At a value of $3.7 trillion, or 25% world merchandise trade, natural resources is accounting for a greater percentage of world trade and, as a result, politicians have elevated its position on trade policy agendas. Given the economic, political and environmental implications of natural resources, this article addresses the issue of maximising mutual gains from resources trade from a WTO perspective.
The WTO defines natural resources as "stocks of materials that exist in the natural environment that are both scarce and economically useful in production or consumption, either in their raw state or after a minimal amount of processing". The extraction and use of natural resources should balance the competing needs of current and future generations. The manner in which they are managed has important environmental and sustainability implications.
Economists have viewed natural resources as a blessing for economic development. On the other hand, sceptics have coined the term "the natural resources curse", arguing that dependency on natural resource exports can trap countries, especially those with corrupt institutions, in a state of perpetual under-development.
There is growing tension between rising demand for natural resources, e.g. forestry, fuels, fish, mining products, and their increasing scarcity. In a troubled economic backdrop that is still much affected by the recent global recession, fears of inadequate supplies in resource-scarce countries and consequent exploitation of resource-rich countries are likely to lead to growing trade conflict. Market forces are a key contributing factor to price volatility in natural resources, particularly when influenced by speculative activities.
The WTO encourages governments to implement resource conserving policies that reduce the negative environmental externalities linked to the consumption of resources, stimulate diversity in exports trade, and stabilise prices in response to demand or supply shocks. In reality however, there are copious problems associated with trade policy measures that face distortion at its source. This includes the emergence of beggar-thy neighbour effects from trade restrictions and poor domestic regulation of a multi-lateral trading system.
WIDS speaker Dr. Hancock elucidates on WTO recommendations for export policy, conservation policy, and domestic policy:
1) Export policy - Commitments on export taxes could be exchanged either among exporters or for concessions on import tariffs in downstream sectors to reduce tariff escalation.
2) Conservation policy - Rules on subsidies that encourage exploitation of a resource must be reinforced. Subsidies that encourage the conservation of resources should encompass greater flexibility.
3) Domestic policy - 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.
In terms of policy objectives, governments apply export restrictions including fiscal revenue, development and social policies. Specifically, several governments have applied export restrictions on metals and minerals for objectives such as environmental protection and the conservation of natural resources. Governments justify their interventions on the basis that they must guarantee resources for future generations.
Not all countries, however, rely on such measures to achieve these objectives and there are alternative policy options with different trade impacts. This leads to two questions: how do the effectiveness and the cost of export restrictions compare to the alternatives? How can coordinated responses that minimize economic distortions be encouraged?
Where the consumption or extraction of a natural resource adversely affects the environment, the WTO advises governments to make producers and consumers take account of the social costs of their activities. A stumbling block revealed by studies regarding the political economy of trade policy concludes that the socially optimal rate of resource extraction can often be excessive due to the influence of interest groups, or other forms of lobbying activities, that face strong incentives to exploit large natural resources rent.
Provisions of multilateral WTO agreements to improve the natural resources trade system have succeeded in recent decades, but the extent of their success is largely dependent on the commitment to, implementation of, and challenges to these trade policy treaties. Regional trade cooperation can assist in mitigating or resolving potential frictions but at an international level, WTO rules are often met with a significant level of resistance.
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