Free trade is bad if not fair. Nigeria must tackle unfair trade

Last week, I responded to the call by the Nigerian Office for Trade Negotiations (NOTN) for inputs into its preparation of a trade policy for Nigeria.This week, I want to return to the same theme, but my focus is on the issue that could give free trade a bad name and which Nigeria, if it embraces greater trade openness, as I advocated last week, must tackle in tandem. I am talking about unfair competition or trade practices, and their legal mitigation in the forms of safeguards and trade remedies. The truth, let’s be clear, is that free trade is not bad in itself. It cannot be! However, certain trade practices can be unfair and injurious to domestic industries, thereby giving free trade an undeserved bad name or reputation. Which is why any independent and rounded trade policy must include legal and institutional frameworks for tackling unfair trade practices.

But I am too much of an unrepentant and unapologetic free trade advocate not to make the point, very strongly, that the benefits of trade are so immense and tangible that no politician or government official should hide behind unfair trade practices, real or imaginary, to resist or roll back open trade.

We have seen how trade openness has transformed lives; how, as I pointed out last week, the combination of choice, value and quality, resulting from free trade, has ensured that consumers have access to a wider choice of quality goods at lower cost, thereby stretching household incomes. Furthermore, as businesses become more efficient and productive due to exposure to international trade, they contribute to the growth of the economy, create more jobs and boost wages, all of which increase prosperity and living standards.

Yet, we can’t have a blinkered attitude to free trade: it creates losers too. Although the winners are significantly more than the losers, the fact is that there are still losers. As long ago as the 19th century, John Stuart Mill recognised the distributional effects of free trade and introduced the “compensation principle”. Today, that principle takes the form of social security support and retraining programmes in many countries.

But a more systemic response to the adjustment effects of trade is embedded in trade negotiations. While the international law principles of good faith fulfilment and pacta sunt servanda require nations to honour their international commitments, the principle of rebus sic stantibus allows them to terminate or suspend those commitments when they face a fundamental change of circumstances. In international trade, it is recognised that most nations would not accept binding commitments, or secure domestic support for such commitments, if they cannot suspend the implementation of an obligation in the event of significant unforeseen adverse side effects. Thus, in order to sustain trade liberalisation, trade agreements usually contain “escape clauses” and safeguard provisions.

For instance, the WTO agreement contains several escape clauses, ranging from trade restrictions to safeguard the balance of payments and protection for infant industry purposes to general exception to protect public morals, human, animal or plant life or health as well as national security exception to protect a nation’s essential security interest. Of course, to prevent the abuse of these provisions, particularly in circumstances that might constitute “arbitrary or unjustified discrimination” or “a disguised restriction on international trade”, strict conditions are attached to their use. For instance, several years ago, Nigeria’s attempt to invoke the balance of payments exemption to justify its import restrictions was declared by a WTO committee to be inconsistent with WTO rules. The fact, however, is that the escape clauses are there to give countries policy space, provided they can invoke them legitimately.

Then, there are safeguards provisions that specifically deal with the adjustment effects of trade. If as a result of being part of a trade agreement, a country experiences an unexpected surge of imports, it is allowed under WTO rules, and under most trade agreements, to impose temporary trade restrictions to address the surge if it is causing serious injury to its domestic industries. Well, you will not be surprised that the conditions for invoking the safeguard provisions are also stringent. In a study that I did for the CUTS International (Consumer Unity & Trust Society) some years ago, I found that even few developed countries invoked the safeguard provisions because of the stringent conditions. But, again, the provisions are there for countries that can use them in a rules-based way.

Which brings me to trade remedies. While safeguard provisions address“fair but injurious” imports, trade remedies deal with “unfair and injurious” trade practices. International trade is based on the principle of comparative advantage, the principle that countries should compete fairly on the basis of their relative strengths. But if some countries can gain unfair advantage over others, as China does, by distorting competition, through dumping (i.e. setting products abroad at below their domestic price or production costs) or flooding foreign markets with subsidised goods, thereby unfairly undercutting other countries’ manufacturers, then the principles upon which free trade is based are undermined.

Thus, the WTO agreement describes dumping and subsidised exports as practices that are “to be condemned”and provides anti-dumping and subsidy-countervailing measures to deal, respectively, with them. Of course, the trade remedy measures must be imposed in a rules-based manner, including having independent national authority that must thoroughly investigate allegations of dumping or subsidised exports and establish injury to domestic industries as well as causation before imposing any measures on imports of specific products.

Now, the point of all the above is that international trade law creates several mechanisms – escape clauses, safeguard provisions and trade remedies – designed to tackle unfair trade practices and, generally, make free trade more politically acceptable. Responsive provisions and flexibilities are embedded in all trade agreements, and, therefore, there is no reason why any country should not enter into free trade agreements knowing that it could invoke, if necessary, their flexibilities. But what is the situation in Nigeria? To what extent has Nigeria been able to use the safeguard and trade remedy provisions to address its trade concerns?

The truth is that Nigeria has huge concerns about smuggling, dumping and surge of imports, the last being the main reason it is reluctant to sign potentially beneficial trade agreements. Yet, Nigeria’s concerns about smuggling, dumping and import-surge only exist because of chronic policy failure and institutional weaknesses, including the lack of capacity to use rules-based trade remedies mechanisms

Take smuggling. A World Bank report states that “The total amount of potential smuggling from Benin is estimated at close to $5bn, nearly 10% of Nigeria’s official imports”, adding that: “Tackling this would lead to an estimated gain of $1.2bn in government revenue”. But smuggling is rampant in Nigeria because of a restrictive trade policy, such as unnecessary import bans, as well as the massive corruption and inefficiency of the customs service. As the former finance minister, Ngozi Okonjo-Iweala, wrote in her book Reforming the Unreformable, “Nigeria must be one of the few countries in the world where smugglers are known and talked about openly, and where big-time smugglers walk around freely in the corridors of power”. Surely, no trade or industrial policy would be successful in Nigeria unless there is a root-and-branch reform of the customs service.

Then, what about dumping? Well, Nigeria does not have a trade remedies regime. During its WTO Trade Policy Review (TPR) in 1998, Nigeria said that it did not have the institutional and regulatory capacity to investigate anti-dumping issues. Twenty years later, during its TRP in 2017, Nigeria was still citing “the difficulty in the domestication” of its WTO commitments as a reason for not having a trade remedy legislation. While South Africa is a major user of anti-dumping measures, Nigeria has not imposed any anti-dumping or countervailing duty since 1998. Of course, the same is true about safeguard measures, which is the legitimate way of dealing with Nigeria’s concern about import-surge. As the WTO puts it, “Nigeria’s law covering contingency measures is outdated”, still governed by the Customs Duties (Dumped and Subsidised Goods) Act 1958.

Recently, the Standards Organisation of Nigeria (SON) said it would use standardisation to ensure that local industries were protected from unfair competition as a result of substandard imported goods. But the WTO has expressed concern about the excessive use of standards, which run into several hundreds, and are often mandatory, thus taking the forms of regulations. With Nigeria having not domesticated the WTO agreements and, therefore, not implementing them, any domestic effort to address the problems of dumping, subsidised or substandard imports are likely to violate WTO rules.

Yet, Nigeria needs a robust and rules-based trade remedies system to deal with concerns about unfair competition or trade practices. As the UK prepares to leave the EU next year and take control of its trade policy, one of the institutions it has created is the Trade Remedies Authority to ensure a level playing field for UK industries. Of course, given the potential for industry lobbyists to hijack a trade remedy system, it is important to ensure that any trade remedies authority is independent and that it distinguishes between cheap imported products, which benefit user industries and consumers, and predatory and injurious dumping, which unfairly undermine domestic industries. Thus, to ensure that its trade remedies regime works well for everyone, the UK has built its system around the principles of impartiality, proportionality, efficiency and transparency. At the heart of the UK’s trade policy is a commitment to free and fair trade. So, trade remedies are not a protectionist tool, but means of levelling the playing field.

As the Nigerian Office for Trade Negotiations prepares “a 21st century” trade policy for Nigeria, based on “a welfare and prosperity trade agenda that works for all”, it must be guided by the principle of “free and fair trade”. In other words, Nigeria’s trade policy must support free and open trade, but it must also provide for a trade remedies framework that addresses the problem of unfair competition. Yet, there must still be concerns about whether Nigeria has the technical capacity to run a trade remedies regime and whether such a regime would be guided by a commitment to the rule of law. Well, let’s hope NOTN has that covered!

Olu Fasan