Edward Borovikov and Bogdan Evtimovof Salans LLP in Brussels discuss the positives and negatives of export restrictions on the trade of natural resources products and services.
Industries’ costs of obtaining natural resources – essential inputs for their manufacturing operations, such as ores and basic metals, minerals and ‘rare earths’ – have been steadily on the rise in the last decade. The global economic and financial crisis of the late 2000s may only have slowed down, but has not reversed the upward price trend. While accepting that such global increase in costs of natural resources has been driven by the massive industrial growth and demand in the largest emerging economies, market players admit that certain resources appear to be increasingly scarce on the global scale, and even approaching exhaustion.
In order to address such emerging scarcity and to contain rising costs domestically, governments of many resource-rich countries opt for imposing various restrictions on exports of certain natural resources. In this way, among wider policy considerations, they aim to preserve the competitive advantage of their domestic industries in favourable access to the earth’s resources.
The spreading emergence of export restrictions on natural resources puts additional upward pressure on prices, and negatively affects the conditions of supply to import-dependent downstream manufacturing industries in advanced economies such as in Europe, the US and Japan. Most affected are major industries, such as, among others, steel-making and metals, construction, chemicals, automotive, aerospace, machinery, electronics and high technologies. As a consequence, governments of developed economies have been gearing up a major quest against export restrictions on natural raw materials in resource-rich countries, working out policy initiatives and external actions pursuing a “level playing field’ in access to natural resources. These are currently high on developed countries’ policy agendas and include domestic policy proposals, negotiations on regional trade agreements, international cooperation fora such as the Organization for Economic Cooperation and Development (OECD) and have even included a current major WTO dispute, briefly commented below.
Scarcity and exhaustion of natural resources is a natural, as well as an economic phenomenon. The allocation of nature’s deposits across geographical regions is uneven, yet in addition, not every naturally occurring deposit is able to offer sufficient return on the investment required for its development and exploitation. In certain resource-rich countries governments provide support to national extraction and development activities, thus facilitating projects that may not have occurred otherwise, due to lack of sufficient economic incentives to private exploration, mining and engineering companies.
Thus it appears fair to argue that there are economic and policy features that are peculiar to natural resources. Governments are expected to ensure the sustainable availability of natural resources to world markets over the long term. There are often significant public sector investments required to make development projects industrially and commercially viable. There is a need to recoup such public investments in collecting revenue from domestic industries, and to create incentives for developing similar projects domestically as well as abroad. There are risks of ‘free-riding’ by those who are not ready to make the same investments but wish to use ready-made results. Yet there are no binding international instruments assisting the development and sustainability of supply of natural resources.
Thus, arguably, there may be a case, a justification for export restrictions on natural resources in that they allow a government to ensure sustainable availability of natural resources, to assist its exploration and development of natural deposits, and create incentives for similar future projects not only through domestic public investments, but also through creating stimuli for competing investments in third countries with underdeveloped deposits. In light of such considerations, the notion of a ‘level playing field’ in the access to raw materials, actively developed by the advanced economies, must be seen as a multi-faceted, complex notion.
Take the particular example of China. Due to natural endowments, as well as government incentives policies, over the past decades China has become the world’s leading exporting supplier of a number of raw material inputs for steel, non-ferrous metals and chemical industries, as well as ‘rare earths’ consumed in the electronics and high-tech industries. However, due to China’s continued domestic growth, it now consumes domestically more than half of the raw materials it obtains. If the trend of increased Chinese and worldwide demand continues, in the next decade China may be likely to face a deficit of raw materials, as well as the rest of the world. This would be particularly true if other countries with large deposits of relatively scarce natural resources (eg, Australia, Canada, Russia, the countries of Sub-Saharan Africa) would not create sufficient incentives to develop their own deposits of resources in line with the trends of global demand. Perhaps partly in anticipation of such risks, China has begun to apply a number of restrictions or similar measures on export of various raw materials needed by industries worldwide.
With the above example as a reference point, a number of questions appear relevant: in which cases and to what extent are export restrictions justifiable? Whether the international legal framework, with WTO rules in focus, is adapted to handle such global challenges in an even-handed way? Does the strategically-thinking community have a down-to-earth policy on export restrictions affecting natural resources, one that could offer solutions not only for the demand problems of the developed economies, but also for the global challenges?
Those are issues which the WTO’s Appellate Body might have the honour to touch upon in the appeal of the recent ruling of the Panel in the dispute China – Measures Related to the Exportation of Various Raw Materials. The dispute in question, led by the United States, the European Union and Mexico, concerns China’s various restrictions on export of industrial inputs including yellow phosphorous, bauxite, coke, fluorspar, magnesium, manganese, silicon metal, silicon carbide and zinc. The challenged restrictions include export duties and export quotas, export licensing and minimum export price requirements. After unsuccessful consultations, a panel was established, and on 5 July 2011 the Panel circulated its report, currently under appeal.
In its report the Panel largely confirmed the past practice under the disciplines for export restrictions in Article XI GATT 1994, and therefore this will not be commented on here. However, there was one controversial finding in the Panel’s report that deserves a separate comment. The said finding relates to the wording in Paragraph 11.3 of the Protocol on the Accession of the People’s Republic of China (‘Accession Protocol’) concerning elimination of export duties. The wording of the said paragraph, according to the Panel, allegedly superseded China’s rights and obligations under the general exceptions of Article XX GATT 1994. The Panel was obviously mindful of the controversy in its finding, but nonetheless sided with the claimants in the dispute.
According to Paragraph 11.3 of the Accession Protocol, China undertook to ‘eliminate all taxes and charges applied to exports unless specifically provided for in Annex 6 of this Protocol or applied in conformity with the provisions of Article VIII of the GATT 1994.’
While admitting violations of Paragraph 11.3 in relation to products not set out in Annex 6, China sought to invoke Article XX GATT 1994. However, the Panel took the view that the two explicit references in Paragraph 11.3, namely ‘Annex 6’ and ‘Article VIII of GATT 1994’ are the only two exceptions from the obligation undertaken by China in Paragraph 11.3, and therefore Article XX GATT 1994 was a priori not available to China in the context of that Paragraph. The Panel supported its finding with the argument that the Paragraph in question did not contain a wording to the effect that the elimination of export duties was without prejudice to the (other) rights of China under GATT 1994 or the WTO Agreement generally. We find ourselves unable to agree with the Panel.
Leaving the parties’ arguments aside, denying rights to a sovereign WTO Member country under the general exceptions of Article XX GATT 1994, based on a text of a provision in an Accession Protocol is highly questionable and alarming for most countries that have acceded to the WTO after its establishment in 1995, and especially for those countries which are currently negotiating their terms of accession to the WTO. If the Panel’s reasoning is supported, a Member’s rights under the security exceptions under Article XXI GATT 1994 could also be threatened by the Paragraph at issue.
Denying rights to a Member under Article XX GATT 1994 in relation to export duties, an area regulated by Article XI GATT 1994 and pertaining to export restrictions cannot be supported also in a systematic interpretation of GATT 1994. The chapeau of Article XX GATT 1994 contains the words ‘nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures’ based on the general exceptions. The provision of Article XX GATT potentially applies to outright import and export bans that are prohibited by Article XI GATT 1994 and is capable of justifying them. Then a fortiori the general exceptions should apply to export duties that are likewise prohibited. The provision of Paragraph 11.3 of the Accession Protocol, in our view, only extends the general obligation of Members for eliminating export restrictions (Article XI) to cover, in respect of China, also export duties (which are referred to in, and therefore within the domain of Article XI) and of export charges that are inconsistent with Article VIII GATT 1994 (eg, significantly exceeding the costs of customs services rendered). However, the text of Paragraph 11.3 does not go any further in restricting other rights of China under GATT 1994.
The Panel’s finding on the relationship between Paragraph 11.3 and Article XX appears to go against the established principle of permissive interpretation of the provisions of the WTO Agreement. One could support the Panel’s reading, for instance, if Paragraph 11.3 contained a wording to the effect that the general exceptions under Article XX GATT 1994 were not available to China under the Paragraph at issue.
The controversy in the Panel’s finding, in our view, is an expression of the major difficulty and perhaps frustration in finding the right balance of interests in the intransigent debate on access to natural resources between advanced economies and resource-rich China. In resolving such complex questions, it would have been desirable to include in the analysis of export restrictions not only the specific provisions in China’s Accession Protocol, but also wider considerations relating to the need to address the global risks of scarcity of natural resources and to facilitate investments related to their exploration and development. The Panel instead took a highly formalistic approach, which, in our view, is unhelpful for future disputes and policy-making.
The Panel’s findings have been appealed by all parties, and in our view this is good news for the multilateral trading system. The outcome of this dispute will set an important precedent for future disputes in relation to export restrictions on other natural resources, possibly rare earths. It will assist a multilateral system of rules which, from the legal point of view, may not be fully adapted to deal with the global challenges affecting sustainable access to natural resources. The final outcome of this dispute might also set an important example for the current initiatives of advanced economies to achieve a ‘level playing field’, thus facilitating the process of shaping up badly needed ‘down to earth’ policies on export restrictions.