Governance of mineral resources: Towards the end of national states’ supremacy?

Broader context on the WTO and trade in mineral resources

When two or more countries disagree regarding any commodity’s trade, they can settle this by resorting to the Dispute Settlement Understanding (DSU). The instauration of the DSU, agreed upon in the Marrakech Agreement (April 1994) was one of the main innovations of the WTO compared to the GATT (General Agreement on Tariffs and Trade). Described by many as the «jewel in the crown» of the Uruguay Round, the DSU allows members of the WTO to delegate the authority to settle disputes to a Dispute Settlement Panel. According to the WTO itself, «dispute settlement is the central pillar of the multilateral trading system, and the WTO’s unique contribution to the stability of the global economy. Without a means of settling disputes, the rules-based system would be less effective because the rules could not be enforced» (WTO 2014b). Thus,

So, this tool allows countries to request consultations when another country is thought to be violating one of the trading rules of the WTO. Following the Chinese decision to reduce their export of rare earth elements, along with other minerals, the European Union decided to request consultations with China on March 13^th 2012, followed shortly after by the United States and Japan (on March 22^nd 2012). Among the WTO rules that are at stake here, are the articles VII, VIII, X and XI of the GATT 1994. These articles entail notably the fees and formalities connected with importation and exportation, as well as the general elimination of quantitative restrictions, both for importation and exportation. It is noteworthy that a similar case, DS394: «Measures Related to the Exportation of Various Raw Materials», was started in 2009, taking China to task on the same grounds. This case, also dealing with Chinese restrictions on raw materials exportation, led to a «recommendation to bring measures into conformity», on February 22^nd 2012. The underlying rationale is that China’s attempt to use Article XX (g) (exhaustion of non-renewable resources and health protection) was not seen as relevant. It is likely that this ruling impacted the decision of the United States to file a new case, similar in many aspects, a couple of weeks later, hoping for a similar decision.

It was obviously not the first time the WTO ruled in a case involving natural resources. In fact, in 2010, the World Trade Report, an annual publication aiming to deepen understanding of specific trade topics, was dedicated to «Trade and Natural Resources», to explain how these resources were considered within the WTO. It seems relevant to outline some of its main components here: the main features shared by all natural resources, and how the WTO has adapted its rules for their trade.

According to this report, natural resources, whether renewable or non-renewable, share five characteristics:

1. they are unevenly distributed;
2. they are exhaustible;
3. they may produce negative externalities;
4. they often represent a dominance in national economies;
5. their prices are highly volatile (WTO, 2010: 7–8).

In the case of rare earth elements, they can be said to comply with most of these general trends: exhaustibility, externalities and volatility. However, the uneven geographical distribution is actually less radical than typically assumed: China does extract more than 90 percent of rare earths elements (97 percent of the world production until very recently) yet possesses only one third to half of the world reserves, depending on references. Finally, its economy is not dependent on rare earth elements at all nor on the extractive industry in general, which accounts for less than 10 percent of its GDP (Wübbeke, 2013).

When it comes to the trade of natural resources, this has historically been a controversial issue almost since the very beginning of the WTO. Indeed, as early as 1958 the Haberler Report warned that the current trade policies were very biased and unfavorable to resources-rich, developing countries. This is obviously a very controversial topic, although it is usually widely accepted in economic theory that countries’ specialization in one kind of production— be it natural resources or manufactured goods— is attributable to comparative cost advantage. When it comes to mineral resources however, many acknowledge the prevalence of the country’s natural endowment, or, as put by Haberler:

An economic theory becomes useful, however, in explaining why certain countries export minerals ores, when others process them domestically first, or even transform them into manufactured goods with a high added value. One can refer to the Staff Working Paper Trade in Mineral Resources (Davis 2009) for a thorough review of various economic theories addressing this issue. This report, which is a working staff paper from the WTO itself, is highly interesting in the sense that while it identifies and acknowledges many complexities and uncertainties linked to the topic of minerals extraction, processing and trade, it somehow chooses to disregard these and opt for a rather «linear model» in which the countries’ endowments in mineral resources determine their trade patterns:

The case of rare earth elements illustrates how flawed this «weakened hypothesis» can be: Indeed, China naturally does have a natural endowment of REE, but as seen before, it represents no more than half of the world reserve. So its almost perfect monopoly cannot be accounted for solely in terms of uneven distribution of geological ores; other aspects — notably environmental and political ones — are of paramount importance.

The WTO case about REE

The WTO case on export restrictions for REE and other materials highlights features that are common to all mineral resources but become even more critical when dealing with strategic materials. Indeed, even though the production of rare earth elements is minuscule (less than 95 000 tons/year) its economic and strategic importance is of critical importance.

Rare earth elements (REE) are a group of seventeen metals including the family of lanthanides, scandium and yttrium¹ with very similar chemical properties. These metals are of paramount importance for the development of new technologies, including high-tech technologies (hard drives, flat panel displays for cell phones, TVs and laptops, audio systems, etc.) and green technologies (wind turbines and batteries for hybrid cars mostly). With about one third of the world reserves, China currently accounts for over 95 percent of world production. With worldwide demand increasing, over several years China has carried out a policy aimed at reducing exports,² which several countries have reacted to, employing the Dispute Settlement Agreement of the World Trade Organization (WTO). Thus on March 13^th 2012 the European Union requested «consultations with China with respect to China’s restrictions on the export of various forms of rare earths, tungsten and molybdenum (WTO 2014a)». On March 22^nd 2012, Japan and the United States requested to join the consultation. The three complainants are therefore the United States (DS431), the European Union (DS432), and Japan (DS433), with China the defendant.

It is noteworthy to mention here that this case at the WTO was considered by the various stakeholders as one policy option among others in order to secure the supply chain in REE. In fact, an American report for the Congressional Research Service from June 2012 presents five different policy options regarding REE supply, challenging China on its export quotas at the WTO is among these. The other options are investing more in R&D, authorizing and giving appropriate funding to the USGS (the «United States Geological Survey», for a comprehensive global assessment to identify economically exploitable REE deposits), supporting and encouraging greater exploration for REE, and establishing a stockpile (Humphries 2012). This document shows that the case at the WTO must be understood within a broader context in which the complainants are desperate to get access to this resource, and are hoping for a favorable ruling owing to a loophole in the general agreements of the WTO, and more specifically section XX.

China’s defense is indeed predicated on the use of the General Exceptions of the GATT Agreement. More specifically, Article XX, «General Exceptions», Section (g) of the GATT Agreement stipulates that

It is worth pointing out that in DS394, China’s attempt to use Article XX was not seen as relevant and China lost the case in the end. China’s government still believes China to be in compliance with the WTO rules, as claimed by the Foreign Ministry spokesman Liu Weimin: «We think the policy is in line with WTO rules (…) Exports have been stable. China will continue to export, and will manage rare earths based on WTO rules.» (BBC World 2012)

There is no broad consensus among scholars regarding whether the WTO ultimately curbs or allows for environmental protection. Some argue that hyper liberalization and procedural features of the WTO – notably the fact that the burden of proof is placed on the shoulders of those arguing for environmental precaution – make environmental harm impossible to prevent (Conca 2000), while others claim that strict environmental national regulation is still possible within the WTO, and that «rather than demonizing the WTO, consumer and environmental advocates should concentrate on winning the debate for regulation at home» (Young 2005).

The ambiguity of article XX (g) was commented upon as early as in the 1990s.³ Among the elements that are not clear is the fact that «exhaustible» resource was not specific enough to know whether it was only non-renewable resources that were considered. Another problem, more relevant in our case, lies with the location of the pollution, usually considered to be within the importing country, without this being specified. Indeed, the majority of cases at the GATT/WTO involving environmental concerns usually happen the other way around: A country bans the import of a specific product, rather than export being reduced. A similar case though can be found in the dispute opposing USA and Canada in 1987 (GATT Panel Report, Canada – Measures Affecting Exports of Unprocessed Herring and Salmon, L/6268, adopted 22 March 1988, BISD 35S/98): Canada banned the export of unprocessed herring and salmon in order to protect the fisheries from over-exploitation. Although processed fish was allowed for export, this was with the proviso that it had been inspected in accordance with the Fish Inspection Act. The USA appealed to GATT on the grounds that the measure was designed to protect the Canadian processing industry, contravening Article XI which prohibits quantitative restrictions. Canada’s defense was, in line with China and its quotas restrictions, the application of XX (g) to the effect that the measure was necessary for, and therefore related to, the conservation of its West Coast fisheries — even though it was not itself a direct conservation measure. The Panel ruled in favor of the USA and the restriction was found to contravene Article XI. It was inexcusable with recourse to XX (g) because the conservation was not the ‘primary objective’ of the scheme, which was the protection of employment:

Following that ruling, it therefore appears that China’s use of article XX (g) is not relevant. «Most commentators accept that Canada’s use of the environmental argument was an attempted disguise of protectionism which the Panel rightly exposed.» (Pearce 1992: 15)

An even more similar case is to be found in the already mentioned DS394, «Measures Related to the Export of Various Raw Materials», in which China had also contested exportations’ restrictions in order to protect its natural resources. However, the panel concluded that:

As for DS431, DS432 and DS433, the panel was formed on September 24^th 2012, and at the time of writing (March 6^th 2014), a decision has not yet been reached. No matter what the outcome of the case turns to be, it is important to understand the narratives behind China’s resources policy and what it means in terms of resources management.

Theoretical frameworks

Conclusion: Towards one world?

To address this issue, I would like to suggest that a better governance of mineral resources would take one of the following paths: either a reform of the WTO allowing for national production quotas and therefore exportation quotas of natural resources, or a globalized governance of mineral resources instituting worldly quotas of mineral production, depending on various factors such as their scarcity in the Earth’s crust, their recyclability and how much they can be a part of a circular economy, the environmental impact of the mining process and so forth. This option is not incompatible with free market, but it would end the madness of assuming that natural resources are infinite and should be governed using the same rules as services and manufactured goods (which in fact do consume a lot of natural resources). However, it seems to be a necessary shift as soon as we acknowledge living in «one world», as advocated by, among others, the consequentialist philosopher Peter Singer:

In any case, it is not by filing cases at the WTO and trying to use its loopholes, that countries will guarantee their security. Ultimately, a positive side effect of such a reform would be that the public distrust and feeling of uselessness regarding the WTO, as expressed in the massive protests of Seattle in 1999, would probably improve if the scope of action of the WTO was reduced and a specific organization was entrusted with the governance and trade rules of non-renewable resources.