News

Export regulation – the WTO’s blind spot?

23.10.2010

Daniel Moulis, Principal

Maria Tang, Solicitor

Buy from me… but must I sell to you?

The Members who have negotiated the GATT and the WTO Agreements have to date focussed on the self-interest of their own producers to sell “stuff” to customers in the territories of other Members. Not the same amount of attention has been paid to the interest of a Member in being able to buy stuff from another Member, and the proposition that one Member’s producers should be “forced” to sell to the input users or consumers of another Member has been entirely absent.

Article XI:1 of the GATT 1994 provides that no prohibitions or restrictions, except duties, taxes or other charges, shall be instituted or maintained on the importation or exportation of any product. Ipso facto duties, taxes or “other charges” are allowed. In the case of imports, however, the Members of the GATT, now the WTO, have agreed to a detailed list of tariff bindings, which are commitments of Members not to raise duties above the published “bound” level. For exports, there is no such list.

Specialisation

The very aim and objective of freeing-up international trade has been to encourage efficiencies by giving full rein to comparative advantage, whether it be measured in terms of a country’s labour, resources, finance, know-how, or whatever. In short, the theory is that the world economy should allow countries to do what they are good at doing, thereby encouraging efficiencies. The natural consequence of this has been greater specialisation. Members produce less varied stuff, because they have discovered that they are good at producing some stuff but not other stuff. As they produce less of the other stuff, they are finding that they have to buy that other stuff from elsewhere.

So what happens if they can’t get the other stuff as freely as they want? After all, they thought that they were doing the right thing, by complying with the theory that they shouldn’t make that other stuff…

Scarcity

The rapaciousness of the human race is causing concerns about access to raw materials for production purposes. Put simply, some “input stuff” is becoming scarce and accordingly more precious. As a result many Members see a need, or a desirability, to impose restrictions, such as duties or outright bans, on the exportation of that kind of stuff from their own borders. Not only does this restrict the access of other Members’ producers to the restricted materials, but it can also increase supply in the restricting Member, thus making the materials less expensive in that territory. The end result is that the “output stuff” that uses the “input stuff” might become less expensive for the producers of the restricting Member to make than it is for the producers of other Members.

Many of the world’s natural resources are slowly running out, or are becoming marginalised or more expensive because of environmental laws and taxes. Entirely new types of resources are growing in importance. “Rare earth” minerals are a topical example. Not everyone has these new resources. Members that don’t have access to them are looking for WTO-given rights to demand they can have them. But what are those rights?

The importance of these new resources, this new “input stuff”, has placed China even more firmly in the trade regulation spotlight (as if it wasn’t there already). It has been estimated that China has 93% of the world’s known deposits of “rare earth” minerals. China is a WTO Member that has an active interest in improving its environmental conditions. And, at the same time, it has traditionally used a number of fiscal and regulatory levers to achieve its own social and economic outcomes. This makes the probability of trade conflict on the question of export restrictions starkly apparent. And China is not alone. These rare resources, which are used to deliver a wide variety of new technologies, including mobile phones and ballistic missiles, also naturally occur in some central Asian and African countries.

Regulation of export restrictions in the WTO

Faced with these problems, of specialisation, globalisation and scarcity, what does the WTO offer by way of guidance as to what is expected of Members on export freedoms? What recourse is available to Members who demand to be able to buy the stuff they want?

Where export restrictions are not “duties, taxes or other charges” Article XI:1 is the main peg, if not the only one, on which to hang an argument about WTO-illegality. A further gloss on this is found in Article VIII which prohibits the taking of excessive fees by customs, if these fees could represent indirect protection to domestic products or a tax on exports for fiscal purposes.

It ought to be fairly clear when a non-tax mechanism, such as an embargo or a quota, is being used to restrict exports. However the peg might not be strong enough to hold fast in the face of some fairly strong winds, which come in the form of express exceptions under various other Articles. So, a prohibition or restriction might be justified if it:

  • is necessary for classification, grading or marketing of commodities;
  • relates to the conservation of exhaustible natural resources, and is applied in conjunction with limits on domestic production or consumption;
  • is part of a government stabilisation plan;
  • is essential in times of general or local short supply; or
  • relates to fissionable materials or military products in times of international emergency.

Also, if an export restriction is imposed, it must be “MUN”: my acronym to describe the obligation of the restricting Member to treat all other Members equally unfavourably.

Because accession agreements are more recent, they reflect modern concerns about the freedom to export, or “the right to buy”, more stringently that the original GATT and the WTO Agreements. China, for example, has agreed to eliminate all taxes and charges applied to exports unless specifically listed in Annex 6 of its Accession Protocol, or unless imposed in accordance with Article VIII. Thus, outside Annex 6, some might argue that China’s ability to impose taxes and charges is actually inferior to that of other Members.

Political and legal uncertainties

Politically, the debate has the potential to fracture international trade relations. Refusal to supply may well be claimed to be a greater sovereign right than those already given away. One can also see an exacerbation of the already paralysing developed country/developing country divide. Accusations could be levelled at the developed world that it has actively participated in resource and commodity cartels in the past, and that any move to tighten up export freedom laws would lead to the application of different standards to new market entrants.

At the same time, there’s not that much case law on export restrictions. Due to ambiguities and seemingly conflicting provisions in the legal instruments, it’s no surprise that there are many unanswered questions about the legitimacy of export restrictions. Can a duty be so high as to be an outright prohibition? If the restriction answers the description of being a duty, does it matter how high it is? How should tax-refund-on-exportation schemes be treated, given that they could be said to be “impliedly permitted” by way of being exempted from subsidy analysis? Should the definition of what is an “exhaustible natural resource” be lax or strict? What degree of correlation is required, if any, between domestic and export limitations to qualify the restrictions as being made in conjunction with each other? What if a Member simply limits domestic production of something that other Members want? Is an export restriction that dramatically distorts international trade open to attack by way of an Article XXIII “non-violation nullification or impairment” claim? And so on.

Proceedings currently underway under the WTO’s Dispute Settlement Understanding hold out some prospect of providing some definition and clarity to the legal principles governing the regulation of exports by Members. In China – Measures related to the exportation of various raw materials (DS394, DS395, DS398), various claims of non-compliance by China have been raised by the United States, the European Union and Mexico.

An issue to watch

The GATT 1994 and its WTO Agreements are impressive in their breadth of coverage and depth of thought. But despite the efforts that went into drafting the original GATT in the late 40s, and the seven completed trade rounds since then, measures of a Member which restrict its own exports continue to be something of a “blind spot” in world trade regulation.

For more information, please contact Daniel Moulis on +61 2 6163 1000 or daniel.moulis@moulislegal.com.

This memo presents an overview and commentary of the subject matter. It is not provided in the context of a solicitor-client relationship and no duty of care is assumed or accepted. It does not constitute legal advice.