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,
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
- 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
- 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
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
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
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
- 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
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.
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