International trade Law:
Both Oceania and Mobilia are WTO members. Mobilia, a developed country, has long had a vibrant and internationally competitive automobile industry. It has benefitted from a regional trade agreement with 2 of its regional neighbors that, among other items, has lowered tariffs for automotive parts made and assembled in the region and allowed Mobilia’s automotive companies to move much of their manufacturing to one of these regional neighboring countries, where labor is much cheaper.
In recent years, however, that industry has fallen on difficult times and Mobilia has looked for ways to prevent the industry from collapsing. Six months ago, Mobilia implemented a measure called the “Auto Industry Competitive Act” (AICA), which among other things, provided that loans given to one of Mobilia’s three automakers would be guaranteed by the government. The largest of these automakers, Fjord, has taken advantage of these loans and as a result, their costs of production have diminished by a 1/4. In the last six months alone, they have increased their foreign sales by 30% alone.
Oceania’s own automakers are very upset about Mobilia’s action. They are of the view that they produce better cars at lower prices than do Mobilian companies, and that these guarantees are preventing them from gaining greater market share in Mobilia, Oceania, and
elsewhere. In the last six months since the loans have been in effect, Oceania’s largest carmaker, Tatano, has suffered a loss in domestic and foreign sales of 15% because they are unable to price 1 their cars competitively as compared to F j ord’s automobiles. As a result, Tatano will likely lay off employees to meet their end~of-the-year budget. Oceania is a developing country with an economy that has been growing by approximately 5% a year; therefore, it would not be considered a least developing country.
In the face of significant pressure from its own automakers, Oceania has contacted you to ask about the WTO legality of Mobilia’s measure.
A. Your task is to explain whether what Mobilia has done is a Violation, and if so, what kind of violation under the WTO Covered Agreements. What can Oceania do about it, and what are the advantages and disadvantages of alternative courses of action for Oceania? Please explain.
B. Please discuss some of the political issues around Oceania’s decision in subpart (A), especially considering that it is a developing country competing with a developed country which, perhaps until now, has had a comparative advantage in the automotive industry.
Does the WTO system help or hurt Oceania to become an economic player in this industry? To confront its own citizens working in the country’s automotive industry? Would a preferential trade agreement help Oceania to resolve its differences with Mobilia with respect to these recent measures for their automotive industry? Please explain your answer.