Comments on the World Trade Report 2010(1)

By Joost Pauwelyn, Graduate Institute, Geneva


 Thank you, Ambassador Jara. It is an honour to be here. I truly enjoyed reading the Report, especially the economics part. To be honest, I found the legal part less appealing. But that is no surprise given that WTO lawyers traditionally can say far less than WTO economists, unless, of course, you are a member of the Appellate Body.

1. Trade is more, not less, important when it comes to natural resources

To get the debate going, though, let me take issue with one recurring theme in the Report: that natural resources are special; implying that normal trade rules do not and should not apply. I realize that this is probably not exactly what the authors meant, but for a non-economist like myself that is the message that many people may take away from the Report. One such example is at p. 183 of the Report:

“natural resources display a number of characteristics that make a case for government intervention … as compared to the free trade outcome”.

In my view, however, the problem is not that we have too much “market” or “trade” in natural resources or energy, but rather not enough. The problem is not that countries have too little policy space to “manage” their natural resources, but rather that they continue to impose policies that inefficiently restrict or distort trade, both on the export and import side.

Granted, natural resources raise serious questions of “exhaustibility” and “externalities”, especially environmental damage, but standard trade theory and trade rules can apply to that.

So my starting point is this: trade and its advantages are not less, but more relevant and important when it comes to natural resources, especially energy.

The core reason for this crucial role for trade is this: natural resources/energy are un-evenly distributed between countries, as well as fixed (BP will confirm this: you cannot move an oil well). So trade between “have’s” and “have not’s” is all the more important: to the benefit of both; it is a question of pure “absolute advantage”.

That said, barriers to this trade in energy are, indeed, different from those in other products, which raises the question of whether current WTO rules are appropriate.

Let me say something, first, on this difference in trade barriers, secondly, explain why WTO rules nonetheless do or could address these different trade barriers and, finally, address possible ways forward.

2. Barriers to trade in natural resources are different

The core focus of the GATT/WTO system has been the reduction of import tariffs. Yet, as the Report notes, tariffs are not a big issue when it comes to trade in natural resources, especially trade in energy (other than, perhaps, renewable energy): few countries impose import duties on, for example, oil.

Why are import tariffs not a big issue? Because oil importing countries need oil and since they cannot produce it themselves there is no point to impose import duties so as to stimulate domestic production. A Swiss import duty on oil will not displace Saudi oil imports in favor of Swiss oil production. Natural resources are fixed. No matter how high the import duty on oil, oil production will not shift to Switzerland.

This illustrates a bigger point: under WTO rules we presume that countries want to sell or export more, and are keen to restrict imports.

When it comes to trade in natural resources, however, this fundamental premise disappears:

- The “have’s” do not want to export more but rather limit production and export so as to maximize their return on what are exhaustible resources.

- The “have not’s”, in contrast, do not want to restrict imports (so as to favour domestic producers, since there are no domestic producers), but rather want to import more, and import at a cheaper price.

So whereas in the WTO the demand is normally “market access” for exports (say, China seeking export markets for textiles); when it comes to natural resources and especially energy, the demand is “access” to production or imports (say, the EU or Japan seeking access to, or more/cheaper imports of, gas, oil or scarce raw materials).

Does this mean that no WTO rules are relevant? No.

3. WTO rules can address the rather unique barriers to natural resource trade

As the Report notes, at least in the economics section:

Firstly, given that energy producers (the “have’s”) export most of their production, production restrictions in those countries may have the same effect as export restrictions, which are regulated, for example, in GATT Article XI.

Although sovereignty over natural resources and the exhaustible nature of natural resources may justify certain production and export restrictions (as provided, for example, in GATT Article XX(g)), energy producing countries not surprisingly often “overshoot”, and impose restrictions to improve their terms of trade in a beggar-thy-neighbour way, leading, for example, to domestic energy prices that are inefficiently low, attracting, for example, energy-intensive fertilizer or petrochemical industries to, say, Saudi Arabia even though they could perhaps produce more efficiently in, say, Belgium or India.

Secondly, when these same countries (the “have’s”) impose export duties on energy, these export duties amount, as the Report rightly points out, to a consumption subsidy for locally-consumed energy (export duties will make it more expensive to export, increase local supply and thereby reduce local energy prices, leading to so-called dual pricing). Once more, however, consumption subsidies are regulated and could be actionable subsidies under the SCM Agreement (when they are “specific” and cause “adverse effects” to other WTO members).

Thirdly, and conversely, given that energy importers (the “have not’s”) cannot produce domestically, consumption taxes in those countries have, as the Report finds, the same effect as import tariffs (in the absence of local production, the tax only affects imports). Yet, as we all know, import duties are regulated in GATT Article II.

When it comes to these consumption taxes (or, in effect, import tariffs), as with energy producers, also energy importing countries too often “overshoot”. Some level of fuel taxation is, no doubt, needed to price-in environmental damage including the cost of carbon. Yet, other parts of this taxation are imposed to improve the country’s terms of trade, that is, to lower the import price of energy and to transfer rents from energy producing to energy consuming countries. Such beggar-thy-neighbour policies may lead, for example, to energy prices which can be too high, thereby scaring off energy-intensive activity which could most efficiently occur in such countries.

In other words, when it comes to trade in natural resources, we may not see many traditional import tariffs; we do see a lot of inefficient (i) production/export restrictions; (ii) export duties; and (iii) consumption taxes. As the Report notes, at p. 116, export taxes on natural resources are twice as likely as export taxes in other sectors; and natural resource sectors account for fully one-third of all export taxes. When it comes to consumption taxes, anyone filling-up a petrol tank in Geneva or next door France knows how high they are: respectively, around 50 and 60% of the price of unleaded gasoline (Report, p. 120).

Whereas the economists writing this Report rightly point out (at p. 196) that “there is no economic basis for regulating these policies differently”, that is, in economic terms, in the present context, production restrictions are export restrictions, export duties are consumption subsidies and consumption taxes are import duties, the lawyers involved in the Report were (understandably) much more careful, finding on p. 166, for example, that “production restrictions are not covered by Article XI [of GATT on export restrictions] and thus would be permissible”.

I am not saying that all production restrictions, export duties and consumption taxes violate WTO rules (some may fall outside WTO rules; others may be excused under exceptions). What I am saying is that some of them are as harmful, inefficient and welfare reducing for both exporters and importers of natural resources as trade restrictions which the WTO explicitly prohibits. And that, as a result, a trade body like the WTO should do something about them.

4. A way forward for the WTO

One of the fundamental questions is whether progress at the WTO will happen through dispute settlement under the current WTO rules which, as I pointed out earlier, arguably already cover and prohibit at least some of these trade distortions; or whether we need and can muster the political consensus to refine and add to the current rules.

Like many, I would prefer for WTO negotiators to clarify and expand on the rules. This will, no doubt, be difficult but negotiators should realize that the alternative is that 7 Appellate Body members do this work for them.

If clarified or new rules are negotiated, should we strive for a separate General Agreement on Trade in Energy (GATE) or a General Agreement on Trade in Natural Resources (GATNAR)?

I am not a big fan, and at a recent conference we, the Graduate Institute, organized jointly with the WTO here in Geneva (the proceedings of which are now available for free), very few participants were in favour of a separate agreement on energy or trade in natural resources. As I said in the beginning, I find the mantra of “energy and natural resources are special and hence need a separate treatment or agreement” suspect. The same could be said about textiles, agriculture, audiovisuals, food etc. Yet, the GATT/WTO track record with such “sectorals” (with the exception of the Information Technology Agreement) is not very promising.

Instead, what we need is rather standard WTO bargaining or trade-offs whereby, in this or some future Round, energy exporters limit their production and export restrictions and dual pricing practices in exchange for commitments by energy importing countries on, for example, consumption taxes including excessive carbon-related taxes or restrictions on imports, and import duties on processed products under so-called tariff escalation. No separate agreement is needed for that, as most of these bindings could occur under, for example, GATT Art. II.

The picture of what might happen if we do not deal with trade distortions in the natural resources sector is not very pretty:

- “land grabs” and fights over access to raw materials as, what the Report refers to as, “export restriction-jumping FDI”.

- Massive relocation of energy-intensive industries towards energy producing countries which keep internal energy prices artificially low, a practice which, in response, may create a wave of anti-dumping and CVD investigations.

- Punitive carbon tariffs or import restrictions by energy importing countries not just to address climate change but also to protect inefficient domestic producers, Indeed, in the absence of a global price on carbon, taxing energy or fuel imports as such may not be sufficient; with the prevailing price wedge of energy between countries, energy producing countries with low energy prices and no carbon tax could simply transform their energy into, for example, aluminum, and then trade aluminum — which really is like “canned energy” — to dodge the carbon tax on fuel imports. This underlines that even where raw energy or natural resources cannot be traded easily, trade in its downstream products can so that trade in agricultural products, effectively, becomes “virtual trade in water”, trade in electricity can amount to “virtual trade in coal” and trade in aluminum may be “virtual trade in hydro-electricity”.

Of course, if one is more ambitious and starts tackling also investment protection, competition and good governance (including corruption) in the energy sector, then new agreements would be needed. Yet, even there I am not sure that such agreements should be limited to energy or natural resources; most, if not all sectors, of the economy could benefit from such disciplines.

To sum up,

(1) Trade liberalization is not less but more important when it comes to natural resources, especially energy.
(2) Trade barriers in this sector are fundamentally different but when interpreted in an “evolutionary” manner current WTO rules can address a lot of the distortions.
(3) The status quo does not present a pretty picture; the big question on how to move forward is whether it will be steered by the Appellate Body or, you, WTO negotiators.

Thank you.

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1. This is the text of the comments delivered by professor Pauwelyn at the launch of the World Trade Report 2010 in Geneva on July 23rd 2010. back to text