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International Trade-Trade Dispute

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International Trade-Trade Dispute

Introduction

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There is no country in the world that can claim to be self sufficient in regard to the availability of raw materials within the country that are required to produce consumer goods leave alone the ability to produce locally all the consumer goods and services that its citizens will need. In view of this fact it is therefore necessary for countries to be trade amongst themselves and this exchange of goods and services between countries is known as international trade (Heakal 2009).

Another reason that propels countries to engage in international trade is due to their comparative advantages and hence the ability to exploit economies of scale. A country is said to enjoy a comparative advantage when it can produce goods more efficiently than its competitors and by supplying many countries it enjoys economies of scale. So as to exploit the economies of scale, countries enter into bilateral, regional or multilateral agreements. The multilateral agreement with the highest number of members is the World Trade Organization (WTO) with a total membership of 153 as of 23 July 2008 (WTO 2009).

There are a number of regional trading blocks such as the North America Free Trade Area (NAFTA), which is a trade agreement between United State, Canada and Mexico and it came into force on January 1, 1994. NAFTA falls into the category of a Free Trade Area (PTA), a regional blocks promoting regionalism. Internal Factor Migration

Labor is a factor of production and its cost is factored in when calculating the unit cost of the goods produced. The price of labor like other factors of production is subject to the laws of demand and supply and this will determine the wages to be paid. The wages to be paid will also be determined by the level of the economic development of the country or a particular region within a country with regions with more advanced economies paying higher wages. The movement of labor from one region to another can potentially be a destabilizing factor (Baldwin 2004). The labor mobility will ultimately affect the price of final products and hence will alter the flow of goods within a region.

Political economy of trade policy

There are several players in international trade who try to influence trade policies to favor them. Each group will lobby politicians to formulate trade policies that are in their favor for example capitalists’ in import-competing sectors will lobby governments for barriers against imports, social change groups do favor the lowest income groups and will hence lobby for high protection level and tariff cuts in sectors that employ low-income, unskilled workers (Gawande, et al, 2001). As demonstrated in the corn dispute Canadian corn users opposed imposition of duties for corn imports from U.S, but is what the corn producers wanted. The foreign policy is also a major player on matters of trade policy. For example, developing countries are exempted from requirements of reciprocity on matching tariff cuts offered by industrialized countries for the exportable goods of developing countries.

Trade dispute being reviewed

In anticipation of there being disagreements in the course of trading, all trade agreements, be they multilateral, regional or bilateral have a mechanism for the settlement of trade disputes. However, disputants that are party to a free trade agreement may have the option of pursuing their case either in the WTO or under the PTA (Smith 200).

According to WTO;

“A dispute arises when a member government believes another member government is violating an agreement or a commitment that it has made in the WTO” (WTO 2009).

Member governments of WTO are the authors of the agreements and are also responsible for settling disputes through the Dispute Settlement Body. Cases are presented before a panel that makes rulings for endorsement or rejection by the WTO full membership. An appeal procedure is available for a losing member. The settlement procedures are a semblance of a court or tribunal but the preferred method of dispute settlement is the encouragement of concerned to negotiate so as to reach a settlement by them. It takes approximately one year to settle a dispute without appeal and one year and three months if there is appeal. A member who has lost a case is required to align its policy with the panel’s ruling or recommendations. In case the country that was a target of the complaints fails to act within the prescribed period, that is no satisfactory compensation is agreed, the complaining country can ask the Dispute Settlement Body for permission to apply limited trade sanctions.

Canada-USA Corn Trade Dispute;

Canada and U.S are neighbors, members of NAFTA and WTO.  The two organizations, NAFTA and WTO, have a trade dispute settlement mechanism but Canada decided to have the dispute resolved through the WTO Dispute Settlement Board.

Nature of dispute

In 2005 Canadian corn producers sought legal action for alleged unfair subsidization and dumping of U.S corn in the Canadian market. On January 8, 2007, the Canadian government requested consultations with the United States under the official WTO dispute settlement process concerning charges against U.S farm subsidies. The three allegations instituted by Canada against the U.S are:-

U.S Corn Subsidies Cause Serious Prejudice.
U.S Export Credit Guarantee Act as Illegal Export Subsidies
U.S Total Domestic Support Exceeds WTO Limit
Background information regarding Canada U.S corn trade dispute:-

a)      Both Canada U.S. produce grain corn. Since 2000 Canada’s annual production has been 8.8 million Metric Tons (MMT) and U.S 261 (Schnepf 2007)[1].

b)      Elimination of duty between Canada and the U.S, following bilateral and regional agreements has facilitated corn imports from United States.

c)      U.S government program payments to corn averaged USD 2.8 bn per year in 1990s and doubled to an average of USD 5.5bn per year since 2000.

d)     The Canadian corn producers claimed that U.S corn producers were being facilitated by large U.S government payments and therefore enabled to sell corn to Canada at less than the cost of production.

e)      Arising from the above facts and the United States’ refusal to repeal Byrd Amendment[2], the Canadian corn producers asked their government to include U.S grain imports on the retaliation list.

f)       On September 16, 2005, the Canadian Border Services Agency (CBSA) and Canada’s International Trade Tribunal (CITT) commenced investigations into the alleged dumping and subsidizing of grain imports from the U.S. and whether these imports were harming Canadian corn producers.

g)      The U.S reacted to these investigations by stating that the U.S believed that Canada’s petition calling for the investigations lacked “sufficient evidence of injury”[3] to justify initiating such an investigation.

h)     U.S officials argued that a 46% decline in Canadian imports of U.S corn during the period 2002 to 2004 and the strengthening of the Canadian dollar implied that economic forces  other than U.S dumping or subsidies may have accounted for increased Canadian imports of U.S corn and weakened Canada’s case. An argument supported by 20 Canadian corn users.

i)        On November 15, 2005, the CITT preliminary findings concluded that dumping and subsidizing unprocessed grain caused injury to Canada’s domestic industry. On December 15, 2005, The CBSA announced its preliminary determination of dumping and subsidizing of U.S. grain corn and duties were imposed.

j)       Canadian corn users complained and this was followed by the Canadian government announcement of duty relief and duty drawback program in mid December 2005.

k)     Some analysts expressed initial concern that the duty rebate program would contribute to the increased U.S imports of agricultural products. U.S trade officials voiced additional concern. They suggested that the duty-drawback program could result in U.S trade action against Canada based on how such a duty rebate program was implemented.

l)        On March 17, 2006, the U.S requested WTO dispute settlement consultations with Canada concerning Canada’s imposition of AD/CV duties on unprocessed U.S corn grain imports. The U.S arguments included an accusation that Canada’s CITT had relied on weak causality between imports and injury.

m)   On April 18, 2006, CITT announced final determination, reversing its earlier position, and issued a finding of no injury regarding the importsof U.S grain corn.

n)     Pursuant to this verdict, AD/CV duties were removed. Similarly, U.S. motivation for pursuing its WTO case against Canadian AD/CV duties was ended.

o)      Following these developments, the Canadian Corn Producers announced that they were reviewing their options for pursuing legal action against imports from U.S.

Arguments presented by both parties

First allegation: – U.S Corn Subsidies Cause Serious Prejudice.

Canada alleged that subsidies and domestic support provided to the U.S corn sector for the period 1996 to 2006 were in violation of Articles 5(c) and 6.3 (c) of WTO’s  Agreement on subsidies and countervailing measures.

Second allegation:-U.S Export Credit Guarantee Act as Illegal Export Subsidies.

Canada argued that the U.S export credit guarantee program operate as a WTO-illegal export subsidy. This charge stems from a previous WTO case, the U.S-Brazil cotton case, where a WTO panel found that U.S export credit guarantees effectively function as export subsidies because the financial benefits returned by these programs failed to cover their long-term operational cost. The panel said that U.S Brazil ruling applied to all commodities that benefit from U.S commodity support programs and receive export credit guarantees.

Third allegation:-U.S Total Domestic Support Exceeds WTO Limit.

Canada contended that the United States provided support to its agricultural sector in excess of its scheduled WTO commodity levels. According the WTO Agreement on Agriculture, each WTO member has agreed to notify its annual domestic support outlays to the WTO for verification that it is adhering to its spending commitments. U.S notified WTO up to 2001.

In response to Canadian allegations U.S responded by arguing that there has been significant increase in international corn prices since September 2006. However, this argument is unlikely to influence WTO investigations since Canada is specifically challenging U.S subsidies for the period 1996 to 2006 when corn prices were substantially lower.

On May 2, 2007 Canada announced that it will temporarily hold off taking action against U.S on corn subsidies pending the outcome of Doha Round of Negotiations.

 However, on June 7,2007, the Canadian government resumed its WTO case against the United States by requesting the establishment of the WTO dispute settlement panel to consider the two of three charges (the first charge against the U.S corn subsidies was dropped). The United States blocked Canada’s request from proceeding at the June 21, 2007, meeting of the WTO’s Dispute Settlement Body. According WTO rules a country can block a panel once.

Do date Canada has refrained from pursuing its panel request at subsequent biweekly Dispute Settlement Body meetings

Consequences of the outcome to either party

The success of U.S-Canada AMS dispute will affect most U.S program commodities since all major program crops will be included. In case the ruling is that export guarantee operates like illegal export subsidies, compliance through policy reform would involve incorporating user fees that reflect the market risk associated with each loan guarantee.

If Canada loses, the corn producers will have to contend with stiff competition from U.S corn producers and some Canadian corn producers may abandon corn farming if they cannot stand the competition.

Whatever the outcome, it is the producers who will either gain or lose but the Canadian corn users will benefit from lower prices if Canada loses the case.

Political realm and link

U.S having realized that it is likely to lose the argument has commenced to make necessary amendments to take on board the concerns of Canada and other WTO members, who have joined Canada in this trade dispute. The politicians from U.S corn growing areas will however lobby Congress to amend the law in such a manner that it complies with WTO ruling. The  politics play a big role as it has been acknowledged that  political party is a central explanatory variable in determining trade disputes in GTT/WTO 1948 to the present (Widsten, 2004).

Contributions of the out come to future trade

The WTO Agreement on agriculture intends to level the playing field in regard to international trade in agricultural products. Subsidies and other financial support programs tend to distort prices and disadvantage grain producers whose governments are not able to come up with support programs. Hence grain producers should strive to produce grain more efficiently if they have to withstand global competition free of governments financial support programs.

      As Celine Charveriat of Oxfam said,

      “The case against U.S dumping is overwhelming and now confirms yet again by the WTO. The debate is over. The U.S must now move quickly to reform its programs and stop dumping cheap cotton onto world markets that undermine the livelihood of poor farmers in the developing world” (Mekay, 2005)

Options available to both parties

The parties to the dispute look at the merits and demerits of this trade dispute and come up with a mutually agreed settlement of the case. Settlement through negotiation will hasten the implementation of the negotiated agreement.

Reference List

Gawande,K, and Krishna, P (2001). Political Economy of Trade Policy: Empirical Approaches. Available at http://econ.brown.edu/~pk/pe-survey.pdf accessed on 22 February 2009.

Heakal, R (2009). What is International Trade? Article in Forbes Digital Company; Available at

http://www.investopedia.com/article/03/112503.asp accessed on 22 February 2009.

Mekay, E (2005). Brazil Triumphs Over U.S. in WTO Subsidies Dispute; Inter-Press Services available at http://www.commondreams.org/headlines05/0304-01.htm accessed on 22 February, 2009.

Schnepf, R (2007). Canada’s WTO Case Against U.S. Agricultural Support; CRS Report to Congress.

Smith, J (2006). International Overlap in International Trade Disputes; Memorandum prepared for Princeton Conference on Nesting and Overlapping Institutions, available at

http://www.princeton.edu/~smeunier/smith%20memo.pdf accessed on 22 February 2009.

Widsten, A. L, 2004-04-15 “Partisan Politics and International Trade Dispute Resolution” Paper presented at the annual meeting of the The Midwest Political Science Association, Palmer House Hilton, Chicago, Illinois <Not Available>. 2009-02-06 from http://www.allacademic.com/meta/p84401_index.html

WTO (2009). Understanding the WTO: Settling Disputes, A unique contribution; available at http://www.wto.org/english/thewto_e/whatis_e/tif_/dis1_e.htm accessed on 22 February 2009.

WTO (2009). WTO/Dispute Settlement Gateways, available at

http://www.wto.org/english/tratop_e/dispu_e/dispu_e.htm  accessed on 22 February 2009.

[1] This paper borrows heavily from the paper produced by Schnepf, R.
[2] The ‘Byrd Amendment’ or the Continued Dumping and Subsidy Offset Act, was a U.S. law providing for the distribution of import duties collected as a result of anti-dumping or countervailing duty orders to petitioners and other interested parties in the investigations that resulted in the orders.
[3] According to WTO, injury is taken to mean material injury to a domestic industry, a threat of material injury to a domestic market industry or material retardation of the establishment of such an industry (WTO, 2009)

Cite this International Trade-Trade Dispute

International Trade-Trade Dispute. (2016, Oct 23). Retrieved from https://graduateway.com/international-trade-trade-dispute/

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