RESEARCH AND ANALYSIS

Export Restrictions and the WTO Law: “Regulatory Deficiency” or “Unintended Policy Space”

Dr. Baris Karapinar, Senior Research Fellow, World Trade Institute, University of Bern

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Export restrictions, arguably an “under-regulated” area in the WTO law, have become increasingly important in recent years. During the “food crisis” of 2007–2008, dozens of countries imposed various forms of export restrictions on food staples, in order to maintain domestic availability of supplies and in some cases to contain growing public discontent about rising prices of food. The second development, an equally notable illustration of the growing importance of export restrictions, was the establishment of a panel by the Dispute Settlement Body (DSB) in December 2009 to examine complaints brought by the United States (US), the European Union (EU) and Mexico concerning China’s export restrictions on selected raw materials.

The review of the previous GATT/WTO cases on export restrictions illustrates that the vast majority of the disputes involved alleged “unfair” advantages that the measures created for the downstream producers and processors of the country instituting them, at the expense of the downstream sectors in complainant countries. For the defendants, economic and political objectives seem to have been the primary motivation. For the complainants the primary incentive was the objective of obtaining greater access to raw materials (e.g. minerals, fisheries, and leather etc.) and other intermediary goods (e.g. semi-conductors). As such, the latest dispute between China and the US, EU and Mexico could be seen as another example of competition over resources. As the world economy recovers from the current slowdown and when the international competition over raw materials picks up again, it is highly likely that there will be more disputes over export restrictions coming before the DSB.

Problems of unfair competition and related global welfare losses would be substantial if a country in a monopoly supplier position of a commodity with limited substitution resorts to export-protectionist measures (or “resource nationalism”). Similarly, as was experienced during the food crisis, in case of “thin” market conditions (e.g. agricultural markets), supply constraints in major producers combined with export restrictions could inflate prices rapidly, to the detriment of net importing countries. On the other hand, export restrictions could help developing countries to promote high added-value sectors and to raise tax revenues. A differentiated export tax on raw materials may offer an important incentive for investment in high-value downstream manufacturing sectors in resource-rich developing countries which aim to move up the value chain.

Looking beyond the pure economics of the matter, however, export restrictions are highly relevant in the context of environmental protection. By placing restrictions on exports, countries may want to prevent or slow down the depletion of their natural resources — including minerals, fisheries, forestry and fresh water — or may simply choose to keep them for the benefit of future generations. These measures could also be effective in containing the environmental side effects of certain export-oriented production activities. Mining is a case in point — as by-products of extracts, and various inputs used in mining operations could be highly contaminating. For instance, some mining sites in China, India, Peru, Russia and Zambia have been identified as the world’s most environmentally polluted areas — as contamination of the air, water and soil caused by discharged material from mines substantially exceeded the safety limits. There are also other environmental concerns arising from the high energy intensity of the production and processing of some minerals. Placing restrictions on exports of minerals produced through environmentally damaging operations, or through high levels of energy consumption and carbon emissions may help alleviate some of the adverse impacts on the environment.

To what extent such policy interventions justify the welfare losses occurring as a result of the consequent market distortion is a question of the social value of the environmental goods (or marginal social cost of depletion/pollution) as well as the effectiveness of the intervention in question. There could be significant discrepancies between the objectives that are intended to be achieved through export restrictions and the actual impact on the ground. Depending on the objective and the nature of the environmental externality that is to be addressed, various policy tools could be employed and be equally as effective or more so than export restrictions (and potentially less costly in terms of welfare losses). Hence the effectiveness and the potential social benefits of export restrictions should be carefully weighed against the welfare losses they cause and the alternative tools at the disposal of policy makers.

The WTO regulation dealing with export restrictions is relatively limited, offering ample “policy space” for domestic policy considerations. GATT XI requires Members to eliminate all prohibitions and quantitative restrictions on exports with the exception of those imposed “temporarily” to prevent and alleviate food shortages and those intended to allow time for the application of regulations such as classification and grading. Yet it does not restrict Members to imposing duties, taxes or other charges on exports. On the other hand, some new WTO Members were required, during their accession negotiations, to commit themselves to stricter rules. They were obliged to phase out export taxes or to limit them to a designated number of tariff lines with a bound rate. This was one of the additional concessions that they had to make to become a Member of the WTO.

Does the field of export restrictions represent a case of “under-regulation” or “regulatory deficiency” in the WTO law, or does it offer some “unintended policy space” which could be treated as a means to correct major market failures in the context of the growing importance of promoting environmental sustainability and inter-generational equity? There have been calls for stricter WTO regulation in this area by import-dependent countries. The reform proposal involved “tariffication” of all export restrictions, and binding of all export taxes. Yet they received cold response from many developing countries. Beyond the questions of political feasibility of introducing verifiable commitments on export taxes, however, such restrictions would also take away an important policy tool which could be effective in protecting natural resources and in promoting high value-added sectors in resource-rich developing countries. As such, restricting this unintentionally large policy space may not only be politically unfeasible but also undesirable.

 

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