WTO (World Trade Organisation) Director-General Pascal Lamy, in a speech at the Third BDI (Federation of German Industries) Raw Materials Congress in Berlin on 26 October 2010, said that “carefully crafted cooperation on rules for resource trade is the only alternative to economic nationalism and conflict.” He added that “concluding the Doha Round will contribute to better harnessing trade in natural resources.”
Editor`s Note: Because of the importance of the speech, ANA decided to carry it in full:
This is what he said:
Ladies and Gentlemen,
Thank you very much for your invitation to participate at the Third BDI Raw Materials Congress. The WTO has a deep interest in the issues that you will be addressing in your meeting today. This year our economists spent a great deal of time and energy exploring the complexities of natural resource trade in the World Trade Report 2010, which we published last July. I very much hope that this analysis will provide a useful contribution to the debate that is ahead of you.
The consumption and trade of raw materials have often posed a choice between conflict and cooperation. We all remember that the choice for a united Europe started with the Coal and Steel Community, which defined rules and created an institutional framework for a common market in place of what for a long time had been contested resources.
The historical context, the countries involved, and the nature of what we would call “strategic” raw materials have changed over time, partly in response to technological developments. But the essential choice between conflict and cooperation is still with us.
This morning I would like to talk about the recent evolution of markets for raw materials, the complexity of trade and trade policy in these sectors, and the challenges for the international regulation of trade in raw materials.
A brief overview of raw materials trade
Raw materials are a broad category of substances, including crude oil, minerals and forestry products, that are used as primary inputs in the production of virtually any other good or service.
Trade in raw materials dramatically increased between 2000 and 2008, mostly as a result of rising commodity prices. The latest available figures show that total world exports of raw materials are valued at 2.4 trillion US dollars, or 19 per cent of world trade, of which roughly 15 per cent is fuel and 4 per cent is non fuel.
The leading importer of raw materials in 2009 was the European Union with 20 per cent of the world total, followed by the United States at 15 per cent. But the rapid growth in import demand in emerging economies is changing the pattern of world trade. China and India, in particular, have seen their shares of world raw material imports increase sharply. China’s share more than doubled, from 5 per cent in 2000 to 12 per cent in 2009, while India’s share rose from 3 per cent to 5 per cent.
International trade in raw materials opens opportunities for mutual welfare gains, but also presents daunting challenges. Many raw materials are highly concentrated in a few locations. This uneven distribution among countries can be a source of international tension, but it is also the main reason why countries gain from trade. Open trade allows all participants to increase their well-being by shifting resources from regions where they are relatively abundant to regions where they are relatively scarce.
Economic theory and experience, however, also point to a number of challenges specific to these sectors. Complexities arise from the fact that raw materials are exhaustible and their extraction and consumption can involve significant environmental effects. The high price volatility of raw materials in international markets creates distress for importing and exporting countries alike. The dominance of resource extraction industries in small economies may generate single-sector dependence, which is a concern for development policy.
These unusual characteristics require us to think hard about the design and implementation of domestic and trade policies and the appropriate nature of international rules and institutions in which these policies are embedded.
Trade policy and raw materials: Key measures and their effects
Let me start by discussing trade policy. It is export policy, rather than import restrictions, that dominates trade in raw materials. The incidence of tariffs in resource sectors is generally lower than for overall merchandise trade. For instance, tariffs in advanced economies are on average 1.4 per cent. On the other hand, quantitative export restrictions and export taxes in these sectors appear twice as likely as in other sectors.
In addition, several other policies affect trade in raw materials. First, a number of domestic measures, subsidies, such as fuel subsidies, and price control mechanisms, such as dual pricing schemes, are widely used. Second, while low on raw materials, tariffs tend to rise with the stage of processing. In mining sectors, for instance, the average tariff on processed goods is three times higher than on raw materials. This phenomenon — in WTO jargon “tariff escalation” — is particularly visible in advanced economies.
Governments often employ trade restrictions to address specificities of raw material sectors. Yet, restrictions can have unavoidable distortionary effects that we need to clearly understand.
WTO members seek to justify policy intervention in raw materials trade on a number of welfare grounds, including the exhaustible nature of these resources, the environmental impact of their extraction, the development objectives of resource-rich countries or their need to diversify their export base. Those members argue that WTO rules acknowledge these specificities and permit such policy flexibility to WTO members. However, others want countries to take into account the tension between the legitimate domestic objectives they pursue, and the fact that trade measures may impose undue costs both on the countries applying them, as well as on their trading partners.
Let me focus for a moment on a practical example. Say a government chooses to rely on an export tax to reduce extraction rates for environmental reasons, or to preserve resources for future generations. Other governments believe that this approach is inappropriate. They argue that the export tax creates a wedge between the domestic price of the raw material and its price in international markets. This price dispersion, in their view, bears two negative consequences. First, they argue that the lower domestic price of the resource may encourage an excessive level of domestic consumption. The result, in their view, is a trade measure that affects an inefficient conservation policy. Second, those who oppose the export tax argue that the increase in the international price of the resource lowers the welfare of foreign countries that need to acquire raw materials on world markets.
Regulation of raw materials trade: The current situation
What is the reach of international trade regulation in this context? The WTO does not have an agreement specifically regulating trade in raw materials, but a number of existing rules are relevant to address the special features of these sectors.
The principle of non-discrimination, the constraints imposed by tariff commitments and the freedom of transit — just to give a few examples — all aim at maintaining an open and predictable trading system. The existence of such a system is essential in ensuring that geographically concentrated resources can be exchanged on a mutually beneficial basis.
WTO rules also envisage some public policy exceptions such as those related to the conservation of exhaustible natural resources and those aimed at protecting human, animal or plant life or health.
Clearly, the WTO is not an island, but rather an integral part of a much broader framework of international cooperation. Many issues relevant to raw materials are regulated outside the WTO. Such matters as the ownership of natural resources, investment policies, environmental protection, or the fight against corruption in international business transactions are the subject of a vast corpus of treaty law outside the WTO domain.
Regulation of raw materials trade: The Doha Round
Important differences of interest exist among nations in this sphere, but there are several areas where mutually beneficial trade-offs could be attained. Some of these are currently under negotiation in the WTO Doha Round. Let me give you some examples:
A first issue relates to transit. The freedom of transit obligation in Article V of the GATT is crucial in facilitating the international supply of raw materials. However, alternative views on the scope of Article V in relation to transport via fixed infrastructures, such as pipelines, create regulatory uncertainty. This uncertainty carries economic costs. The Doha Round seeks to address this unresolved question under the rubric of trade facilitation in the negotiations.
A second concern is the sustainable exploitation of raw materials. Careless use of these precious assets by society today can weigh heavily on society tomorrow. Opening of markets in renewable energy and energy efficient goods in the context of the Doha Round will help reduce the pressure on raw materials which are in finite supply. Similarly, the improvement of subsidy disciplines will ease incentives to over-consume resources that are scarce or have a negative environmental impact.
A third issue currently addressed in the Doha Round of negotiations is the reduction of tariff escalation. This matter is really about development, as higher tariffs on products of higher value added impact mostly on countries with a poorly diversified export basis.
While the correct identification of these trade-offs is often far from easy, a successful completion of the Doha Round will serve as a stepping stone towards better international trade rules in resource sectors.
Regulation of raw materials trade: Future challenges
Having said that, a number of challenges will remain for the international community to address in the future. Let me briefly go over some of these issues.
A first issue concerns trade policy. WTO members could have made binding commitments on the use of export taxes — as they have done with respect to import tariffs — but most of them have not. While I mentioned earlier the range of factors that may justify the need for some policy flexibility, the lack of commitments on export taxes also comes at a cost.
A second issue relates to domestic policy. When raw materials are highly concentrated in some countries, the border between trade and certain domestic policy is often blurred, in the sense that trade and domestic measures can be close substitutes. It has been argued that a consumption tax or a domestic regulation can have effects similar to tariffs in resource-importing countries. Similarly, some believe that production quotas or the lack of enforcement of competition policy in resource-rich nations may have consequences similar to restrictions on exports of raw materials. Not to mention the fact that no international competition framework of rules exist. Focusing on only one of the equivalent measures might therefore be insufficient to achieve undistorted trade.
A third issue concerns the design of supranational institutions. Many issues relevant to raw materials are regulated by international rules outside the WTO. In this context, coherence is important as inevitably many discussions on international issues surrounding raw materials will proceed on several multilateral fronts. A number of challenges can only be effectively confronted through better global governance.
In my remarks today, I hope I have convinced you of two main propositions.
The first is that the deep causes of international tensions that often characterize raw materials trade are linked to the inherent complexities of these sectors. Our approach must be nuanced and sensitive to these realities.
The second proposition is that carefully crafted cooperation on rules for resource trade is the only alternative to economic nationalism and conflict. The rules must be perceived to be fair and effective, and enforced by strong and coherent supranational institutions that bear the stamp of legitimacy.
Concluding the Doha Round will contribute to better harnessing trade in natural resources. This is a low hanging fruit that can provide answers to a number of your concerns. This is why throwing your weight behind a deal is worth it.
Thank you for your attention.