To what extent are WTO rules relevant to trade in natural resources?

Dr Melaku Desta: Reader in International Economic Law and Director of PhD programme


The International Economic Law and Policy Blog hosted a week-long discussion on various legal issues related to trade in natural resources (10-17 March 2010). The text below highlights some of the comments posted
Sub-questions under this included: 1) To what extent are WTO rules relevant to trade in natural resources? 2) What makes trade in natural resources different from trade in other products? And 3) What do we mean by trade in natural resources anyway – i.e. at what point does a natural resource cease to be a natural resource and become a tradable product, and does this matter in legal terms?

1) To what extent are WTO rules relevant to trade in natural resources?
As an introduction to this discussion, it was submitted that access to markets, reflecting producers’ interests, and access to supplies, reflecting consumers’ interests, should be distinguished. Whereas the major issue in the natural resources sector (e.g. crude oil) is access to supplies rather than to markets, the GATT/WTO system is designed to advance market access more than access to supplies. Therefore, the trading system will need to undergo radical changes in order to address issues of supply access.

The view was expressed that WTO rules on trade in goods apply to natural resources in the sense of applying to measures that regulate natural resources and in the same way that they apply to measures regulating goods more generally. When natural resources are being traded (or might potentially be traded), they are effectively treated as goods/ products, and as a result of this, measures regulating them are subject to the various trade-in-goods agreements set out in Annex 1A of the WTO Agreement. This view was supported by the reference to the dictionary definitions (i.e., Black’s Law Dictionary, 8th ed.) defining the terms “natural resources”, “goods” and “products”. On the basis of these definitions, it was argued that, although “natural resources” are not goods themselves, they appear to be something akin to “potential” goods and, therefore, fall within the scope of “goods”/ “products” within the meaning of the WTO law. Through extraction and processing, they can be turned into goods, and can be sold as commercial products. In other words, all natural resources fall within the ambit of the WTO regime. This also can be confirmed by the GATT Article XX (g) exception (i.e., measures relating to the conservation of exhaustible natural resources), which suggests that natural resources are generally covered by the GATT.

Goods v. Potential Goods

It was further argued that if natural resources did not fall under the GATT, it would be too difficult to draw a line between “natural resources” and “goods”/ “products” covered by the WTO rules. In support of the above, the example of aquaculture/fish farming was illustrated, where the line between fish as a natural resource and fish as a product appears to be particularly blurry. It was suggested that with the purpose to set a general standard, the explicit line between “natural resources” and “goods”/ “products” should be drawn in the WTO.

However, it was noted that the above view does not imply that measures regulating natural resources would necessarily violate WTO rules (e.g. a production ban on a natural resource). On the contrary, there is a good chance that even if these measures fall under WTO rules, they will not be found in violation (or will be justified by the GATT exceptions).

In relation to the above view and particularly the coverage of the GATT, the question was raised whether the WTO scope extends as far as to upstream measures? It was noted that if upstream measures were covered by the GATT/WTO rules, these measures, including production bans, would almost certainly be equivalent to export bans, and, therefore, would prima facie constitute a violation of the GATT. Along these lines, the following question was asked: what is the test to determine whether a particular upstream measure in the natural resources sector is subject to the GATT/WTO system: i.e., is it 1) whether the measure has any impact on trade in the product downstream, or 2) is there any requirement of direct relationship between the measure and the tradable product?

Upstream measures v. downstream consequences

Referring to the earlier suggestion to draw a line between “natural resources” and “goods”/ “products” as well as the example of fish used thereof, the GATT Report on Canada – Herring and Salmon [BISD 35S/98, adopted on 22.03.1988] has been recalled. In this case, both parties and the panel appear to agree that GATT rules do not apply to any measures restricting fish catch (i.e., upstream measures) but only to measures restricting the export of fish after they have been caught. Further the parallels between Canada – Herring and Salmon and OPEC production control measures were drawn. It was concluded that OPEC member states appear to be in analogous position to Canada or the US in this GATT case. The moment OPEC countries produce the crude and ban its exportation, or make exportation conditional on any further processing within the countries, they would be in breach of their WTO obligations. To the extent they only restrict production, their acts remain outside the scope of the GATT/WTO system, falling instead under the established principle of permanent sovereignty over natural resources. In other words, WTO law comes into play only after a given natural resource has passed through a production process and has been converted into a product ready for exchange and trade. If this law applies to the pre-production stage, it is only to the extent necessary to ensure that measures taken at that stage do not affect the competitive relationship on the market between the products that come out of the process.

Goods v. products: are they different? Interpretation?

In regard to the question of whether a particular upstream measure in the natural resources sector is subject to the GATT/WTO system, the arguments were submitted that the title of the Annex 1A of the Marrakesh Agreement (i.e., Multilateral Agreements on Trade in Goods [emphasis added]) implicitly answers this question. In other words, any measure affecting trade in goods will fall under the GATT. Further, the analysis of what does the term “good” mean under the GATT was carried out in the light of international customary rules of treaty interpretation codified by the Vienna Convention on the Law of Treaties of 1969, Articles 31 and 32 thereof. This analysis addressed the ordinary meaning and the contexts relevant to the term “goods”. It was concluded that natural resources may be defined as goods within the meaning of the GATT as soon as they comply with the following requirements: 1) they are listed as goods in the Member States’ Schedules of Concessions on goods; 2) they are tradable (i.e., they have monetary value); and 3) they have reached a level of processing specified by the HS Nomenclature in relation to specific natural-resource-based good. On the second point, it was noted that the tradability of goods should be distinguished from the tradability of production licenses, which may, inter alia, contain a state permit to explore or exploit natural resources, but do not necessarily confer possession rights over natural resources on the licensees. It was also pointed out that when analyzing the ordinary meaning of the terms, the WTO Panels/AB should not confine their inquiry only to dictionaries; the use of rulings/opinions of judges and arbitrators in other fora, such as, inter alia, the ECJ, on the basis of the right to seek information set out in the DSU Article 13.1 was suggested.

Following up on the above arguments, the attention was drawn to the fact that the term used in the GATT Articles I, III and XI is actually “product” and not “goods”. It was noted that while both terms may have the same meaning, the starting point of the analysis should be the words actually used in the provisions at issue. The use of the term “product” in the above provisions appears to create additional limitations on their application to natural resources. In addition, the question was raised whether the GATT Article XXIII: 1 (b) is limited only to products, or not? The other point brought up along the same lines was that the GATT Articles I, III and XI do not apply to every measure “affecting” products, but rather, each of them establishes the degree of connection required between a measure and a product, narrowing the broader term “affecting” in some way or another.

In relation to the argument that in order to be defined as goods within the meaning of the GATT a natural resource has to be, inter alia, a “tradable good”, the US - Softwood Lumber IV case has been recalled [WT/DS257/R; WT/DS257/AB/R adopted on 17.02.2004], where both the panel and the Appellate Body rejected Canada’s argument that the term “goods” in the context of a subsidy provided in the form of goods or services other than general infrastructure (see Article 1.1(a)(1)(iii) of the SCM Agreement) is limited to tradable goods. This point appears to be relevant also to the above argument that the WTO law may extend to measures applied at pre-production stage, if these measures affect the competitive relationship between products on the market.

Questions lead to further questions

The following further questions were raised during the discussion: 1) To what extent have countries surrendered their sovereignty over natural resources under international law? And 2) Can GATT Articles XI (i.e., General Elimination of Quantitative Restrictions) and XVII (i.e., State Trading Enterprises) be considered as an expression of state consent to limit their sovereignty over their natural resources?.