be seen as a more amicable solution because they allow exporters to internalize the price increase. Hence, price undertakings are more favourable for foreign exporters, which - ceteris paribus - benefit from higher profits. At the same time they lead to inferior overall welfare effects for the EU's domestic economy compared with duties. Thus, some welfare economists have concluded that 'a rational policy maker will always prefer duties' (Pauwels and Springael, 2002, 135). Nevertheless, some political economic scholars have highlighted that there is indeed a rationale: the EU uses 'harder' and 'softer' trade defence instruments (TDI) against foreign producers in a sticks and carrots approach to promote its norms and values. Hence, their acceptance can be explained as a diplomatic tool in the EU's neighbourhood policy, particularly to promote post-communist transition to market economies (Steinbach, 2014). This account is powerfully confirmed by a sharp decline in the frequency with which price undertakings were used after the EU's Eastern enlargement in 2004 (Appendix 1).

Yet, a paradox persists. A closer look at the pattern of countries whose price undertakings have been accepted in the last decade reveals the limitations of the neighbourhood policy argument: Out of fourteen price undertakings accepted between 2006 and 2015, only four accounted for countries in the EU's immediate neighbourhood. In contrast, ten fell outside of Europe, with the BRIC countries accounting for nine, and China alone for five (Appendix 2). The obvious common characteristic of the latter countries' is not that they are in the EU's neighbourhood. They all rank in the top ten of the EU's 2014 main merchandise trading partners (European Commission, 2014). This makes them influential counterparts of EU trade policy.

In response to this paradox, the paper reviews the following question: What are the political economic determinants of accepting price undertakings in the EU? I find the acceptance of price undertakings arises from an institutional conflict that can be foreign induced. In contrast to judicialized systems, an incomplete delegation of trade defence in the EU has led to a politicization of the trade defence proceeding. This is characterized through the empowerment of three veto-players: Community industry, Commission, and Council. Powerful foreign parties actively capitalize on the engagement of political actors and - in an effort to achieve a less harmful outcome than duties - influence the three veto-players. Eventually, price undertakings are accepted by the Commission, if only the Council signals to exert its veto- rights.

The following section sets the academic scene by reviewing related literary accounts of economic and political economic research and critically points at gaps in the literature. Section 3 then explains my argument in short. Section 4 finds that the nature of trade defence has led to an incomplete delegation in the EU's institutional setting. It reviews the current trade defence procedure in detail and emphasizes the existence of three veto-players at different stages. In the empirical section 5, I show how the three veto-players were pointedly targeted and pressurized by foreign actors in the case of solar panels from China4, which resulted in a price undertaking. The conclusion highlights the need for reform and sketches out possible steps.

2. Related Literature on the Determinants of Price Undertakings

The number of academic accounts pointedly dealing with the determinants of price undertakings are sparse. However, some valuable insights can be drawn from related economic and political economic literature. Economic accounts of TDI primarily provide insights into the distinct functions of duties and price undertakings, but they also shed light on different actors' preferences in the policy-making process. Political economic accounts provide more pointed explanations for the acceptance of price undertakings on grounds of interest representation, ideological and diplomatic considerations.

2.1. Economic Approaches

Economists explain the selection of various TDI through the macro- and microeconomic effects they exert. Hence, they can be used as functional devices to achieve a set of economic policy objectives. Duties and price undertakings have divergent effects on income distribution, competition and business strategy.

A first set of economists deals with the direct income effects that different TDIs exert. These are based on the Harberger (1964a, 1964b) triangle method of analysing deadweight losses and quantifying efficiency losses of price distortions caused by different forms of government intervention. Krugman et al. (2009) and Suranovic (2010) highlight that TDIs aim at reversing the domestic welfare effects of strategic price setting or subsidization of exporters in the importing country: they increase domestic producer surplus, but decrease domestic consumer surplus and overall welfare. However, Pauwels and Springael (2002) show that in contrast to price undertakings, AD-duties have superior total welfare effects in Europe, regardless of the simultaneousness or sequence of output decisions and whether firms compete in a Cournot or Bertrand fashion. Several scholars also highlight that AD-duties are more favourable for the EU's overall welfare, because the community receives the revenue of the import tax, while under a price undertaking the price increase can be internalized by the foreign firm (Konings et al., 1998; Everaert, 2003; Steinbach, 2014)(Appendix 3).

A second group of economists analyzes the impact of instrument selection on industry structure, which impacts income allocation beyond the conventional Harberger triangle analysis. Vermulst (1987), Messerlin (1989) and Prusa (1992) see price undertakings as a collusive device. Prusa (1992) finds that settlement agreements entail larger distortions than imposed duties, because petitions can be used to force foreign producers into a collusive agreement. In contrast, Vandenbussche and Veugelers (1999) find that TDIs may also result in pro-competitive behaviour, depending on the type of measure installed, the extent of cost- asymmetry and product differentiation.

A third group of authors highlights the effects on business strategy. Vandenbussche and Wauthy (2001) show that - with a price undertaking in place - foreign producers are less incentivized to compete on price, which leads to a reversal of the quality ranking and is detrimental to European domestic producers. Furthermore, Belderbos et al. (2004) find that foreign firms use FDI in the EU to ‘jump’ antidumping-duties. Thus, the mere expectation of price undertakings can discourage FDI flows into the EU. Furthermore, Everaert (2003) highlights that under a regime of price undertakings, the adoption of new technologies is delayed.

In sum, there is economic consensus on the assumption that price undertakings affect the imposing nation's total domestic welfare more negatively than duties. Yet, economic literature is inconclusive about the advantageousness of price undertakings among domestic groups. In contrast, a much clearer picture can be distilled out for foreign producers: Price undertakings are always preferable to antidumping duties. This leads to two conclusions. On the one hand, approaches based on pure economic rationality are of little use when it comes to identifying the domestic government's motives for accepting price undertakings. Put in the words of Pauwels and Springael's (2002, 135): 'Because of their detrimental effect on European welfare, it can be expected that a rational policy maker will always prefer duties. Given this conclusion, one may wonder why the EU Commission does accept price-undertakings'. On the other hand, the unambiguous benefits of price undertakings for foreign producers leads away from an exclusive focus on domestic actors. An approach that investigates into foreign actors' influence on the European political economy needs to be taken.

2.2. Political Economic Approaches

The political side of EU trade policy 'remains underdeveloped, both theoretically and empirically' (Poletti and De Bièvre, 2014, 102). However, some political economic approaches provide insights concerning the selection of TDIs. Nevertheless, they suffer from the lack of an integrative overarching account.

Some authors have investigated whether EU trade outcomes are the result of institutional rules or political discretion. Majone (1994) argues that Europe has developed features of a regulatory state, in which elected authorities delegate economic policy decisions to regulators which follow legally binding rules and are subject to oversight. However, with regards to trade defence, Tharakan and Waelbroek (1994) find in an econometric analysis that political variables are more important to the injury determination of the EC than in the US. Holmes and Kempton (1996) also highlight that EU anti-dumping decisions are less judicialized than decisions in the United States. Eymann and Schuknecht (1996, 187) confirm that the institutional setting 'provides protection through administrative discretion and political influence on administrators'. Hence, although the EU is sometimes portrayed as a regulatory state, EU trade defence cannot be seen as a regulatory policy area that is primarily guided by set of legal rules. This opens the door widely for political considerations and interest representation.

A pointed approach to the acceptance of price undertakings deals with the role that price undertakings play in the EU's neighbourhood policy. The rationale is that the EU uses 'harder' and 'softer' TDIs against foreign producers to promote its norms and values. Steinbach (2014) argues that price undertakings serve as a diplomatic tool in the EU's neighbourhood policy to promote post-communist transition to market economy. However, Montado (2006, 1) finds that 'the European Union is less likely to accept the 'softer' remedy of price undertakings in cases involving non-market economies' (NMEs). This can be explained by her finding that monitoring difficulties are a reason for rejecting price undertakings, which arise in the context of low market transparency. Monitoring issues accrue particularly in the context of non- market economies, such as China (Steinbach, 2014, 176). These two arguments need to be reconciled: The EU uses price undertakings as carrots for prospective members and neighbours, and duties as sticks for other countries deviating from the principle of 'fair competition'. However, the weakness of this diplomatic sticks and carrots approach is that it largely fails at explaining the actual country pattern of accepted price undertakings since 2006.

In fact, China tops the ranking of countries with producers whose price undertakings were accepted by the EU between 2006 and 2015 (Appendix 2).

Theories of interest representation highlight that in a politicized system the government's objective function is influenced by domestic aggregate interests. Olson (1965) develops a logic of collective action, in which he highlights the benefit of group concentration. Narrow interest groups are at an advantage in overcoming transaction costs arising from collective action and free-rider problems. They are thus overrepresented. De Bièvre and Eckhardt (2011) argue further that in trade policy the certainty of producers' losses positively impacts mobilization capacity. Furthermore, following Grossman and Helpman (1994), certain producer groups face stronger economic incentives, are more affluent and benefit from informal ties with decision-makers. However, for other authors, lobbying does not necessarily skew a government's objective function towards the most vocal interest group. Lohmann (2003) sees special interest promotion as a means of overcoming voter information asymmetries, which results in better governance and a reduction of the efficiency loss inherent in redistributive decisions. Trumbull (2012) further argues that the need to make policy appear legitimate inverts the logic of collective action in certain cases, because diffuse interests are viewed with less suspicion and benefit from a credibility bonus.

Which view is applicable to trade defence? The fact that price undertakings - a measure characterized by inferior total domestic welfare effects - are accepted in the EU at all makes Lohmann's logic of a more efficient government highly questionable. Furthermore, duties as well as price undertakings reduce consumer surplus, but consumer groups are typically characterized as relatively diffuse. Hence, if price undertakings are accepted, this is unlikely to happen on grounds of gaining credibility as argued by Trumbull. In contrast, according to Woll (2006, 1), 'trade policy is a classic field for the study of private influence on policy- making'. However, it can also be argued that domestic interest groups have little to say about the type of measure and are primarily concerned about whether measures are imposed at all. This depends on the actors' time horizon and rationality. Short-sighted domestic consumer groups may be primarily driven by prices, and would always lobby against any measure imposition to avoid price increases - no matter whether they are caused by price undertakings or duties. Furthermore, they may not be able to predict long-run alterations in competitive behaviour and business strategies through different types of measures. Moreover, the effects of different TDIs on producers are ambiguous, which may not lead to a clear preference. The only group whose preferences for price undertakings are clear are foreign producers. Hence, any paper on this issue taking interest groups into account should reach beyond purely domestic European actors.

3. The Argument in Brief

I argue that price undertakings arise from an institutional conflict that can be foreign induced. Firstly, I find that EU trade defence is politicized because it is de facto characterized by three veto-players: the 'community industry', the Commission and the Council. This 'three veto- player setting' arises out of an incomplete delegation of trade defence: The agent - the Commission - is de jure left with a high degree of political discretion and the principal - the Council - reserves itself the right to block the agent's conclusions. As the agent is reluctant to use its discretionary powers in initiating cases, the 'Community industry' becomes de facto a third veto-player. This prevents a quasi-judicial handling of trade defence issues in the EU.

Secondly, I illustrate that foreign actors pointedly target and pressurize the veto-players at different stages of the decision-making process to achieve a less harmful outcome than duties (i.e. a termination without any measures or price undertakings). However, I find that under certain circumstances these attempts fail at mobilizing a veto-majority amongst the adversely affected 'community industry'. They also fail at influencing the Commission which acts de facto as quasi-judicial authority. Nevertheless, they may be successful at mobilizing unrelated core industries of the member states and thus influence their position in the Council. Eventually, price undertakings emerge as a 'messy compromise'. If community industry and Commission favour measure imposition to remove trade distorting effects, but the Council intends to exercise its veto-power against final duties, the Commission has to resort to price undertakings, which is at its sole discretion.

4. The Incomplete Delegation of EU Trade Defence and Three Veto-Players

The nature of trade defence makes its delegation and institutional design a difficult process. While it is characterized through heterogeneous political interests, upwards delegation becomes necessary to maintain the functionality of defence measures once a free trade area has been created. This two-sidedness has led to an incomplete delegation of trade defence in the EU. Counter the principal-agent logic, the EU's institutional design leaves de jure high political discretion to the Commission in making decisions on provisional measures and price undertakings. Nevertheless, due to the Commission's unassertiveness in self-initiating complaints, the Community industry receives the status of a de facto veto-player. Moreover, the Council's role as gatekeeper for final measures further induces politicization of EU trade defence.

4.1. The Optimal Delegation of Trade Defence

The Treaty of Lisbon classifies 'common commercial policy' as exclusive EU competence, in which the Commission, Parliament and Council are responsible for the legislation and 11 adoption of binding acts. Member states are responsible for their implementation5. Taking a first generation fiscal federalist approach, Alesina et al. (2005, 36) argue that the delegation of commercial policy to a supranational level in the EU is optimal, because the policy area is characterized by high externalities and low preference asymmetries. Nevertheless, this assessment is not valid without qualifications for the policy sub-area of trade defence. Trade defence is characterized by a high degree of heterogeneous preferences arising from ideological and economic conflicts, but also by high negative externalities arising from a lack of collective action.

On the one hand, preference asymmetries partly arise from member states' ideological positions. Several authors identify two blocks of member states in the Council, one that routinely supports TDIs ('Friends of TDI') and another one that tends to oppose the introduction of measures (Evenett and Vermulst, 2005; Nordström, 2011; Freudelsperger, 2014). Hence, it can be concluded that the Council's default condition is marked by a division between trade liberals and protectionists. But beyond the separating political power of economic ideas, the income effects inherent to TDIs also make the policy sub-area more controversial than others. In contrast to negotiations about trade liberalization which may theoretically result in a positive sum game for all actors of a customs union, protectionist trade defence leads to a negative sum game, because of the inherent domestic welfare loss. This does not only inflict conflicts between producer and consumer groups, but also between national governments. For example, if the majority of producers of product A is located in Germany, but the majority of consumers of product A is resident in Italy, an income shift from consumers to producers also means an income shift from Italy to Germany. Policy- makers in both countries face strong different preferences for measure imposition. Eventually, with regards to delegation theories it is commonly held that countries are reluctant to delegate policy functions which lead to ideological conflicts and fundamental conflicts of economic self-interest (Scharpf, 1997, 10).

On the other hand, the non-delegation of trade defence becomes economically harmful once countries form a free trade area, because of the sub-field's high externalities. Economic functionalists (Balassa, 1961) highlight the negative consequences arising from spillover effects at different stages of the integration process. In a free trade area, different external trade measures create arbitrage opportunities for trading companies, which means that all products enter the area through the country with the lowest barriers. Hence, it would be easy to circumvent defensive measures, there would be high incentives not to raise duty levels and the free trade area would be trapped in a race to the bottom. Thus, a lack of collective action inflicts external costs in the form of ineffective national TDIs. These costs would be particularly large for protectionist customs union members.

This leads to a dilemma: While the political side is reluctant to delegate trade defence, the economic side makes delegation necessary. Nevertheless, if the overall gains from the creation of a customs union outweigh the difficulties arising in this sub-area of common commercial policy, states are willing to engage in a trade-off and reluctantly delegate trade defence. At the same time member states ensure that their political discretion is not fully abandoned, which however leads to political conflicts on the supranational level. In the EU this has further hindered an optimal delegation design following the principal-agent logic.

[...]


1 Council Regulation (EC) No 1225/2009 of 30 November 2009.

2 Council Regulation (EC) No 597/2009 of 11 June 2009.

3 See AD regulation 8(1), AS regulation 13(1b).

4 Case AD590 - Solar panels (Crystalline silicon photovoltaic modules and key components). 5

5 This does not apply, if the EU empowers them to legislate and adopt themselves.

Details

Pages
49
Year
2015
ISBN (eBook)
9783668108264
ISBN (Book)
9783668108271
File size
679 KB
Language
English
Catalog Number
v311804
Institution / College
London School of Economics – European Institute
Grade
Distinction
Tags
Political Economy EU International Trade Economic Policy Diplomacy Anti-Dumping Anti-Subsidy Price Undertaking Countervailing Duties Trade Defence Solar

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Title: 'Amicable Solutions' in Trade Defence. What are the Political Economic Determinants of Accepting Price Undertakings in the EU?