Settling Disputes in Natural Resource Trade: What Role for the WTO?

1. Settling Disputes in Natural Resource TradeSWP Securing Access to Critical Raw Materials What Role for the WTO in Tackling Export Barriers to Trade? Transatlantic Academy/German Marshall Fund Washington D.C. 08. December 2011 Dr. Stormy-Annika Mildner (M.Sc.)

2. Settling Disputes in Natural Resource TradeSWP Context “We have spent six decades creating an open trading order by pushing down import duties for goods – only to have export restrictions putting those gains into reverse.” Former EU Trade Commissioner Peter Mandelson „The Challenge of Raw Materials”, speech before the EU Parliament on September 29, 2008. “In the WTO the EU will continue to insist on the establishment of a minimum of disciplines on the use of export taxes.” David O`Sullivan, Director General, EU DG Trade, speech before the Conference on Raw Materials, Brussels, September 29, 2008. “I believe not only that there is room for mutually beneficial negotiating trade-offs that encompass natural resources trade, but also that a failure to address these issues could be a recipe for growing tension in international trade relations”. WTO Director-General Pascal Lamy, 2010 http://www.wto.org/english/news_e/pres10_e/pr611_e.htm Introduction WTO Rules The China Case Recommendations 2

3. Settling Disputes in Natural Resource TradeSWP • Context: Why is the Issue Important for the U.S. and the EU • Recent Trends: Turbulences in Primary Commodity Markets • High growth rates of GDP, especially in emerging countries • High demand for many metals and minerals which are indispensible in the production of IT, green tech, medical and laser products • increasing competition • Increasing prices • Interventionist trade policies in resource-rich countries have increased • Number of export tariffs and export quotas grows • The U.S. and the EU are highly vulnerable to price fluctuations and interruptions of supply of raw materials Introduction WTO Rules The China Case Recommendations 3

4. Settling Disputes in Natural Resource TradeSWP Context: Why is the Issue Important for the U.S. and the EU High Import Dependence: Germany • Well endowed with construction materials like sand. • BUT: Highly-dependent on imported metals and minerals, many of these are strongly concentrated with regard to their origin • Imports 2009: 54.8% of rare earths from China, 82.5% of lithium-carbonate from Chile, 75.3% of chrome from South Africa, 73.3.% of bauxite from Guinea Introduction WTO Rules The China Case Recommendations 4

5. Settling Disputes in Natural Resource TradeSWP Context: Why is the Issue Important for the U.S. and the EU High Import Dependence: The United States • Well-endowed with metals and minerals naturally: 10% of global gold, 11% of global lead, 14% of global rhenium production in the US • But it is still highly import-dependent for many metals, e.g. indium, gallium, germanium, lithium (100%; 99%; 90%, over 50%) • High concentration or import sources U.S. Department of Energy - Critical Materials Strategy Introduction WTO Rules The China Case Recommendations 5

6. Settling Disputes in Natural Resource TradeSWP Context: Why is the Issue Important for the U.S. and the EU High Concentration of many critical materials U.S. Department of Energy - Critical Materials Strategy Introduction WTO Rules The China Case Recommendations 6

7. Settling Disputes in Natural Resource TradeSWP • Question • How well is the WTO equipped to tackle export barriers to trade? • What can the transatlantic partners do to sufficiently deal with this issue? • Result and Recommendation • WTO rules on export restrictions are relatively weak. • We therefore recommend a four track approach of: • 1. Join forces in lobbying for a revision of WTO rules on export restriction; • 2. Push for rules on export restriction within their current negotiations of free trade agreements (FTAs), while agreeing on a common legal language for these rules; • 3. Address the root of the problem, assisting poorer countries in their efforts to reform their taxation systems and design sustainable mineral policies; and • 4. Join efforts in designing comprehensive resource strategies in which trade policy is one of many instruments to secure supply with critical materials. Introduction WTO Rules The China Case Recommendations 7

8. Settling Disputes in Natural Resource TradeSWP • Roadmap: • Introduction: • What are Export Barriers in International Trade • Motivations for Export Barriers to Trade • WTO Rules on Export Restrictions • Dispute Settlement in the WTO – the China case • Recommendations for the transatlantic partnership Introduction WTO Rules The China Case Recommendations 8

9. Settling Disputes in Natural Resource TradeSWP • Introduction:What are Export Barriers in International Trade • According to the WTO, export restraints are „a border measure that takes the form of a government law or regulation which expressly limits the quantity of exports or places explicit conditions on the circumstances under which exports are permitted, or that takes the form of a government-imposed fee or tax on exports of the products calculated to limit the quantity of exports”. • They can take many different forms:Taxes, duties and charges, quotas and export bans, mandatory minimum export prices, reductions of value added tax (VAT) rebates on exports, and stringent export licensing requirements. • Economic Objectives • increasing government revenues • promoting downstream or infant industries • Improving of terms of trade • diversifying exports • controlling price fluctuations • Preferable measure: export tariffs • Non-economic objectives • national security • protection of the environment and human, plant, and animal welfare • Conservation of • conservation of exhaustible natural resources • Preferable measure: export quotas Introduction WTO Rules The China Case Recommendations 9

10. Settling Disputes in Natural Resource TradeSWP • 1. Introduction: What are Export Barriers in International Trade • The most frequent users of export restrictions are developing countries. • Items most subjected to export duties were agricultural products (36 of 65 members), mineral and metal products (28 of 65 members), products made from leather, hide and skin (17 of 65 members), forestry (15 of 65 members), and fishery (13 of 65). Number of countries applying export duties, by regions and other groupings (2003-2009) Many small developing countries use export taxes to raise government revenue Source: Jeonghoi Kim, Recent Trends in Export Restrictions, OECD Trade Policy Working Paper No. 101. Introduction WTO Rules The China Case Recommendations 10

11. Settling Disputes in Natural Resource TradeSWP • 1. Introduction: What are Export Barriers in International Trade • The WTO also found an increase of barriers within its Report on G20 Trade and Investment Measures WTO, OECD, UNCTAD (2011), Report on G20 Trade and Investment Measures, May to Mid-October 2011, October 2011, http://www.oecd.org/dataoecd/24/31/48941943.pdf, p. 8. Introduction WTO Rules The China Case Recommendations 11

12. Settling Disputes in Natural Resource TradeSWP • 2. WTO Rules on ExportRestrictions • Export Tariffs – most relevant rules • Export taxes are not prohibited by the WTO, though such taxes must be non-discriminatory and transparent under Articles I and X of the 1994 GATT. • While they are to be applied undiscriminatorily, export tariffs are not bound. • WTO members can agree to legally binding commitments through accession agreements (an example is China's accession agreements (Part I (11.3) and Annex 6 of Accession Protocol). • Quantitative Export Restrictions – much stricter rules • Article XI:1 GATT Measures which might restrict the quantity of exports of a product are prohibited. • Article 12 in the WTO Agreement on Agriculture: “any new export prohibition or restriction on foodstuff shall (a) “give due consideration to the effects of such prohibition or restriction on importing Members’ food security”; (b) “give notice in writing”, and “consult, upon request, with any other Member having a substantial interest as an importer with respect to any matter related to the measure in question.” Introduction WTO Rules The China Case Recommendations 11

13. Settling Disputes in Natural Resource TradeSWP • 2. WTO Rules on ExportRestrictions • Exceptions: • XI:2 permits the temporary imposition of barriers in cases of critical shortage of foodstuffs or other products essential to the exporting contracting party, • Article XX: • (XX(b))export restrictions are permitted when necessary to protect human, animal, or plant life and health • or to conserve exhaustible natural resources (XX(g)) • Article XXI: export restrictions are permitted when necessary to protect national security. • Article IX(3) of the Marrakesh Agreement Establishing the World Trade Organization: if three-fourths of WTO members agree, the General Council can, in exceptional circumstances, decide to waive an obligation imposed on a Member by any of the WTO’s agreements. • Open for interpretation: “essential to the exporting”, “national security”, “critical Shortages”, • So far very few dispute cases on export restrictions Introduction WTO Rules The China Case Recommendations 12

14. Settling Disputes in Natural Resource TradeSWP • 3. The United States and the EU against China: Export Restrictions on Metals • 3 June 2009 the U.S. and EU filed a formal complaint with the WTO. • 5 July 2011, the panel provided a report to its members. • A report by the Appellate Body is expected in December 2011 • The materials in question include: various forms of bauxite, coke, fluorspar, magnesium, manganese, silicon carbide, silicon metal, yellow phosphorus, and zinc. • China is an important producer of each of these materials, which are used in many technology products. • Four types of restraints were identified: export duties, export quotas, export licensing, and minimum export price requirements. Introduction WTO Rules The China Case Recommendations 14

15. Settling Disputes in Natural Resource TradeSWP • 3. The United States and the EU against China: Export Restrictions on Metals • The complainants’ position • Chinas export duties are inconsistent with its commitment in paragraph 11.3 of the WTO accession protocol • Quantitative restrictions infringe Article XI:1 of the GATT • China can justify its export restrictions neither with Article XI:2(a) nor Article XX(b) and (g). • Article XI:2(a) is not applicable as the products were neither in “critical shortage” nor “essential products” to China • The defendant’s position • The language of its accession protocol did not impede the usage of Article XI:2(a) and Article XX(b) and (g). • Export restrictions were indeed necessary to protect the environment, human welfare and conserve natural resources. • China did face a shortage of critical raw materials. Introduction WTO Rules The China Case Recommendations 15

16. Settling Disputes in Natural Resource TradeSWP • 3. The United States and the EU against China: Export Restrictions on Metals • The WTO panel finding • Chinas export duties are indeed inconsistent with its commitment in paragraph 11.3 of the WTO accession protocol • Quantitative restrictions infringed Article XI:1 of the GATT; • With regard to XI:1: a critical shortage of the materials in question could not be found • China did not meet the criteria of Article XX(b) and (g). China could not demonstrate that it imposed restrictions on domestic production or consumption to conserve the raw materials in question. • The panel warned • “export restriction on an exhaustible natural resource, by reducing the domestic price of the materials, works in effect as a subsidy to the downstream sector, with the likely result that the downstream sector will demand over time more of these resources than it would have absent the export restriction.” Introduction WTO Rules The China Case Recommendations 16

17. Settling Disputes in Natural Resource TradeSWP • Preliminary Results: • The EU and the US hope that the recent panel ruling will serve as precedent for following cases • But: • China is somewhat a special case, most other countries face less stringent rules • In general, export restrictions are an underregulated area in WTO law; • Dispute settlement within the WTO does not provide a remedy: Rules and grey zones convey legal insecurities; • Not all export restrictions aim at increasing the competitiveness of domestic exporters • In some cases, the WTO is not the right institution to successfully tackle the problem of export restrictions Introduction WTO Rules The China Case Recommendations 17

18. Settling Disputes in Natural Resource TradeSWP • 4. Options for the European Union and the United States • Join forces in lobbying for a revision of WTO rules on export restriction • Export restrictions should fall under the same rules as import restrictions, and rules should feature the same exceptions. • As long as the rules cannot be changed, the U.S. and EU could lobby for a plurilateral agreement under the framework of the WTO • Problem: Fierce opposition by producer countries • Use FTAs to push for stricter rules • Push for rules on export restriction within their current negotiations of free trade agreements (FTAs) • Agree on a common legal language for these rules; • Problem: No FTA negotiations with large producer countries Introduction WTO Rules The China Case Recommendations 18

19. Settling Disputes in Natural Resource TradeSWP • 4. Options for the European Union and the United States • Address the root of the problem, taking into account different motivations for export restrictions • assist poorer countries in their efforts to reform their taxation systems and design sustainable mineral policies; • Join efforts in designing comprehensive resource strategies in which trade policy is one of many instruments to secure supply with critical materials. • diversifying the global supply chains by securing access to resources abroad and facilitating extraction, processing, and manufacturing at home; • developing material and technology substitutes, enhancing recycling, and a more efficient use of resources; • increasing transparency on resource availability and demand, and publishing regular reports on critical materials. Introduction WTO Rules The China Case Recommendations 19

20. Settling Disputes in Natural Resource TradeSWP Thank you for your attention! Introduction WTO Rules The China Case Recommendations 20