U.S.

Export Restraints on Crude Oil Violate

International Agreements
Posted by
Alan M. Dunn
on September 11, 2013

The U.S. current policy of restricting crude oil exports is fundamentally at odds with binding U.S. commitments under a number
of international agreements. The General Agreement on Tariffs and Trade, or GATT, is the foundation agreement for the World
Trade Organization, WTO. Among the principle GATT commitments adopted by all WTO member countries is a prohibition on
the imposition of quantitative restraints on exports. There are exceptions to this prohibition but they are narrowly construed and
apply only to certain, and very limited, circumstances.
Crude oil and natural gas, like almost all other products, are subject to GATT disciplines on trade. These same disciplines apply
to crude oil and natural gas under U.S. free trade agreements, FTAs, such as the NAFTA, as well as numerous bilateral
investment treaties, BITs, most of which also incorporate the GATT prohibitions on restricting exports.
The Prohibition on Export Restrictions Is Enforceable
GATT obligations prohibiting export restrictions are enforceable in binding proceedings under the WTO Dispute Settlement
Understanding, DSU. These are the very same procedures recently used by the U.S. to successfully challenge Chinas
restrictions on exports of raw materials and coerce Chinese compliance through the DSU mechanism. Currently, the U.S. again
is using these procedures to pursue a second challenge to Chinas export restraints on rare earths, tungsten, and molybdenum.
Importantly, some of the Chinese export restraints that were found to violate the GATT are comparable to the U.S. export
restrictions on crude oil and natural gas, including:
Quantitative restrictions;
Additional requirements and procedures vis--vis the quantitative restrictions; and
Delayed licensing requirements on exports.
Other U.S. international agreements incorporate the GATT obligations and prohibitions either by reference or direct recitation,
and most of those agreements also provide a right of action by which parties may challenge violations to the agreements,
typically in international arbitration and sometimes in the courts. For example, bilateral investment treaties and trade and
investment facilitation agreements, TIFAs, often incorporate the GATT obligations and provide rights of action under arbitration.

U.S. Statutes Regarding Oil Export Licensing Should Be Interpreted By the Agency and the Courts to Avoid Conflict
With GATT Rules
The current U.S. export control regime on exports of crude oil are rooted in a complicated web of U.S. statutes and
implementing regulations that give the U.S. president and/or various executive branch agencies sufficient discretion to grant
exports of crude oil or gas if the export would be consistent with the U.S. national interest or public interest. Basic rules of
statutory interpretation dictate that the executive branch and the courts must resolve any ambiguity in interpreting these
statutes in a manner that is consistent with the GATT and other U.S. international agreements. For example, the Court of
Appeals for the Federal Circuit ruled that:
[ A] n i nt erpret at i on and appl i cat i on of [ a] st at ut e whi ch woul d conf l i ct wi t h t he
GATT Codes woul d cl earl y vi ol at e t he i nt ent of Congress .
Conclusion
The General Agreement on Tariffs and Trade, Article XI, prohibits U.S. export restrictions on crude oil and natural gas to other
GATT/WTO member countries, except under very limited exigent circumstances. The limited exceptions to the basic prohibition
on export restrictions are narrowly construed and reliance on these exceptions to the GATT prohibition would require the U.S.
to impose onerous restrictions on domestic U.S. production and consumption of crude oil and/or natural gas. In addition, even
delaying exports under protracted export licensing schemes have been found to be violations of the GATT.
These well-established rules of international trade are incorporated in numerous binding international agreements to which
United States is a party. The WTO and other agreements have enforcement mechanisms that enable the parties to these
agreements to compel U.S. compliance.
For all of these reasons, the current U.S. policies and procedures restricting exports of U.S. crude oil and natural gas are highly
vulnerable to legal challenges in WTO as well as other international forums and the U.S. courts.

Alan Dunn served as Assistant Secretary of the U.S. Department of Commerce during the Administration of George H. W. Bush
and as one of the lead U.S. negotiators in the multilateral GATT Uruguay Round negotiations, which established the World
Trade Organization (WTO). He also served as a lead negotiator in the North American Free Trade Agreement (NAFTA)
negotiations with Mexico and Canada. He is a partner at Stewart and Stewart and has been practicing international trade law
for 30 years. This guest post is in conjunction with the Bush Institute's September 12 conference, Energy Regulation: Lessons
about Growth from the States, the Nation and Abroad.




Comments on the World Trade Report 2010
(
1
)

By Joost Pauwelyn, Graduate Institute, Geneva


Thank you, Ambassador Jara. It is an honour to be here. I truly
enjoyed reading the Report, especially the economics part. To be
honest, I found the legal part less appealing. But that is no
surprise given that WTO lawyers traditionally can say far less
than WTO economists, unless, of course, you are a member of
the Appellate Body.
1. Trade is more, not less, important when it comes to natural
resources
To get the debate going, though, let me take issue with one
recurring theme in the Report: that natural resources are special;
implying that normal trade rules do not and should not apply. I
realize that this is probably not exactly what the authors meant,
but for a non-economist like myself that is the message that many
people may take away from the Report. One such example is at p.
183 of the Report:
natural resources display a number of characteristics
that make a case for government intervention as
compared to the free trade outcome.
In my view, however, the problem is not that we have too much
market or trade in natural resources or energy, but rather not
enough. The problem is not that countries have too little policy
space to manage their natural resources, but rather that they
continue to impose policies that inefficiently restrict or distort
trade, both on the export and import side.

Granted, natural resources raise serious questions of
exhaustibility and externalities, especially environmental
damage, but standard trade theory and trade rules can apply to
that.

So my starting point is this: trade and its advantages are not less,
but more relevant and important when it comes to natural
resources, especially energy.

The core reason for this crucial role for trade is this: natural
resources/energy are un-evenly distributed between countries, as
well as fixed (BP will confirm this: you cannot move an oil well).
So trade between haves and have nots is all the more
important: to the benefit of both; it is a question of pure absolute
advantage.

That said, barriers to this trade in energy are, indeed, different
from those in other products, which raises the question of
whether current WTO rules are appropriate.

Let me say something, first, on this difference in trade barriers,
secondly, explain why WTO rules nonetheless do or could
address these different trade barriers and, finally, address possible
ways forward.
2. Barriers to trade in natural resources are different
The core focus of the GATT/WTO system has been the reduction
of import tariffs. Yet, as the Report notes, tariffs are not a big
issue when it comes to trade in natural resources, especially trade
in energy (other than, perhaps, renewable energy): few countries
impose import duties on, for example, oil.

Why are import tariffs not a big issue? Because oil importing
countries need oil and since they cannot produce it themselves
there is no point to impose import duties so as to stimulate
domestic production. A Swiss import duty on oil will not displace
Saudi oil imports in favor of Swiss oil production. Natural
resources are fixed. No matter how high the import duty on oil,
oil production will not shift to Switzerland.

This illustrates a bigger point: under WTO rules we presume that
countries want to sell or export more, and are keen to restrict
imports.

When it comes to trade in natural resources, however, this
fundamental premise disappears:
- The haves do not want to export more but rather
limit production and export so as to maximize their
return on what are exhaustible resources.

- The have nots, in contrast, do not want to restrict
imports (so as to favour domestic producers, since there
are no domestic producers), but rather want to import
more, and import at a cheaper price.
So whereas in the WTO the demand is normally market access
for exports (say, China seeking export markets for textiles); when
it comes to natural resources and especially energy, the demand
is access to production or imports (say, the EU or Japan
seeking access to, or more/cheaper imports of, gas, oil or scarce
raw materials).

Does this mean that no WTO rules are relevant? No.
3. WTO rules can address the rather unique barriers to
natural resource trade
As the Report notes, at least in the economics section:

Firstly, given that energy producers (the haves) export most
of their production, production restrictions in those countries may
have the same effect as export restrictions, which are regulated,
for example, in GATT Article XI.

Although sovereignty over natural resources and the exhaustible
nature of natural resources may justify certain production and
export restrictions (as provided, for example, in GATT Article
XX(g)), energy producing countries not surprisingly often
overshoot, and impose restrictions to improve their terms of
trade in a beggar-thy-neighbour way, leading, for example, to
domestic energy prices that are inefficiently low, attracting, for
example, energy-intensive fertilizer or petrochemical industries
to, say, Saudi Arabia even though they could perhaps produce
more efficiently in, say, Belgium or India.

Secondly, when these same countries (the haves) impose
export duties on energy, these export duties amount, as the
Report rightly points out, to a consumption subsidy for locally-
consumed energy (export duties will make it more expensive to
export, increase local supply and thereby reduce local energy
prices, leading to so-called dual pricing). Once more, however,
consumption subsidies are regulated and could be actionable
subsidies under the SCM Agreement (when they are specific
and cause adverse effects to other WTO members).

Thirdly, and conversely, given that energy importers (the have
nots) cannot produce domestically, consumption taxes in those
countries have, as the Report finds, the same effect as import
tariffs (in the absence of local production, the tax only affects
imports). Yet, as we all know, import duties are regulated in
GATT Article II.

When it comes to these consumption taxes (or, in effect, import
tariffs), as with energy producers, also energy importing
countries too often overshoot. Some level of fuel taxation is, no
doubt, needed to price-in environmental damage including the
cost of carbon. Yet, other parts of this taxation are imposed to
improve the countrys terms of trade, that is, to lower the import
price of energy and to transfer rents from energy producing to
energy consuming countries. Such beggar-thy-neighbour policies
may lead, for example, to energy prices which can be too high,
thereby scaring off energy-intensive activity which could most
efficiently occur in such countries.

In other words, when it comes to trade in natural resources, we
may not see many traditional import tariffs; we do see a lot of
inefficient (i) production/export restrictions; (ii) export duties;
and (iii) consumption taxes. As the Report notes, at p. 116, export
taxes on natural resources are twice as likely as export taxes in
other sectors; and natural resource sectors account for fully one-
third of all export taxes. When it comes to consumption taxes,
anyone filling-up a petrol tank in Geneva or next door France
knows how high they are: respectively, around 50 and 60% of the
price of unleaded gasoline (Report, p. 120).

Whereas the economists writing this Report rightly point out (at
p. 196) that there is no economic basis for regulating these
policies differently, that is, in economic terms, in the present
context, production restrictions are export restrictions, export
duties are consumption subsidies and consumption taxes are
import duties, the lawyers involved in the Report were
(understandably) much more careful, finding on p. 166, for
example, that production restrictions are not covered by Article
XI [of GATT on export restrictions] and thus would be
permissible.

I am not saying that all production restrictions, export duties and
consumption taxes violate WTO rules (some may fall outside
WTO rules; others may be excused under exceptions). What I am
saying is that some of them are as harmful, inefficient and
welfare reducing for both exporters and importers of natural
resources as trade restrictions which the WTO explicitly
prohibits. And that, as a result, a trade body like the WTO should
do something about them.
4. A way forward for the WTO
One of the fundamental questions is whether progress at the
WTO will happen through dispute settlement under the current
WTO rules which, as I pointed out earlier, arguably already cover
and prohibit at least some of these trade distortions; or whether
we need and can muster the political consensus to refine and add
to the current rules.

Like many, I would prefer for WTO negotiators to clarify and
expand on the rules. This will, no doubt, be difficult but
negotiators should realize that the alternative is that 7 Appellate
Body members do this work for them.

If clarified or new rules are negotiated, should we strive for a
separate General Agreement on Trade in Energy (GATE) or a
General Agreement on Trade in Natural Resources (GATNAR)?

I am not a big fan, and at a recent conference we, the Graduate
Institute, organized jointly with the WTO here in Geneva (the
proceedings of which are now available for free), very few
participants were in favour of a separate agreement on energy or
trade in natural resources. As I said in the beginning, I find the
mantra of energy and natural resources are special and hence
need a separate treatment or agreement suspect. The same could
be said about textiles, agriculture, audiovisuals, food etc. Yet, the
GATT/WTO track record with such sectorals (with the
exception of the Information Technology Agreement) is not very
promising.

Instead, what we need is rather standard WTO bargaining or
trade-offs whereby, in this or some future Round, energy
exporters limit their production and export restrictions and dual
pricing practices in exchange for commitments by energy
importing countries on, for example, consumption taxes
including excessive carbon-related taxes or restrictions on
imports, and import duties on processed products under so-called
tariff escalation. No separate agreement is needed for that, as
most of these bindings could occur under, for example, GATT
Art. II.

The picture of what might happen if we do not deal with trade
distortions in the natural resources sector is not very pretty:
- land grabs and fights over access to raw materials as,
what the Report refers to as, export restriction-jumping
FDI.

- Massive relocation of energy-intensive industries
towards energy producing countries which keep internal
energy prices artificially low, a practice which, in
response, may create a wave of anti-dumping and CVD
investigations.

- Punitive carbon tariffs or import restrictions by energy
importing countries not just to address climate change
but also to protect inefficient domestic producers,
Indeed, in the absence of a global price on carbon,
taxing energy or fuel imports as such may not be
sufficient; with the prevailing price wedge of energy
between countries, energy producing countries with low
energy prices and no carbon tax could simply transform
their energy into, for example, aluminum, and then trade
aluminum which really is like canned energy to
dodge the carbon tax on fuel imports. This underlines
that even where raw energy or natural resources cannot
be traded easily, trade in its downstream products can so
that trade in agricultural products, effectively, becomes
virtual trade in water, trade in electricity can amount
to virtual trade in coal and trade in aluminum may be
virtual trade in hydro-electricity.
Of course, if one is more ambitious and starts tackling also
investment protection, competition and good governance
(including corruption) in the energy sector, then new agreements
would be needed. Yet, even there I am not sure that such
agreements should be limited to energy or natural resources;
most, if not all sectors, of the economy could benefit from such
disciplines.

To sum up,
(1) Trade liberalization is not less but more important
when it comes to natural resources, especially energy.
(2) Trade barriers in this sector are fundamentally
different but when interpreted in an evolutionary
manner current WTO rules can address a lot of the
distortions.
(3) The status quo does not present a pretty picture; the
big question on how to move forward is whether it will
be steered by the Appellate Body or, you, WTO
negotiators.
Thank you.