The Pitfalls of Addressing Rising Industrial Un-competitiveness Through Trade Remedies

Energy costs have been rising, particularly in Europe following Russia’s invasion of Ukraine in 2022. This price hike is a major blow to heavy industries for which energy makes up a large part of the cost of production. The issue has been further exacerbated by the fact that the affected products are mostly commodities. As a result, producers in one region can face a higher rise in cost of production than those in another, so less affected competitors are able to sell at lower prices while still generating a profit. For example, gas prices were about three times higher in Europe than in the United States in 2023 and 2024, doubling the portion of energy cost in the total cost of production for industries such as steel and chemicals.  Many heavy industries in Europe, and other countries relying on imported energy such as Japan and Korea, are struggling to survive intensified global competition in this context.

To palliate this issue, domestic authorities increasingly resort to trade remedies, in particular anti-dumping measures, to protect their industries from lower priced imports originating in regions less affected by the rise in energy costs. The EU and the UK have been at the forefront of this practice. Since 2022, they have been imposing anti-dumping measures to protect steel, chemical, glass, and a growing range of heavy industries.

Trade remedies are permitted under international trade law subject to conditions long established under the relevant WTO agreements. To apply anti-dumping measures, for instance, authorities must have sufficient evidence to show (i) imports are being dumped, and that those dumped imports (ii) cause (iii) material injury to the domestic industry producing the like products. Anti-dumping measures, typically in the form of import tariffs, are widely and frequently used by governments. Despite the protectionist effect of such measures, the prevailing narrative justifies them as being necessary to ensure a level playing field. The G7 Leaders’ Communiqué in 2024 reiterated this narrative and their continued commitment to maintain “a global level playing field” by combatting unfair trade practices and non-market policies associated with state intervention. 

Yet, the rapidly growing anti-dumping actions in the EU and the UK to protect domestic industries affected by the rise of energy cost arguably fall short of the WTO’s legal standards. As mentioned, a key requirement under the WTO Anti-Dumping Agreement is that dumped imports are the cause of the deteriorating situation of the relevant domestic industry. This requirement also exists in the UK Trade Remedies (Dumping and Subsidisation) (EU Exit) Regulations and EU Basic Anti-Dumping Regulation. However, in these recent cases, the alleged injury to domestic industries was not caused by the subject imports but by the industries’ declining competitiveness due to rising energy costs. So far, the authorities have rejected this argument under the political necessity to protect domestic industries by claiming that in a situation of “fair” trade (meaning in the absence of dumping), those industries would have been able to include the increased cost of production in their sales price.

This argument is highly controversial, especially in a commodity market where prices align to reflect the price of the largest volume at the lowest price. If this lowest price is driven in the most part by lower cost rather than by trading practices such as dumping, then causation cannot be established. This is the case in many of the recent investigations concerning domestic industries affected by higher energy costs. The dumping margin (the difference between a company’s export price in a given market and its normal value – that is, in simple terms, the domestic profitable price) is often much lower than the injury margin (the difference between a company’s export price in a given market and the domestic price charged by local competitors in that market). As a result, even in a situation of no dumping and “fair” trade, domestic producers suffering from high energy costs would still be undercut by imports.

Thus, it is unclear whether the conclusion of the causation analysis from these authorities would stand. While the Court of Justice of the European Union has granted the European Commission an exponentially larger margin of discretion in trade matters, WTO rules may entail more constraints on such discretion. Indeed, the European Commission’s decisions to impose anti-dumping and countervailing measures against price distortions caused by government action were found to be incompatible with WTO rules in many disputes. However, given the ongoing paralysis of the Appellate Body, a successful challenge to such WTO inconsistencies requires the complainants to be a party to the so-called Multi-Party Interim Appeal Arbitration Arrangement. Otherwise, the EU, as other WTO members, may choose to “appeal into the void” unfavorable panel decisions, effectively blocking the dispute settlement process. Indeed, the EU did so when its anti-dumping methodology was successfully challenged by Russia in 2020.

A more practical issue concerns the fact that exporting producers are often not engaged in dumping. This is so because uncompetitive industries still hold a large market share in their domestic markets thanks to closer geography with consumers and historical business ties. As a result, prices in their markets are often higher than international market prices (even if not sufficiently high to allow them to sell above cost of production). This means that domestic prices in countries less affected by the energy price rise are typically lower than in more affected countries of export so that there is no dumping. This absence of dumping practices appeared in a number of recent investigations initiated by the European Commission on imports of steel and chemicals.

In such circumstances, however, the European Commission could still find the existence of dumping through so-called cost adjustments methodology which enables authorities to calculate higher domestic prices in the country of exportation. The US Department of Commerce achieves a similar result through adjustments for particular market situations affecting costs of production. This was notoriously used against companies from the Republic of Korea exporting certain oil country tubular goods. Even though Commerce’s findings were repealed by the US Court of International Trade and the EU’s methodology repeatedly condemned at the WTO, the practice continues to be used in both jurisdictions. The result of the methodologies relied on by the EU and US (and other countries such as Ukraine and Australia) has been to replace actual input costs with a surrogate international market-based cost based on findings that the former are artificially lowered due to government intervention.

By doing so, the methodologies often inflate the production cost and hence the final domestic price of the subject goods for comparison with the export price. It is, therefore, strongly linked to the “levelling the playing field” narrative noted above. The problem is, however, the playing field is not distorted or biased against EU industries due to non-market policies of the foreign government concerned. The industries’ lack of competitiveness was the result of increased energy cost and its asymmetric impact on producers in different regions. Using anti-dumping tariffs to level an undistorted “playing field” and restore the competitiveness of domestic industries undermines the established narrative and goes down the slope of protectionism.

A larger problem looms. Protecting heavy industries through increased import tariffs might help these industries remain profitable when selling domestically. However, it does not enhance their competitiveness abroad. It also passes on their lack of competitiveness to their downstream buyers given that those buyers are forced to buy inputs at above international market prices. This renders these buyers uncompetitive in turn, forcing them to lobby for more and higher protection while losing competitiveness in export markets.

This begs the question whether trade remedy measures are the right tool to address the decreasing efficiency of heavy industries affected by rising energy costs. As highlighted by Mario Draghi, former president of the European Central Bank, trade remedies must be used with caution or else they will negatively impact the wider economy. However, given the political sensitivity surrounding manufacturing these days, as well as strained budgets, governments might have no better option at hand.