Resource Scarcity, Export Restrictions and the Multilateral Trading System

The turn of the millennium marked a shift towards higher commodity prices and greater price volatility, as a result of high demand for natural resources from emerging economies combined with export restrictions and financial speculation. A recent Chatham House report highlights that, over the past decade, the global consumption of coal and iron ore grew by five to ten percent a year. Annual growth was closer to two percent for oil, copper, wheat and rice.[1] Fast growth in demographic heavyweights and the rise of large middle classes in an increasing number of middle-income countries are likely to remain a major commodity boom driver for years to come. Global demand for food is expected to grow by 70 percent from 2010 to 2050, while global energy demand is forecasted to be one-third higher by 2035 according to the International Energy Agency. A recent study shows that real commodity prices for energy and non-energy resources have actually been on the increase for the past six decades, notwithstanding short-term boom/bust episodes and medium-term cycles, with real prices being particularly low in the 1990s and early 2000s.[2]  The boom in unconventional oil and shale gas shall exert a significant impact on energy prices. In some cases however, powerful constituencies are already advocating for export restriction in order to keep domestic prices low (e.g. shale gas in the United States).

As the world has entered an era of relative resource scarcity, an increasing number of bilateral and regional trade agreements include deals on strategic resources aimed at enhancing supply security for importing partners. This heightens shortage risks for other importing countries that are not part of the deal and poses a serious challenge to the multilateral trading system, inherited from a previous era of relatively low commodity prices and abundant natural resources.

Export Protectionism

Over the past decade, a growing number of countries have introduced export restrictions on food, energy and mineral products. While primary commodity exporters had long levied export duties for fiscal purposes or to promote the domestic transformation of raw materials, things look different this time: between 2007 and 2011, over thirty countries imposed export restrictions on agricultural goods out of food security and price concerns. Such trade restrictions may be responsible for up to half of the food price hikes of 2007-2008.

The post-World War II GATT and post-Cold War WTO were established with the primary objective of addressing import protectionism. Notwithstanding the prohibition of quantitative restrictions on exports (and imports) under GATT Article XI, the negotiations focused primarily on setting binding limits on import tariffs and non-tariff measures, and on export subsidies. In contrast, export duties have not been explicitly dealt with under the GATT, which, in addition, allows for exceptions to the general rule of eliminating quantitative export restrictions. In its 2010 World Trade Report, the WTO underlined that multilateral trade rules had not been designed to regulate trade in natural resources and were not always adequate to respond to sectoral specificities.[3] However, general WTO principles do provide a framework for limiting trade wars in the resource sector, and there are specific provisions that are particularly relevant to trade in natural resources.

When it comes to the recent food price crisis, assessing the extent to which trade-related measures mattered is no easy task. The specific impact of abnormal climatic events, trade restricting measures and financial speculation remains a contested issue and may greatly vary from one commodity to another. The 2008 rice crisis offers a few important insights in this regard. The price of a metric ton of rice increased from US $393 in January 2008 to more than $1’000 in April-May 2008, and then fell back to $550 by the end of the year. According to rice experts, the market fundamentals did not justify such a price boom and bust. Despite drought affecting a few producing areas, there was no shortage of rice on world markets. Speculation on rice futures markets remains very limited, contrary to the situation prevailing in other markets (e.g. wheat or oil). The major actors on the rice market are sovereign states and private traders.The largest rice futures market, hosted at the Zhengzhou Commodity Exchange, is tightly regulated under the China Securities Regulatory Commission. Financial market speculation cannot be pointed to as the main culprit, although the indirect impact of speculation in other commodity markets cannot be dismissed. Rice can be a substitute for wheat, the price of which had peaked from $196 in May 2007 to $440 in March 2008, i.e. a few months before rice. In addition, the concomitant oil price hike had a severe impact on the price of fertilizers and other agricultural inputs.

Trade policy actually did play a central role in the rice crisis. Producer countries consume about 93 percent of the global rice production domestically, leaving a relatively marginal portion for cross-border trade. By early 2008, India and Vietnam, the second and third largest rice exporters, announced export restrictions soon followed by others, while China introduced an export surcharge. Shortly thereafter, the government of the Philippines announced its resolve to import the required quantity of rice to satisfy domestic consumption at a price as high as $1’100 a ton. These measures and official announcements, combined with a lack of transparency on stocks and production levels, led to panic buying and hoarding that sent prices skyrocketing. Since 2009, rice prices have stabilised at approximately between $500 and $600 a ton, whereas the price of wheat has remained more volatile, with a renewed increase from mid-2010 onward. Policy responses to the 2008 rice crisis include efforts by Association of Southeast Asian Nations (ASEAN) countries to increase transparency and exchange of information on production and stocks, which seems to ward off rice from price volatility affecting other commodities.

In sum, export restrictions – or their mere announcement – combined with a lack of transparency and trust between major players were the key ingredients in the 2008 rice crisis. The extent to which such temporary export restrictions may have been justified under international trade law remains untested; however, their legality appears questionable, given that there was no critical shortage of rice. In any case, the WTO dispute settlement mechanism would have been much too slow to address such a sudden crisis unfolding over less than a year.

Export Restrictions on Non-renewables

In a context of resource scarcity, what should the role of the WTO be in providing a sense of security regarding strategic supplies? The January 2012 Appellate Body decision related to Chinese export restrictions on various raw materials is the first ruling directly dealing with the conditions that may justify export restrictions under the WTO.

The dispute was brought up three years earlier by the European Union, Mexico and the United States against export quotas and export duties imposed by China on certain raw materials (e.g. bauxite, manganese, zinc). The Appellate Body broadly confirmed the July 2011 panel decision against China, referring to GATT Article XI:2(a) and Article XX(g) in addition to specific provisions of China’s WTO accession protocol, which oblige the country to eliminate all export duties. Article XI:2(a) allows for a temporary waiver to the general prohibition of quantitative restrictions: export bans and restrictions can be ‘temporarily applied to prevent or relieve critical shortages of foodstuffs or other products’ that are deemed essential to the exporting country. It thus applies first and foremost to renewables. Article XX(g) deals with specific measures relating to the conservation of exhaustible resources, ‘if such measures are made effective in conjunction with restrictions on domestic production or consumption’. The decision of the WTO Appellate Body sets an important precedent not only with regard to the ongoing trade dispute over Chinese export restrictions on rare earths, but more generally to forthcoming export restrictions concerning dwindling non-renewable resources.

From a resource economics perspective, the price of exhaustible resources like rare earths is bound to peak sooner or later as the reserves are depleted. The basic Hotelling rule states thatin a competitive market, the price of an exhaustible resource must increase at the same rate as the discount rate. The simple model must, of course, be expanded to account for technological progress that affects demand through efficiency gains or substitutes. Following this logic, export restrictions delay future prohibitive price hikes by constraining current consumption. More importantly, they send critical political signals and provide useful market incentives. The Chinese decision to restrict rare earths exports sent shockwaves worldwide, leading importing countries to consider reopening domestic mines, investing in alternative technologies and boosting recycling efforts with a view to reducing what had become an alarming dependence on Chinese rare earths. The enforcement of the WTO Appellate Body decision tends to delay the price increase and associated market incentives. While unrestricted exports keep prices low in the short to medium term, they may lead to more abrupt price hikes over the long run, leaving a shorter time span to develop alternative products and technologies. Export restrictions on exhaustible resources whose reserves are getting scarce can provide early warning signals and incentives for timely reactions.

A Greater Role for the WTO?

How pivotal should the WTO be in improving the global governance of food, energy and minerals? Each commodity market presents its own characteristics with different key players and specific regional and global organisations pursuing different, potentially conflicting, objectives. Enhancing transparency by providing reliable information on stocks and flows is critical to enable importing and exporting countries as well as investors to take early action and avoid panic moves. The WTO could provide greater transparency on export restrictions with tighter rules on early notifications and consultations involving all interested parties. Member states could also clarify the interpretation of relevant WTO disciplines, in particular with regard to the temporary application of export restrictions for the sake of preventing or relieving critical shortages of primary commodities deemed essential to exporting countries. It has further been suggested to seek a deal under which importing countries would commit to reduce tariff escalation on processed goods against binding commitment from exporting countries not to impose trade restrictions on primary commodity exports.[4]

Concluding Remarks

The Doha Round stalemate does not bode well for rapid advances on the options highlighted above. This should, however, not prevent progress on greater transparency and effective early consultations. For obvious reasons, previous multilateral trade negotiations focused on import protectionism. Today, the WTO should address export restrictions as a matter of priority. An effective multilateral trading system is expected to contribute to avoiding harmful panic moves when not justified by market fundamentals, as exemplified by the 2008 rice crisis. On the other hand, the WTO does and can further take into account the legitimate concerns of producer countries, allowing for restrictions deemed essential for national security or environmental protection.

This should be part of a broader attempt to strengthen the global institutional architecture dealing with food and energy security. It requires considering a myriad of bilateral, regional and global arrangements ranging from informal, voluntary initiatives to systematic data exchange and oversight via the building and sharing of emergency stocks and the clarification of binding rules related to export restrictions. There is no one-size-fits-all solution: each commodity market has its own characteristics with different players and specific risks and vulnerabilities. Yet, the growing nexus between water, food and energy requires factoring the complex interactions between various commodity markets into the analysis with a view to identifying critical bottlenecks and devising early risk management strategies. Pragmatic multilateralism must contain the tendency to address resource scarcity through bilateral and exclusive deals.

This piece is a revised version of a forthcoming paper to be published in Bridges Trade BioRes Review under the title “International Trade in an Era of Relative Resource Scarcity”.