RESEARCH AND ANALYSIS

Relationship between International Trade and Energy

Timothy J. Richards
GE Corporate
& World Energy Council Task Force Chair

Lawrence Herman
Cassels, Brock & Blackwell, LLP
& World Energy Council Task Force Director

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The World Energy Council is pleased to have an opportunity to address the relationship between international trade and natural resources. Our focus here is on trade in energy goods and services. We will leave aside the precise definition of “energy”, but in what follows, we assume that it covers not only traditional forms of energy, such as hydrocarbons, but also renewable energy forms, such as biofuels, wind, solar, but importantly on the range of products and services which are themselves traded and/or which are otherwise involved in transborder movement.

Historically, neither the GATT nor the WTO Agreement were considered as having a direct bearing on international energy trade. Trade in hydrocarbons, fissionable materials and cross-border transmission of electricity largely took place outside the multilateral trading system. The GATS covers only limited kinds of energy services and doesn’t address these comprehensively or in terms of sectors. While a few discrete issues involving energy goods reached the GATT and WTO dispute settlement stage (Reformulated Gasoline for example), these were relatively rare.

Another reason why energy trade and GATT/WTO rules seemed to largely operate in isolation from one another was that, for the most part, these agreements contain rules of general application. Neither refers to “energy” or deals specifically with energy matters, although the coverage of the GATS includes market access commitments on various kinds of services equally pertinent to the energy sector.

Even though there are structural elements in the energy sector that differentiate it from issues involving typical goods and services trade, there are important developments that show a convergence between the international energy business and the rules embodied in the WTO regime.

The first is the accession and impending accession of major oil-producing States to the Organization. Saudi Arabia is now a WTO member and Libya, Algeria, Russia and other oil producers are waiting in the wings. The accessions of these producing States may well change the dynamics of the WTO as an organization.

The second is climate change and the recognition that progress in reducing greenhouse gases through the UNFCCC and various national measures directly engages the application of WTO rules. This was an important issue at the recent COP meeting in Copenhagen in December 2009.

Recognizing the changing picture globally and the interrelationship between energy, trade rules and climate change, the WEC began addressing these matters over the last three years: first, by inviting the Director-General of the WTO to address the World Energy Congress in Rome in 2007; and second, by appointing a Task Force to undertake an examination of trade and investment rules for energy, leading to its first report in September 2009.

World Energy Council Task Force Report

Using some of the comments of the Secretary General at the Rome Congress as a point of departure, the Task Force report stresses the importance of WTO rules for maintaining open energy markets, more crucial than ever in the context of the current recession and of efforts aimed at stimulating global economic recovery. The Report also signals the benefits of completing the Doha Round, particularly as a means of promoting trade in energy-related goods and services in general and in climate-friendly goods and services in particular, both of which can assist in the economic recovery and in GHG reduction through stimulating exchanges in “green” technologies.

Where does all of this take us today?

Responding to the question whether the WTO can play a role in encouraging “a more efficient management” of energy resources, it is possible to propose three guiding principles. The first, taking a cue from the Doha Development Agenda, is that open trade in energy goods and services is indispensible for economic progress generally and for meeting the needs of developing countries in particular. There is thus an intertwining of trade in energy and issues of economic development as parts of a whole.

The second, is that, to meet economic development objectives, energy markets must be allowed to operate as efficiently as possible. This requires a rules-based system that guarantees the operations of market mechanisms through non-discrimination (meaning national and most-favoured-nation treatment), regulatory transparency and access to fair, open and impartial adjudicative processes. These rights and obligations are embedded in the WTO system and, because of that, the WTO and the interests of the energy sector converge.

The third principle is to recognize structural factors unique to the energy sector constrain or at least qualify the full application of WTO rules, the most important being that energy resources typically belong to the State and that many countries have structured their petroleum and electricity sectors around state owned enterprises. State ownership and sovereignty interests differentiate energy goods from typical goods and services in international trade. This affects any consideration of an enlarged role of the WTO in this area.

Applying these principles, the report recommends that WTO members take two specific actions that can be negotiated immediately:

First, as the global community looks for solutions to the challenge of climate change, we believe agreement to reduce trade barriers and open markets in energy services, including environmentally-friendly goods and services, should be pursued as a priority. We believe such action should be within the WTO and be as broadly-based and cover as many like-minded countries as possible. If the Doha Round cannot effectively bring closure on this subject, a possible plurilateral accord on energy services within the WTO would make an important contribution to global “governance” in this area.

Second, in ongoing consideration under the UNFCCC and elsewhere, it will be important to ensure the integrity of the rule of law under the WTO Agreement, both to ensure stability of international energy markets and to promote the realization of global development priorities under the principles referred to above. The WTO should bring its unique expertise to bear on the question of what, if any, forms of border measures could legitimately be applied by countries that adopt domestic greenhouse gas reduction measures.

With rapid changes in the sector, combined with challenges of climate change, a more comprehensive discussion by the international community of this and other areas of potential WTO “governance” relevant to energy markets would be useful.

WEC is pleased to have had the opportunity to submit these recommendations and would be pleased to provide support to further work in these areas.

 

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