RESEARCH AND ANALYSIS

Natural Resource Subsidies

Matthew S. Yeo, Partner, Steptoe & Johnson LLP

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One important point of intersection between natural resources and the multilateral trading system concerns the treatment of natural resource subsidies under the WTO Agreement on Subsidies and Countervailing Measures. Many countries retain sovereign ownership of natural resources and allow commercial enterprises to exploit these resources under different types of compensation arrangements. The commodities that are thereby produced, or downstream products that are manufactured from those commodities, may become the target of anti-subsidy disciplines (such as countervailing duties) if there is an allegation that the government provided the natural resources on subsidized terms. What, then, does it mean for a government to provide a natural resource subsidy?

The resolution of this question has important implications for international trade in natural resources and products that are produced with natural resource inputs. Countries that pursue economic development and diversification through the exploitation of sovereign natural resources may find that their exports become subject to countervailing duties in other countries or to an action under Part III of the SCM Agreement. One of the longest-running trade disputes in history, the softwood lumber dispute between the United States and Canada, is fundamentally a dispute about natural resource pricing. In addition, the question of how countries should price natural resources to avoid anti-subsidy disciplines is closely related to how a country should price natural resources to promote conservation and sustainable yields.

In its 2004 report in United States – Softwood Lumber IV, the Appellate Body found that the term “goods” in Article 1.1 of the SCM Agreement includes “tangible items of property, like trees, that are severable from land,” and found that governments “provide” these goods to commercial enterprises when there is “a reasonably proximate relationship between the action of the government providing the good … and the use or enjoyment of the good” by the holder of the natural resource right(1). This interpretation would appear to encompass a broad array of natural resource rights that are typically provided by governments. Oil, gas, minerals, metals, plants, and agricultural crops, along with trees, are all “tangible items of property … that are severable from land.”

Under Article 14(d) of the SCM Agreement, the provision of goods by a government confers a benefit if the government provides the goods “for less than adequate remuneration” (hereafter, “LTAR”). The use of the term “adequate” in this provision suggests that the level of remuneration for the provision of natural resources must be “sufficient,” or perhaps only “barely sufficient.” But determining the “sufficiency” of something requires a known reference point – sufficient in relation to what? While this interpretative problem relates to any type of “good” that might be evaluated under Article 14(d), it raises particular complexities in the case of natural resources.

Natural resources are usually valued by reference to their economic rents, referred to as “resource rents.” The resource rent of a natural resource is the total revenue that can be generated from the extraction of the natural resource, less the cost of extracting the resource (including a normal return on investment to the extractive enterprise). For example, if the market value of a barrel of oil is $100, while the cost of extracting the oil and bringing it to market is $40, the resource rent for that barrel of oil is $60. The amount of resource rent associated with a natural resource will vary as market prices for the commodity fluctuate. In addition, the amount of resource rent will vary from one location to another depending upon the costs of extraction at each location.

Applying the LTAR concept to natural resource rights leads to this question: what portion of the resource rents does a government need to collect in order to obtain “adequate remuneration” for the “goods” that it has provided? One possible answer – “all of the resource rents” – seems inherently implausible. Among other considerations, governments have rarely sought to collect all of the resource rents associated with sovereign natural resources. In the oil and gas sector, for example, the so-called “government take” usually ranges anywhere between 40 and 80 percent of the available rent. It is doubtful that WTO Members intended to impose a standard that is so far out of line with general practice. Moreover, the standard is “adequate” remuneration, not “maximum” remuneration. Presumably, the drafters of Article 14(d) were aware of the difference.

But if Article 14(d) does not require governments to collect all of the resource rent associated with sovereign natural resources, then how do we determine whether a lesser amount of rent collection is “adequate”? Is there a meaningful difference, for example, between a government that collects 80% of the rent and a government that collects 40% of the rent? What is that difference, and by what principles would we identify it?

To compound the problem further, any resolution of this question must account for the peculiar case of fishing rights. Fish have a resource rent, just like trees, oil, or minerals. In the ongoing negotiations on fisheries subsidies, no one seems to think that WTO Members should be required to collect “adequate remuneration” for the conferral of fishing rights in sovereign waters. Instead, the negotiations largely relate to the infrastructure of commercial fishing. But if we require governments to collect “adequate remuneration” for trees that are harvested from public lands, why don’t we require governments to collect “adequate remuneration” for fish that are harvested from public waters? Any set of principles concerning natural resource subsidies should apply coherently and consistently across different resource sectors.

Without proposing a definitive resolution to these issues, the following are among the considerations that might be relevant in evaluating whether governments receive “adequate remuneration” for the conferral of natural resource rights:

  • Does the government use market-based mechanisms, such as auctions or sealed bids, to allocate natural resource rights?

  • Does the government price natural resources so as to recover the government’s cost of providing and maintaining the resource? This might include the cost of negative externalities (e.g., pollution), as well as the cost of supporting other public benefits associated with the resource (e.g., recreational benefits).

  • Does the government price natural resources in a manner that encourages non-sustainable or non-commercial exploitation of the resource? This might occur, for example, if the government prices natural resources in a manner that allows a commercial enterprise to extract resources that have negative resource rents, i.e., resources that would not be extracted by the enterprise under normal market conditions.

 

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Note: Appellate Body Report, US – Softwood Lumber IV, paras. 59, 71. Back to text