Resources trade and the WTO

Michele Ruta 04 August 2010

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Trade in natural resources accounts for a growing share of world trade and a growing share of policymakers’ attention. The world's growing population and economy create pressures that increase the demand for trade in fish, forestry, fuels, and mining products, stimulating a related policy debate on its environment (Dean and Lovely 2008) and development impacts (Brahmbhatt et al. 2010 and Spatafora and Tytell 2010).

The tension between rising demand for natural resources and their scarcity is one of the challenges that most modern societies must address. Indeed, the resulting tensions seem likely to increase, especially as the global economy recovers from recession. Fears of insufficient access to supplies in resource-scarce countries and of inappropriate exploitation in resource-rich regions could lead to trade conflict or worse. All this raises an important question: how to adequately design rules that can promote mutual gains from resources trade?

Natural resources trade

The total value of world trade in natural resources was $3.7 trillion in 2008, or nearly 24% of world merchandise trade. This value has increased more than six-fold between 1998 and 2008, mostly due to steadily rising prices of fuels and minerals (see Figure 1), while the volume of natural resources trade has been quite steady in the past decade.

Figure 1. World resources exports by product, 1990-2008 (Billion dollars)

Figure 2 shows the trade flows in natural resources by region. Less industrialised regions abundant in natural resources, as Africa, the Commonwealth of Independent States (CIS) and the Middle East, have very little intra-regional trade in natural resources and mostly ship these goods to more industrialised countries in Europe, Asia, and North America.

Figure 2. Share of intra-region trade in natural resource exports, 2008

Natural resources have a number of distinctive features, i.e. uneven geographical distribution, exhaustibility (hence the large rents associated to their scarcity), environmental externalities deriving from their extraction and consumption, dominance in some economies, and high price volatility. Keeping these characteristics in mind is essential for recognising the effects of international trade, the rationale and consequences of trade policy measures, and hence the efficient design of rules governing resources trade (Collier and Venables 2010).

Standard trade theory suggests that shifting resources from regions of relative abundance to regions of relative scarcity has the potential to improve efficiency and increase welfare. Yet welfare comparisons are complicated by dynamic factors – the exhaustibility of natural resources – and pervasive market failures such as imperfectly competitive markets. For instance, faster depletion can result from free trade of fish that suffers from an open access problem and poorly defined property rights. In this case, the standard result of welfare gains from open trade may break down, at least for one country (Brander and Taylor 2010). The theory emphasises that policy interventions in natural resource sectors can be justified on welfare grounds by the specific features of natural resources.

Trade policy in resource sectors

A recent study by the WTO finds that export policy, rather than import restrictions, dominates natural resources trade (WTO 2010). Resource rich countries often restrict exports through a variety of means such as export taxes and quantitative restrictions, whereas tariffs and other import restrictions in resource-scarce countries are low. Applied tariffs are on average 23% lower in natural resource sectors relative to other merchandise trade, while export taxes cover 11% of natural resources trade (compared to 5% of other merchandise trade) and export restrictions on natural resource products represent 35% of all notified export restrictions. Figure 3 provides a breakdown of data on export taxes by sector and by county.

Figure 3. Natural resources exports covered by export taxes – upper bound estimates for selected countries

There are, however, two important qualifications to this general rule.

  • First, domestic policies – including subsidies, technical regulations and consumption taxes – are frequently used. When resources are highly unevenly distributed across countries, domestic measures have trade effects that are very similar to border measures.
  • Second, the structure of protection that resource exporters face tends to rise with the stage of processing (tariff escalation), as shown by tariff measures imposed by developed economies in forestry, fuels and mining sectors (see Figure 4).

Figure 4. Structure of tariff protection in developed countries, by stage of processing

Governments employ trade policies as instruments to improve resource conservation, reduce environmental externalities associated with the harvesting or consumption of resources, stimulate diversification of exports away from dominant resource sectors, and stabilise resource prices in response to supply or demand shocks. However, independently of the objectives actually pursued by policymakers, trade measures have distortionary effects that need to be recognised.

  • First, restrictions on trade have beggar-thy-neighbour effects, as they shift rents across countries or alter the terms of trade.
  • Second, while in some cases the only available policy option, trade measures are typically beggar-thy-self as they are a second-best policy to address problems associated with natural resources. The first-best intervention is often a domestic policy that addresses the distortion at the source.

Resources trade regulation

The general principles of the multilateral trading system provide a framework for limiting non-cooperative and self-defeating trade policies, including within resource sectors. In addition, several WTO rules have relevance in relation to the specific features of natural resources, such as the exceptions in Article XX of the GATT that allows the use of trade measures relating to the conservation of exhaustible resources. WTO rules, however, were not drafted specifically to regulate natural resources trade and may not always respond adequately to sectoral specificities.

Three areas in particular may require intensified cooperation on trade regulation (see WTO 2010)

  • Export policy: A large country can improve its terms of trade and shift rents internationally by imposing export taxes. As such policies lower the welfare of trading partners they are likely to induce some form of retaliation. Commitments on export taxes could be exchanged either among exporters or for concessions on import tariffs in downstream sectors, that is to reduce tariff escalation.
  • Conservation policy: Rules on subsidies that increase the exploitation of a resource with an open access problem, such as fish, or the consumption of resources that have negative environmental externalities, such as fuels, may need to be reinforced. On the other hand, a case can be made to grant flexibility to subsidies aimed at improving the conservation of natural resources (“green” subsidies).
  • Domestic policies with large trade effects: A production quota is equivalent to an export quota when the resource-rich country has little domestic consumption. Similarly, a consumption tax imposed by an importer with no domestic production of the resource is not different from a tariff. In these cases, regulating only one of the equivalent measures may be insufficient to achieve undistorted trade.

The opinions expressed here should be attributed to the author only. They are not meant to represent the positions or opinions of the WTO and its Members and are without prejudice to Members' rights and obligations under the WTO.

References

 

Brander, J. and S. Taylor (2009). “Trade, Tragedy and the Commons, American Economic Review, 99:3, 725-49

Collier, P and T Venables (2010), “International Rules for Trade in Natural Resources”, Journal of Globalisation and Development, 1(8).

Dean J and M Lovely (2008), “Chinese trade and environmental degradation”, VoxEU.org, 14 May.

Brahmbhatt, M, O Canuto and E Vostroknutova (2010), “Dealing with Dutch disease”, VoxEU.org, 21 June.

Spatafora, N and I Tytell (2010), “Commodity terms of trade: New data on the history of booms and busts”, VoxEU.org, 24 March.

WTO (2010). Trade in Natural Resources, World Trade Report 2010.

 

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Topics:  Development Environment International trade

Tags:  trade policy, WTO, natural resources