World Trade Report10 e

9 789287 037084

World Trade Report  

The World Trade Report 2010  focuses on  trade  in natural  resources, such as fuels, forestry, mining and fisheries. The Report examines the characteristics  of  trade  in  natural  resources,  the  policy  choices available  to governments and  the  role of  international cooperation, particularly of the WTO, in the proper management of trade in this sector.  

A  key  question  is  to  what  extent  countries  gain  from  open  trade  in natural resources. Some of the issues examined in the Report include the role of trade in providing access to natural resources, the effects  of  international  trade  on  the  sustainability  of  natural  resources,  the environmental  impact of resources trade,  the so-called natural resources curse, and resource price volatility. 

The  Report  examines  a  range  of  key  measures  employed  in  natural resource  sectors,  such  as  export  taxes,  tariffs  and  subsidies,  and provides  information on  their current use.  It analyses  in detail  the effects of these policy tools on an economy and on its trading partners.  

Finally, the Report provides an overview of how natural resources fit within the legal framework of the WTO and discusses other international agreements  that  regulate  trade  in  natural  resources.  A  number  of challenges are addressed, including the regulation of export policy, the treatment of subsidies, trade facilitation, and the relationship between WTO rules and other international agreements.  

“I believe not only that there is room for mutually beneficial negotiating trade-offs that encompass

natural resources trade, but also that a failure to address these issues could be a recipe for

growing tension in international trade relations. Well designed trade rules are key to ensuring

that trade is advantageous, but they are also necessary for the attainment of objectives such as

environmental protection and the proper management of natural resources in a domestic setting.”

Pascal Lamy, WTO Director-General

World

Trad

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World Trade Report 2010Trade in natural resources

This report is also available inFrench and Spanish.

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© World Trade Organization 2010

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The World Trade Report is an annual publication that aims to deepen understanding about trends in trade, trade policy issues and the multilateral trading system.

The 2010 World Trade Report is split into two main parts. The first is a brief summary of the trade situation in 2009-2010. The second part focuses on the special theme of natural resources.

Website: www.wto.orgGeneral enquiries: [email protected]: +41 (0)22 739 51 11

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contents

1

ContentsAcknowledgements and Disclaimer 2

Foreword by the Director-General 3

executive summary 5

I The trade situation in 2009-10 18

II Trade in natural resources 38 A Introduction 40

B natural resources: Definitions, trade patterns and globalization 44

1. Definitionsandkeyfeaturesofnaturalresources 46

2. Naturalresourcetradeflowsandrelatedindicators 54

3. Modesofnaturalresourcestrade 59

4. Naturalresources:Globalizationandtheintellectualdebate 63

5. Conclusions 70

c trade theory and natural resources 72

1. Tradetheoryandresourcedistribution 74

2. Tradetheoryandresourceexhaustibility:Theproblemoffinitesupplies 75

3. Tradetheoryandresourceexhaustibility:Theproblemofopenaccess 81

4. Naturalresourcesandtheproblemofenvironmentalexternalities 87

5. Thenaturalresourcecurse 91

6. Naturalresourcesandpricevolatility 97

7. Conclusions 107

D trade policy and natural resources 112

1. Tradeandotherpolicyinstrumentsinthenaturalresourcesectors 114

2. Tradepolicy,resourcedistributionandexhaustibility 123

3. Tradepolicyandexhaustibility:Theproblemofopenaccess 130

4. Naturalresourcesexternalitiesandenvironmentalpolicy 136

5. Thepoliticaleconomyoftradepolicyinnaturalresourcesectors 138

6. Nationalresourceabundanceandregionalintegration 141

7. Conclusions 147

e natural resources, international cooperation and trade regulation 160

1. TradeinnaturalresourcesandWTOrules 162

2. Otherinternationallawandnaturalresources 176

3. Trade-relatedissuesaffectingnaturalresources:Challengesahead 183

4. Conclusions 196

F conclusions 200

statistical appendix 204

Bibliography 229

technical notes 240

Glossary 244

Abbreviations and symbols 245

List of figures, tables, boxes and maps 247

Wto members 251

Previous World trade Reports 252

world Trade reporT 2010

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acknowledgements

disclaimer

TheWorld Trade Report 2010waspreparedunderthegeneral direction of the Deputy Director-GeneralAlejandroJaraandsupervisedbyPatrickLow,DirectoroftheEconomicResearchandStatisticsDivision.Theprincipal authors of the Report were Marc Bacchetta,Cosimo Beverelli, John Hancock, Alexander Keck,Gaurav Nayyar, Coleman Nee, Roberta Piermartini,Nadia Rocha, Michele Ruta, Robert Teh and AlanYanovich.OtherwrittencontributionswereprovidedbyMarcAuboin,MireilleCossyandJamesWindon.Tradestatistics information was provided by the StatisticsGroupoftheEconomicResearchandStatisticsDivision,coordinated by Hubert Escaith, Julia de Verteuil,AndreasMaurerandJurgenRichtering.

Aishah Colautti assisted in the preparation of thegraphical input and Paulette Planchette, assisted byVéronique Bernard, prepared the Bibliography.Research assistance was provided by Tushi Baul,Edoardo Campanella, Sandra Hanslin, Joelle Latina,ShreyMetha,HeinerMikosch,SilviaPalombiandXueWen.OtherDivisions in theWTOSecretariatprovidedvaluable comments on drafts at various stages ofpreparation. The authors are particularly grateful toseveral individuals intheAgricultureandCommoditiesDivision,theAppellateBodySecretariat,theInstituteforTraining and Technical Cooperation, the Legal AffairsDivision,theMarketAccessDivision,theRulesDivision,TradeandEnvironmentDivision, theTrade inServicesDivisionandTradePoliciesReviewDivision.

The following individuals from outside the WTOSecretariat also made useful comments on earlerdrafts:FrankAsche,KenAsh,MorvaridBagherzadeh,Paul Collier, Graham Davis, K. Michael Finger, DavidHartridge, Luis Diego Herrera, Arjen Hoekstra, LutzKillian,JeonghoiKim,JorgeMiranda,HildegunnKyvikNordås,CédricPène,JuanRobalino,RaedSafadi,CarlChristian Schmidt, Yulia Selivanova, Martin Smith,Robert Staiger, Scott Taylor, Frank Van Tongeren andAnthonyVenables.

TheproductionoftheReportwasmanagedbyPaulettePlanchette of the Economic Research and StatisticsDivisioninclosecooperationwithAnthonyMartin,SergeMarin-Pache,HeatherSapey-PertinandHelenSwainofthe Information and External Relations Division. Thetranslators in the Languages, Documentation andInformationManagementDivisionworkedhardtomeettightdeadlines.

This year the WTO Secretariat launched a WebpagediscussiononthetopicoftheWorldTradeReport2010.TheWebpagewasmanagedbyMicheleRuta,assistedby Edoardo Campanella and Joelle Latina, incollaboration with Anthony Martin. Around ninetyindividuals from academia, institutions, non-governmental organizations and the private sectorcontributed to this Webpage with stimulating andhelpfularticlesandcommentaries.

TheWorld Trade ReportandanyopinionsreflectedthereinarethesoleresponsibilityoftheWTOSecretariat.

TheydonotpurporttoreflecttheopinionsorviewsofmembersoftheWTO.ThemainauthorsoftheReportalsowishtoexoneratethosewhohavecommenteduponitfromresponsibilityforanyoutstandingerrorsoromissions.

FoReWoRD

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Foreword by the wTo director-General

The2010World Trade Reportexaminestradeinnaturalresources. This is a topic of growing importance ininternational trade relations. Natural resources are atthe root of much economic activity, they are a keycomponentofmanyeconomies,andtheirshareinworldtrade is growing. A number of features exclusive tonatural resources explain why they occupy a specialplaceineconomic,politicaleconomyandpolicyanalysis.

Naturalresourcestendtobeconcentratedinrelativelyfewlocationsaroundtheworld.Thismakesforprofitabletradingopportunitiesamongnations.Atthesametime,because natural resources are so crucial to manyeconomic activities, adequate access to them isregardedasavitalnationalinteresteverywhere.Thosewhopossessnaturalresourcesmaynotalwayswishtotradethem,butrathertoharnessthemdomesticallyasa basis for economic development and diversification.Whentheunderlyingconditionsofsupplyordemandfornaturalresourceschange–whichhasbeenthecaseinrecentyearsformanyresourceproductsandislikelytocontinue to be so – competing national interests canbecomeasourceofpoliticaltension.

Another important featureofnatural resources is thatthey are either finite in nature – like fossil fuels – orexhaustible.Iftheyarerenewablebutexhaustible–likefishandforests–theycaneffectivelyberenderedfiniteby over-exploitation. In the case of both finite andrenewable resources, current policies are inextricablylinked with the prospects of future generations. Therate at which natural resources are extracted orexploitediscrucial.Thisrealityaddstothecomplexityof policy analysis and strengthens the need forinternationalcooperation.

Theproductionandconsumptionof natural resourcesalsofrequentlycreatesituationsinwhichmarketpricesdo not reflect the full costs or benefits of economicactivity.Thisgenerateswhateconomistsrefertoasanexternality,amarketfailurethatcanonlybeaddressedbypolicyintervention.Suchinterventioncouldinsomecases also entail institutional innovation.A feature of some natural resources is open access,which means that property rights are ill-defined. Oneperson’s harvest of such a resource affects theharvesting prospects of everyone else, and it is notdifficulttoseehowaresourcecanbeexhaustedbythepursuit of individual self-interest in the face of adeficient market and a lack of regulation. This is aclassic externality. Most externalities associated withnatural resources tend to be negative, such as the

environmental damagecausedbyburning fossil fuels.Theseeffectsoftenoccuracrossborders,andcannotbe addressed effectively without joint action amongnations.

Natural resources sometimes dominate entireeconomies,posingparticularpolicychallenges.Thisismore likely to be the case for smaller developingcountries.Thekindsofpoliciesthatthegovernmentofanationintheseconditionspursuesmakethedifferencebetweensuffering fromaso-called resourcecurseandbuildingsuccessfullyfordevelopment.

We have seen over the years how natural resourceprices can be much more volatile than the prices ofothergoods.Volatilitycarrieseconomiccostsbecauseitgeneratesuncertainty.Itmakesplanningdifficultandmeans that incomes fluctuate, hurting individuals,enterprisesandcountries.Somethingscanbedonetocounteractpricevolatilityandtherearealsowaysthataffected parties can insulate themselves from theeffects of volatility. But uncooperative governmentresponses topricehikesoftenexacerbaterather thanreducevolatility.

The characteristics of natural resource markets canmake standard trade policy prescriptions problematic.While it is clearly true that trade in natural resourceproductscanoftenyieldbenefitstoallconcerned,blindreliance on standard prescriptions for greater tradeopenness can be hazardous. Where markets fail andnothing is done to rectify the failures, more trade canstrengthen the adverse effects of poorly functioningmarkets. Increased trade in an open access situationcan exacerbate the problem of over-exploitation.Habitats can be destroyed if resource management ispoor and trade accelerates changes in land use.Countries in which natural resources dominate theeconomyrungreaterrisksofsufferingfromtheresourcecurseiftrademerelyintensifiesresourcedependency.

Mostoftheseargumentsarenotaboutthedesirabilityoftrade.Rather,theyareabouttheneedtoensurethattrade is accompaniedbydomesticpoliciesandglobalrulesthataddresstheparticularitiesofnaturalresourcemarkets.Moreover,openingtotradecanhavespecificbeneficial effects in natural resource markets. Tradecan support technological developments that improveresourcemanagement.Itcanprovideopportunitiesforresource-dependent economies to diversify anddevelop new industries. By joining up markets, tradecanprovideabulwarkagainstvolatility.


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Iftherelationshipbetweentradeandnaturalresourcesis by nature complicated, it is hardly surprising thatthesecomplexitiesspilloverintotradepolicy.Thereportdevotesconsiderablespacetoaneconomicanalysisofdifferent policies affecting trade, how these policiesrelatetoeachotherandaffecteconomicwelfare.Whilethe use of tariffs is less prevalent in natural resourcesectorsthaninothergoodsmarkets,domesticpoliciesaffectingproductionandconsumptioncanhaveeffectsverysimilartotradepolicieswhereanaturalresourceispredominantlyexportedorimported.Policiesaffectingexportsaremorecommon innatural resourcesectorsthanelsewhere.Subsidiesarealsoquitecommon.

Amongtherangeofpoliciesaffectingnaturalresourcestrade,subsidiesandexportpoliciesappeartobethemostchallenging. Subsidies can be useful instruments foraddressing market failures and changing incentivestructures in ways that favour superior outcomes. Buttheycanalsomakemattersworse.Everythingdependson what subsidies governments are deploying, andwhethertheyarerespondingtopublicwelfareconcernsorpressures fromnarrow interestgroups.Governmentsmay use export taxes and restrictions for a variety ofreasons,includingeconomicdiversificationanddomesticprice stabilization, to counter escalating tariffs inimporting countries and to manage environmentalexternalities. But at the same time, export taxes andrestrictionsmayalsoraiseworldpricesandshifteconomic“rents” arising from scarcity. Beggar-thy-neighbourpoliciesofthisnaturereduceeconomicwelfare,increasetradetensionsandcanprovokeretaliation.

Asdiscussedinthereport,theGATT/WTOruleswerenotwrittenwithnaturalresourcemarketsastheprimaryfocus.Manyoftherules impingeonnatural resourcestrade but some of them are open to competinginterpretations as well as disputes from time to time,andtheydonotcoverallaspectsofthepolicyrealitiessurrounding natural resources trade. Moreover, manyotherinter-governmentalagreementsbesidestheWTOcontain rules relevant to natural resources trade, andthismixtureisnotalwaysentirelycoherent.

Thereportattemptstoclarify,elucidateandcontributeto a debate which in effect is already taking place invariousguises,includingthroughnegotiatingproposalsintheDohaRound.Ibelievenotonlythatthereisroomfor mutually beneficial negotiating trade-offs thatencompass natural resources trade, but also that afailure to address these issues could be a recipe forgrowing tension in international trade relations. Well-designed trade rulesarekey toensuring that trade isadvantageous, but they are also necessary for theattainment of objectives such as environmentalprotection and the proper management of naturalresources in a domestic setting. My final point, whichwill come as a surprise to no-one, is that we wouldgreatlyenhanceourchancesofpositiveaction in thisareaifweweretocometoapromptclosureoftheDohaRound.

Pascal Lamy Director-General

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executive summary

SectionA:Introduction

natural resources represent a significant and growing share of world trade, and properly managed, can provide a variety of products that contribute greatly to the quality of human life. they also present particular challenges for policy makers.

The extraction and use of natural resources mustbalance the competing needs of current and futuregenerations. The manner in which they are managedhas important environmental and sustainabilityimplications. The unequal distribution of naturalresources across countries and frequent volatility intheir prices are potential sources of internationaltension. Moreover, as world output growth resumesfollowing the financial crisis and global recession,naturalresourcepriceswillalmostcertainlyriseagain.

A number of characteristics peculiar to naturalresourcesinfluencethemannerinwhichtheyaretradedandthenatureoftherulesappliedtothistrade.Differinginternational and inter-generational interests inherentinnaturalresourcestrademaketransparent,predictable,well-designed and equitable trade rules particularlyvaluable.Inadequateorcontestedrulesriskstokingthefiresofnaturalresourcenationalism,wheredifferencesin power across countries and beggar-thy-neighbourmotivations dominate trade policy. In a world wherescarcenaturalresourceendowmentsmustbenurturedand managed with care, uncooperative trade policiescould have a particularly damaging effect on globalwelfare.

The report examines these issues with particularreference to resources that are traded betweencountries, such as fish, forestry, fuels and miningproducts.Agriculturalproductsarenot included intheanalysis as they are cultivated rather than extractedfrom the natural environment. Other non-tradedresourcesareonlybrieflydiscussed.For instance, thereportconsiderswater,notasatradedproductinitself,but rather in terms of the water content of othercommodities. Natural resources such as air orbiodiversity are only examined to the extent that theyareaffectedbytrade.

See page 40.

SectionB:Naturalresources:Definitions,tradepatternsandglobalization

Definitions and key features of natural resources

natural resources are “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”. most natural resources share a number of important characteristics, including uneven distribution across countries, exhaustibility, externalities (market failures in the form of unpriced effects resulting from consumption and/or production), dominance in output and trade, and price volatility.

Unevendistribution

Supplies of some of the world’s most vital naturalresourcesarecontrolledbyasmallnumberofcountries,whichmaybeabletoexercisepowerovermarketsasaresult.Tradefrictionsmayfollow,althoughtradehasthepotentialtoimproveefficiencyandincreasewelfarebyshifting resources from regions of relative abundancetoregionsofrelativescarcity.

Exhaustibility

Resources are either non-renewable (e.g. fossil fuelsand metallic ores) or renewable (e.g. fish, forests andwater)butevenrenewableresourcescanbeexhaustedif they are mismanaged. This is what makes resourcemanagement so important. In some instances, trademay contribute to the exhaustion of resources byacceleratingtheirdepletion.

Externalities

The production, trade and consumption of naturalresources can have negative impacts on people notinvolvedinthemarketsinwhichtherelevanteconomicdecisionsaremade.Trademayexacerbateoramelioratethese externalities either by increasing the rate ofconsumption or by promoting more efficient use ofresources.

Dominanceinnationaleconomies

Resourceextractionindustriesaresometimesresponsiblefor an outsized share of a country’s trade and/or GDP.Thisisespeciallytrueforfuels,andtoalesserextentforores and other minerals. Exports from resource-richcountriestendtobehighlyconcentratedinfewproductsandtradecanencourageover-specializationinresourceextraction. Trade can also facilitate diversification byprovidingaccesstoforeignmarkets.


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Volatility

Certainnaturalresources,particularlyfuelsandminingproducts,canbesubjecttoextremepricevolatility.Thisis a source of uncertainty that adversely affectsinvestment and production decisions. Trade cancontributetoareductionofvolatilitybyensuringaccesstodiverseresourcesupplies.

natural resource trade flows and related indicators

the share of natural resources in world trade has risen sharply in recent years, partly reversing the trend since World War II towards increasing trade in manufactured goods, but the picture varies by region.

Therecentriseismostlyduetorisingcommodityprices,particularly foroil.Fuelsaccount formore than three-quartersofnaturalresourcestrade.

Africa, the Middle East and the Commonwealth ofIndependent States (CIS) all had resource shares intotal exports in excess of 70 per cent in 2008, whileNorthAmerica,EuropeandAsiaallhadresourcesharesof20percentorless.SouthandCentralAmericawasinbetween,at47percent.

Less industrialized regions have very little intra-regional trade in natural resources, whereas more industrialized regions tend to trade resources within their own regions.

Shares of intra-regional trade in natural resourceexportsofthemoreindustrializedWTOregionsin2008wereasfollows:82percentforEurope,78percentforAsia and 62 per cent for North America. Meanwhile,resource-dominant regions of the CIS, Africa andMiddleEasthadverylowintra-regionaltradesharesof12 per cent, 5 per cent and 2 per cent, respectively.LatinAmericawasagainbetweentheextremeswithanintra-regionaltradeshareof22percent.

modes of natural resources trade

natural resources trade differs from trade in manufactured goods in some notable respects. Being more or less homogeneous in nature, natural resources are amenable to centralized trading that facilitates exchange transactions and entails the formation of a unified price.

The emergence of organized exchanges has greatlyreducedtransactioncostsfortradeinnaturalresources.Althoughalargeshareofcommoditytradingstilloccursin the developed world, some developing-countryexchanges have become market leaders for certaincommoditycontracts.

Centralized exchanges facilitate “price discovery” – orthedeterminationofmarketprices–and,byencouragingcompetition, these exchanges tend to lower prices to

consumers. Commodity exchanges also increaseliquidity and allow disruptions in supply from oneproducer to be compensated by alternative suppliesfrom elsewhere. They also allow for hedging againstunfavourable price movements and act as financialintermediariesaswellasclearinghouses,thusmanagingthe risk associated with exchange transactions andensuringtheintegrityofthemarketplace.

specific modes of trade, such as long-term intergovernmental contracts and vertical integration, have also developed in response to particular characteristics of natural resources, notably their unequal geographical distribution.

Until the early 1970s, trade in a range of commoditieswas conducted primarily through long-term contractsbetween producer and consumer countries, mostly viastate or multinational companies. These arrangementsresponded to a number of factors, including strategicconsiderations, non-competitive production structures,highsunk-cost investmentsandsecurityofsupply.Overtime, these bilateral long-term supply contracts havebeen complemented and even replaced by trading onorganizedexchanges.However,bilateralsupplycontractsbetween governments of resource-abundant countriesandprivateinvestorsorfirmsfromabroadstillexist.

Formanyenergyandminingcommodities, rather thanarm’s-length contracts, the vertical integration ofvarious stages of the production process within onecompany is often the preferred mode of trade inincreasingly important global production chains. Thismaybeattributabletofluctuationsinprofitsatdifferentstages of the supply chain, uncertainty in access toresources,highsunkcostsassociatedwithlocationorsite-specific investments, and consumer demands forqualityandsafety.

natural resources: Globalization and the intellectual debate

the globalization of natural resources trade has been driven by a number of factors, including population growth, spreading industrialization, and the rise of developing economies. However, two trends are particularly significant – the revolution in transport technology since the mid-19th century and the gradual opening of commodity markets since the 1980s.

Technological advances in transport and informationtechnology have dramatically changed the economicsof moving low-value goods cheaply across greatdistances.Naturalresourcetransportcostsfellover90per cent between 1870 and 2000. This, in turn, hasgreatly expanded the volume of raw materials traded,thedistancescovered,andthecommoditiesinvolved.

Theperiodafter the1980ssawa steady (thoughnotuniversal)shifttowardsanopeningofglobalcommoditymarkets.Tariffbarriershavegraduallybeenreducedinsuccessiveroundsofmultilateraltradenegotiations.

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A wide-ranging intellectual debate continues about the impact of economic growth on the earth’s limited natural resources.

Some have argued that continued economic and/orpopulationgrowthwillinevitablyleadtotheexhaustionof natural resources and the degradation of theenvironment.

Othersbelievethateconomicgrowthandtechnologicalprogresscanhelptomanagescarceresourcesandtodevelopalternatives.

One point of disagreement is whether markets, aspresently structured, are equipped to deal with thesepressures. Concerns about the viability of marketsrelate to spillovers or externalities that need to bemanaged by government policy. Climate change andother signs of environmental degradation have beenpointed to as evidence of the limitations of existingmarkets in addressing resource depletion andenvironmentalcosts.

views have differed over the years as to whether natural resources are a “blessing” or a “curse” for economic development. many economists have seen natural resource endowments as key to countries’ comparative advantage and critical to economic growth, while others have argued that dependency on natural resource exports can trap countries in a state of under-development.

While signs of declining prices and growing resourceabundance were a cause for optimism among someeconomists, others drew a link between fallingcommoditypricesonworldmarketsanddecliningtermsoftrade(fallingexportpricesrelativeto importprices)for developingcountries, leading to stagnant incomesandarresteddevelopment.

Inordertobreakfree,developingcountrieswereurgedto diversify their economies and develop theirmanufacturing industry– includingthroughtheuseofselectiveprotectionandimportsubstitution.Excessiverelianceonimportsubstitutioninsomecountriesgaveway toanemphasisonexport-ledgrowth,andalso tothebeliefthatopenmarketswerethesurestguarantorofgrowthanddevelopment.

The debate has matured in recent years, recognizingthe multi-faceted and inherent complexity of thedevelopment process. This perspective acknowledgesboth the advantages of market openness and theresponsibilityofgovernmentsinfosteringdevelopment.

See page 44.

SectionC:Tradetheoryandnaturalresources

trade and resource distribution

uneven geographical distribution of resource endowments across countries plays an important part in explaining the gains from natural resources trade.

In standard trade models built on the theory ofcomparative advantage, endowments of immobile andscarce natural resources may constitute a source ofgains from trade. Trade fosters a more efficientallocationofresources,leadingtoanincreaseinglobalsocial welfare. These “static” effects need to beevaluatedagainstthedynamiceffectsthattradehasontheexhaustibilityofnaturalresources.

Recentempirical literaturefindssupportfortraditionaltheory.However, italsosuggeststhatonlywhenotherdeterminants of comparative advantage – such asinfrastructure,schoolingand institutionalquality–areinplacedoestheresource-abundantcountryreapthefullbenefitsofexchangingitsresourceswithcountriesthat have relatively high endowments of capital andskilled labour, and import capital-intensive goods inreturn.

trade theory and resource exhaustibility: the challenge of finite supplies

trade in finite resources has both “static” and “dynamic” effects on social welfare. While traditional theories predict that the static effects are positive, the dynamic implications of trade are more difficult to study.

A key feature of finite resources is that current usealters consumption possibilities of future generations.Thisposesaproblemfor theefficientmanagementofnaturalresourcesovertime.

Severalstudieshaveconcludedthatinaworldoffiniteresources, thepredictionsof thetraditional theoryaregenerally preserved under the assumption that therearenomarketandgovernmentfailures.Whilethis isausefultheoreticalfinding,itisimportanttobearinmindthat failures such as imperfect competition,environmentaleffectsunpricedinmarkets(externalities)andpoorgovernancearepervasiveinnaturalresourcesectors.

Imperfections in some natural resource markets raise questions about the efficiency of extraction and optimal extraction rates. Imperfect competition may affect trade patterns, although the impact of trade on resource management in these circumstances remains largely unexplored in the economic literature.


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Natural resource markets are often characterized byhighconcentrationandmonopolypower.Onthesupplyside, uneven geographical distribution of naturalresources, scarcity and high fixed costs of extractionlimit market participation and favour the creation ofcartels.Onthedemandside,highfixedcostsofrefiningnatural resources and high transport costs favourconcentrationofprocessinginfewlocations.

A finding of economic theory is that imperfectlycompetitivemarketswillleadtoslowerresourcedepletionthan in the case of perfect markets. As far as trade isconcerned, the notion that imperfect competition willdeliveramoreconservativeextractionpaththanperfectcompetition continues to hold in a situation where allresourcesarecontrolledbyacartelandexportedtotherest of the world. More generally, economists are lesscertainaboutthe impactoftradeonresourcedepletionunder imperfectcompetition.This isbecausemodellingimperfect competition in natural resource marketsintroduces analytical complexities, due to the fact thatstrategicinteractionsamongagentshavetobeconsideredinaninter-temporalframework,makingwelfareanalysismoredifficultandresultshardertogeneralise.

Trade patterns are likely to depart from comparativeadvantageifextractioniscontrolledbyaninternationalcartel. Imperfect competition per se may also be adeterminantof trade.Monopolists in twomarketsmaydifferentiatebetweendomesticandforeignmarketsinterms of prices, thus generating two-way trade in thesame type of goods – a phenomenon referred to asreciprocaldumping.

technical change and capital accumulation can partially offset the exhaustibility of non-renewable resources. trade can contribute to this process.

Currentuseofnon-renewablenaturalresourceswill,bydefinition, reduce future consumption possibilities.However, economists point out that this simple factdoes not necessarily imply that current growth ratescannotbesustainedinthefuture.

The substitution of man-made factors of production(capital)fornaturalresourcescanoffsetthelimitationsimposed by natural resources. To the extent that itpromotes thediffusionof technologies thatoffset theexhaustionofnaturalresources,internationaltradecanhelptosupportsustainedgrowth.

trade theory and resource exhaustibility: the problem of open access

open access may reverse some of the predictions of standard trade theory.

Weaknessinpropertyrightsmeansaccesstoanaturalresource, such as a lake stocked with fish cannot becontrolled.Theentryoftoomanyfishermen,results inover-exploitation of the natural resource. Eachfisherman reduces the productivity of all otherfishermen.However, the individualfishermandoesnot

takeintoaccountthenegativeeffectofhisentryontheproductivityofotherfishermen.Intheendtheresultistoomucheffortexpendedtocatchtoofewfish.

Instandardtradetheory,countrieswith identical tastes,endowmentsandtechnologiesdonothaveanyreasontotrade.However,ifanaturalresourcesectorischaracterizedby open access, differences in the strength of eachcountry’spropertyrightsregimecancreatethebasisfortrade despite countries being identical in all otherrespects.Thismeansthatthepropertyrightsregimecanserveasade factobasisofcomparativeadvantage,whichcan also alter the pattern of trade. For instance, it ispossible for the resource-scarce country to end upexportingthegoodtoamoreresource-abundantcountryiftheformer’spropertyrightsregimeissufficientlyweak.

open access may also undermine the gains from trade.

While the welfare of the resource-importing countryriseswith trade, itdeclines for the resource-exportingcountry. This is because free trade exacerbates theexploitationofthenaturalresourcesothatthestockislower than in autarky. Since the size of the naturalresource stock affects labour productivity, the lowerstock means that the economy will be harvesting asmaller quantity of the natural resource under moreopentrade.

trade pessimism may be overstated if demand for an open-access natural resource is high or if trade strengthens the property rights regime.

Ifthedemandforaparticularnaturalresourceishigh,acountrywithweakpropertyrightscanendupimportingrather than exporting the natural resource. Thecombinationofhighdemandfortheresourceandpoorlydefinedproperty rights leads to rapiddepletionof thestockevenifthecountrydoesnottradeatall.

Thestrengthofthepropertyrightsregimedependsonavarietyoffactors,includingtheabilityofagovernmentto monitor supplies and catch cheating, the nature oftechnologiesforharvestingandforregulating,andtheeconomic benefits from poaching the resource. Anincrease in the price of the natural resource broughtaboutbytradeaffectseachofthesefactorsindifferentways. It may lead to increased monitoring effort orhigher penalties for poaching, both of which wouldstrengthen the property rights regime. The possibleeffects of trade-induced technological change areambiguous,dependingonthenatureofthechange.

environmental externalities and trade

the extraction and use of exhaustible resources in production and consumption activities can have negative effects on the environment.

Adverse environmental effects of resource extractionanduse,suchascarbondioxideemissions,acidificationof the sea or deforestation, may not be taken into

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accountbythemarket.Theresultingnegativeexternalityleads to resource extraction in excess of the sociallyoptimumrate.

In the case of polluting resources that are finite, such as fossil fuels, a general conclusion of the theoretical literature is that postponing resource extraction is optimal for the environment. the impact of trade on pollution externalities resulting from finite resource extraction is ambiguous.

Pricesofnon-renewableresourcesmaybeexpectedtoriseovertimeasstocksaredepleted.Thiswillimplicitlytake care of part of the environmental damagegenerated by the extraction of such resources. Inaddition,themarketmayreacttotheincreaseinpricesby developing alternative energy technologies to dealwith the climate changeproblem.Wheremonopolisticpowerexistsintheextractionindustry,theresourcewillbe extracted at a slower rate than it would be undermorecompetitivemarketconditions.

In the presence of market failures such as differentlevelsofinformationamongactorsinthemarketaboutthe total amount of available resources and poorlydefinedpropertyrights,trademayaccelerateresourceconsumptionbeyondthesocialoptimumandexacerbatethe environmental externalities associated with theextractionanduseoffiniteresources.Bycontrast,theimpactoftechnologicalinnovationinducedbytradeonenvironmental damage will be negative or positivedepending on whether the technology reduces thecostsofextractionor theemissionsgeneratedby theextractionandconsumptionactivity.Forresourcessuchascoal,oilandnaturalgas,trademighthelptomitigatesome of the environmental externalities deriving fromtheiruseby facilitatingsubstitution frommore to lesspollutingenergysources.

the preservation of biodiversity is an important concern in the context of renewable resource use. In certain contexts opening to trade can have an adverse impact on biodiversity via the destruction of natural habitat. the effect of trade on species in the context of an open access problem depends on the biological relationship between species.

Habitat destruction, in forestland or grassland, forexample,isadirectresultoftheexpansionofeconomicactivities, such as timber or grain productionrespectively.Thewelfaregainsfromtradewouldneedtobediscountedbythisconsiderationtotheextentthattradehascontributedtosuchanoutcome.Ifthespeciesof each country are specific to that country, tradespecialization will have a negative impact on globalbiodiversity. If, however, the same species live in allcountriespriortoopeninguptotrade,itisstillpossiblethattradeallowsforanoverallincreaseinbiodiversity.

The impact of trade on various species of plants andanimalsdependsonwhethertheirrelationshiptootherspecies is symbiotic – or positive. For example, in aworld without trade where two species of fish areharvested,theproblemofcommonaccesstoanatural

resource will be mitigated if the relationship betweenthespeciesispositive(thatis, ifthestocksofthetwospecies are mutually beneficial). The problem will beworsened if the relationship is negative. With tradebetweentwocountries,leadingtospecializationintheharvesting of one species, the result will be under-harvesting (or over-harvesting) if the relationshipbetween the species is negative (or positive). As thenumberofcountriesexploitingandtradingeachspeciesrises,whetherthereisover-orunder-harvestingwillnotonlydependonthetypeofbiologicalexternalityacrossspecies.Itwillalsobedeterminedbyaseriesoffactorssuchasthetotalnumberofcountriestrading,thepriceeffectsandconsumerpreferencesamongcountries.

the natural resource curse

the dominance of a natural resource in an economy may harm economic performance. this phenomenon is often referred to as the resource curse hypothesis. transmission channels for the resource curse include the “Dutch disease”, adverse effects on other determinants of growth, and civil conflict.

TheDutchdiseaseoccurswhenanincreaseinrevenuesfrom natural resources de-industrializes a nation’seconomybyraisingtherealexchangerate,makingthemanufacturingsectorlesscompetitive.Thistypeofde-industrialization can be direct or indirect. It is directwhen production shifts from manufacturing to thenatural resources sector, and indirect when additionalspending caused by the increase in natural resourcerevenues results in a further appreciation of the realexchange rate. If the manufacturing sector hasbenefited from positive externalities through learningby doing or other factors, the contraction inmanufacturingoutputinducedbytheDutchdiseaseislikely to reduce the growth rate of the economy, withpermanenteffectsonincomelevels.

Resource dominance may have an indirect effect oneconomicgrowththroughtheinstitutionalframework.Itcan either hamper growth in the presence of weakinstitutions, such as badly defined property rights,poorlyfunctioninglegalsystems,andweakruleoflaw,oritcanitselfcontributetoinstitutionalworsening.

Primary commodities canhelpemerging rebel groupstofundtheiroperations,sonaturalresourcesincreasethe probability of civil wars. In addition, resourceextraction can create grievances among the localpopulationonaccountofsuchfactorsasinsufficientlycompensated land expropriation or environmentaldegradation.Countriesmarkedbyanunevendistributionof natural resources within their territory and ethnicdivisionsareparticularlypronetocivilconflict.Evidenceshows that “point-source” natural resources – that is,resourcessuchasoilandmineralsthatnaturallyoccurindenseconcentrations–aremorelikelytoengendertheonsetofcivil conflict.Theamountofcommoditiesthatcanbelootedandsmuggled,likegemstones,tendstobecorrelatedwiththedurationofcivilconflict.


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trade may intensify or dilute natural resource dominance in an economy.

Allelsebeingequal,openingup to tradewill increasethe price of a natural resource and engender greaterresource dominance. However, trade may also offeropportunitiesfordiversificationoftheproductionbaseandthereforereducedominance.The lattereffectwilldepend largely on whether governments pursuerelevantsupportingpoliciesfordiversification.

empirical literature on the natural resource curse has so far failed to reach unified conclusions.

Earlierliteratureidentifiedanegativerelationbetweengrowthandresourcedependency,evenaftertakingintoaccountalargenumberofotherpossibledeterminantsof slow growth, such as terms of trade changes,investmentactivityandinstitutionalquality.Subsequentwork pointed to institutional quality as a crucialdeterminantofwhethernaturalresourceabundanceisacurseorablessing,arguingthatresourceabundanceindirectlyaffectseconomicgrowththroughitsadverseimpactoninstitutions.

Morerecentempiricalcontributionshavecriticizedthefinding that natural resource abundance is a curse,arguingthatnaturalresourcedominancecanhavezeroor even positive effects on growth if abundance iscorrectly measured, additional variables that correlatewith resource abundance are taken into account, anddepletion of the resource over the sample period isfactoredintotheassessment.

natural resources and price volatility

Historically, natural resources have been characterized by periods of high price volatility. In the most recent commodity boom and bust – one of the largest and most long-lasting in history, covering a broad range of commodities – the dramatic acceleration of price increases from 2006 onwards for certain commodities created the suspicion that prices were influenced by speculative activity.

The possible role of non-traditional investors, such asindexfunds,hedgefundsandothersnotconnectedtothe commodity business, in bringing about pricevolatilityhasbeenamatterofconcern.Theincreasingmarket share of financial traders in the oil futuresmarket between 2004 and 2008 (from 33 to 50 percent), for instance, and the declining participation oftraditional traders, such as oil producers, refiners andwholesalers(downto15percentfrom31percent),isseen by some as being indicative of “herding” effectsthatmayhaveresultedinaspeculativebubble.

However,itisdoubtfulthat“speculators”haveplayedamajorroleinexplainingrecentcommoditypricevolatility.Speculative trading may raise prices in spot markets,where physical delivery of a product is immediatelyarranged, only if it induces participants to hold

commodities outside the market and build upinventories. Inventorydataona rangeofcommoditiesover the time period in question suggest that stockshave stayed flat or even declined, thus defying anynotionofpossible“hoarding”.

Someevidencesuggeststhatcommodityinvestmentbynon-traditionaltradershasdelayedormoderatedpricevolatility,ratherthaninitiatingoraddingtoit.Highpricevolatilityhasbeenpresentincertaincommoditymarketswithlittleparticipationofnon-traditionalinvestors.Asinprevious cycles, it appears that a particular mix offundamental economic factors is responsible for theobservedlargeswingsincommodityprices.

market forces that appear to have contributed to price volatility include buoyant economic growth in emerging economies, limits to production capacity in the short run and the relative prices of resource substitutes.

Relativetothe1980sand1990s,theperiodfrom2002to 2007 saw large annual increases in the globalconsumptionofmajorcommodities,inparticularduetorapid economic growth, industrialization andurbanization in several emerging economies. In mid-2008,however,thistrendchangedwithacontractionofworlddemandduringtherecession.

In the short run, there are limits to increasing supplycapacity.Capacityconstraintsbecameapparentduringthe commodity price boom as a result of limitedinvestmentsduringthe1980sand1990s,whenpriceswere low. On the other hand, high commodity pricespriortotherecenteconomicdownturnarelikelytohavestimulated investment in production capacity, therebyalleviatingsupply-sideconstraintsinthefuture.

Linkages across different commodity markets havealso played a role in recent price fluctuations. Forinstance, higher oil prices affected other commodityprices,asinthecaseofsubstitutionfromoiltocoalforpowergeneration.

volatility in the price of natural resources has long been considered a problem for countries that are heavily reliant on commodity exports.

Onereasonforthisisthatrisk-averseconsumersspendincomeonhedgingagainst the riskof largeswings inresourceprices.Anotheristhatwhenexportersborrowagainsthighexportearningstofundadditionalimportsand consumption, they may confront worrisome debtburdenswhennaturalresourcepricesfall.

Empirical evidence confirms that volatility hamperseconomic growth. When countries suffer from theresource curse, this is aggravated by price volatility.Even in countries where resource abundance has apositiveeffectongrowth,thiseffectcanbeoverturnedbythenegativeinfluenceofvolatility.

volatility in the price of natural resources is also a concern for countries that are heavily reliant on

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imports of these products. this has especially been the case for oil, due to its prominence as an input into production in virtually every sector.

Fluctuationsinoilpricesaffectoil-importingeconomiesthroughthreechannels–supply,demandandmonetarypolicy.Ariseinoilpricesincreasestheproductioncostsof goods that use oil as an intermediate input.Consumption and investment expenditures on goodsand services decline in response to unanticipatedenergy price increases. Inflationary pressures fromrising oil prices may lead to contractionary monetarypolicy.Theempiricalliteraturesuggeststhatchangesindemandconstitutethestrongestinfluenceonchangesinoilprices.Whatistrueforoilinthiscontextcanapplytoanynaturalresource,butprobablytoalesserdegree.

See page 72.

SectionD:Tradepolicyandnaturalresources

Information on trade and other policy instruments applied in the natural resource sectors

Standardtradepolicyinstrumentsareappliedtonaturalresourcesjustastheyaretoothergoods.Theseincludeexporttaxes,tariffs,quantitativerestrictions,othernon-tariffmeasuresandsubsidies,allofwhicharediscussedin the report.However, themotivationsandeffectsofpolicy interventions may differ in certain ways onaccount of the particular characteristics of naturalresourcemarkets.

Although only partially comparable across countries, information on export taxes and quantitative restrictions recorded in Wto trade Policy Reviews (tPRs) suggests that these measures are applied with relative frequency to natural resources.

Onthebasisofselectiveandoftenhighlyaggregatedinformation covering different years, it appears thatwhile natural resources represent approximately24percentofallsectors,aboutone-thirdofallexporttaxesrecordedinTPRscovernaturalresourcesectors.Export taxes occur with greater frequency in fishingandforestrythaninfuelsandmining.

Evidence on quantitative export restrictions suggeststhat,wherethesearepresent,itisoftenforthedeclaredpurpose of conserving exhaustible natural resources.InformationonotherformsofexportrestrictionsnotifiedtotheWTOalsomainlyrelatestonaturalresources.

tariffs are generally low in the natural resources sector, although tariff escalation is present. certain non-tariff measures are also applied.

Theincidenceoftariffsinthenaturalresourcessectoris generally lower than for overall merchandise trade.The only exception to this is fisheries, where fordeveloping countries tariffs are higher than for allmerchandiseimports.Fuelsandminingproductsattractthelowestrates.Boundratesonnaturalresourcesareoften higher than applied rates, with the amount of“water”between the twobeinggreater fordevelopingcountries.

Tariffescalationappearstobepresentinsomenaturalresourcegoods,suchasforestryandmining,butnotinothers, such as fuels. However, if one focuses ondeveloped country markets only, the extent of tariffescalationappearsgreaterandappliestofuelsaswell.

Themostcommontypesofnon-tariffmeasuresappliedto the natural resource sectors are: (i) technicalregulations (product characteristic requirements,labelling requirements, testing, inspection andquarantine requirements, etc.); (ii) non-automatic


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licensing(licencecombinedwithorreplacedbyspecialimport authorization, prior authorization for sensitiveproduct categories, etc.); and (iii) import prohibitions.The frequency of non-tariff measures is greater infisheriesthanineitherforestryorfuels.

Domestic and trade policies in natural resources are often substitutable in terms of their economic effects

Because of the geographical concentration of naturalresources,measuresaffectingdomesticproductionorconsumptionhaveaconsiderableimpactonexportsorimports.Forexample, acountry that importsall itsoilandchargesaconsumptiontaxonitachievesthesameeffectontradeasifitleviedatariff.Thelegaldistinctionbetweenthesetwointerventionsisimportant,however,since the WTO and other international agreementstypicallycovertariffs,butnotconsumptiontaxes.

the incidence of measures other than tariffs and other trade (non-tariff) measures vary significantly among countries and categories of natural resource products.

Inthecaseoffuels,forexample,domestictaxestendtobehigherandseveralordersofmagnitudegreaterthantariffs on fuels. Subsidies to fisheries are large inabsolutetermsandasashareoftotalproduction.

trade policy, resource distribution and exhaustibility

For exhaustible and finite natural resources, the effects of trade policy depend not only on the level of interventions but also on the evolution of a policy over time. only a few studies have looked at the dynamic effects of trade policy on natural resources.

Theavailableliteratureonthisdimensionoftradepolicyhas focused exclusively on import tariffs andconsumptiontaxes.Amajorresultfromthesestudiesisthatifagovernmentcanpre-committoaconstanttariff,thepriceandextractionpathofanaturalresourcewillremain unaffected. Trade policy may also face timeconsistency problems. An initial policy stance, forexample,maycomeunderpressureasmarketdynamicsunfold. Policy consistency over time is therefore achallengeforgovernments.

the quest for scarcity premiums (economic rents) is one explanation for using trade measures in non-renewable resource sectors.

Tariffs cannot move production from one location toanother if natural resources are location-specific andimmobile, making rent-shifting – whereby resource-importingcountriesseektoextractrentsfromresource-exportingcountries–amotiveforusingsuchmeasures.Moregenerally, theavailabilityof largerents inscarcenatural resourcesprovidesastrong incentive for rent-seekingbehaviour.

While import tariffs shift rents from the exporting to the importing country, export taxes shift rents from the extracting company to the government, and export quotas shift rent from the future to the present.

Eveniftheimmediateeffectofatariffistoincreasethedomestic price in the importing country, rigidity insupplymeansthattheburdenofthetariffwilleventuallyfallontheexporter.Theexportpricewillfalltothepointwherethetariff-inclusivepriceintheimportingcountryisequaltothepriceprevailingbeforetheintroductionofthetariff.

Whenall resourcesextractedareexported, anexporttaxonanon-renewableresourceconstitutesatransferofresourcesrentsfromtheproducertothegovernment.Inthesecircumstances,thereisonlyoneexportpriceatwhichallavailableresourceswillbedemandedandtheproducerwillbearthefullburdenofthetax.Therewillbenoeffectonexportprices(terms-of-tradeeffects).

A quotaonnatural resourceswill increaseprices, butthiswillresultinhigherextractionratesandlowerpricesinthefuture.Ifallproductionisexported,anexport(orproduction) quota shifts rents from the future to thepresent.

there may be a terms-of-trade argument in the case of a large supplier for taxing exports of exhaustible natural resources, thereby increasing the price of exports relative to the price of imports. However, certain qualifications apply to this argument.

When resources are also consumed domestically, anexport tax is equivalent to a subsidy on domesticconsumption – or dual pricing – in terms of price andquantityeffects.Therefore,overallwelfareconsiderationsinrelationtotheeffectofanexporttaxontheresource-producingsectorshouldbetakenintoaccount.

Whenacountryislargeenoughtoincreaseworldpricesby taxing its natural resource exports, thus inducingterms-of-trade gains at the expense of importingcountries,overallworldwelfarewillbereduced.Thisiswhyterms-of-trademotivationsfortrademeasuresarereferredtoasbeggar-thy-neighbourpolicies.

In the long run, higher export prices resulting fromtaxesmayprovideanincentiveforthedevelopmentofsubstituteproducts,newresource-savingtechnologies,ortheexploitationofnewresources.Importingcountriesmayalsoretaliatebyimposingtaxesonimportsofotherproducts.Short-runnationalterms-of-tradegainsneedtobemeasuredagainst the long-termcostsofhigherdemanduncertainty.

export taxes and other trade policies may also be justified to address a variety of other policy objectives, including problems related to natural resources volatility and dominance in a domestic economy setting. However, the use of trade measures in a number of these circumstances is not without hazards.

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Exporttaxesonanaturalresourcereducethedomesticpriceoftheproductinquestion.Thiscanhelptosoftentheimpactofrapidlyrisingworldpricesinthedomesticmarket, thusprotectinglocalconsumers.Manynaturalresourceeconomistswouldarguethatthisisasecond-bestwayofaddressingincomeinstabilityproblems,tobeusedonlywherethefirst-bestoptionofdevelopingefficientstockexchangesandfinancialmarkets isnotattainable.

Export taxes have also been used to avoid de-industrialization (the so-called Dutch disease) and topromote infant industries or diversification. Sincenatural resources are used as inputs in many higher-value added industries, export taxes can work as anindirectsubsidytomanufacturingbyreducingthepriceof resource inputs. The justification for such second-best measures rests on some form of marketimperfection, including in this instance a learning-by-doingargument.

subsidies can have rent-shifting and beggar-thy-neighbour effects, but they may also be used to address legitimate policy objectives.

Economic theory generally supports the use ofsubsidiesincaseofmarketfailures.Awellknowncaseisthatof“green”subsidies.Forinstance,whendecidinghowmuchtoinvestinthedevelopmentofatechnologythat reducesextractionemissions,afirmwillcomparethe private benefits of producing the new technologywithitsprivatecosts.Sinceafirmwillnotfullytakeintoaccount the environmental benefits to society, it willunder-invest. This market failure could justifygovernmentinterventionintheformofsubsidies.

Another interesting example is that of explorationsubsidies. A key feature of non-renewable naturalresources is that their supply is uncertain. Companiesinvestinexplorationtodiscovernewdeposits.Alsointhiscasethemarketmayfailandgovernmentsmayneedtointervene. Examples of these market failures includespillover of geological information and the hold-upproblemarisingbecauseofthesunkcostsofexploration.

trade policy and exhaustibility: the problem of open access

the first-best solution to the problem of open access is to strengthen the property rights regime. If this option is unavailable or very costly, a government may consider measures that directly affect production or trade.

Aproductiontaxonanatural resourcecanalsoserveasafirst-bestpolicyinstrumentifitissetatalevelthatresultsintheinternalizationoftheeffectsthatproducershave on each other’s productivity. A similar argumentcould also be made for a production quota on theharvestofthenaturalresource.

Althoughexport taxeswill not correct theabsenceofproperty rights, they can limit the over-exploitation of

the natural resource base. However, the use of anexporttaxhasabeggar-thy-neighboureffectbecausetheincreaseinwelfareoftheexportingcountrycomesattheexpenseofthewelfareofitstradingpartner.Theimportingcountrywillsufferaterms-of-tradedecline.

Byloweringthedomesticpriceofanaturalresource,anexporttaxcouldalsoencourageanunsustainablelevelof domestic consumption of a resource. Such anoutcome could be avoided through measures thatensureasustainablelevelofresourceextraction.

Subsidies to natural resource industries, such asfisheries, will worsen the exploitation of stocks thatalreadysuffer fromopenaccess.However, the impactonharvestandtradeisambiguous.Iftheeffortrequiredto increase the harvest is too great because of theprevailingdegreeofover-exploitation,thesubsidymayactuallyreduceproduction.

natural resource externalities and environmental policy

Recognition of the link between environmental externalities and resource depletion is key to an efficient implementation of environmental policy.

Theeconomicliteraturearguesthatanad valoremtaxthatvariesover timedelaysdepletionandslowsdownadverseenvironmentaleffectsofresourceexploitation.Whenenvironmental damage increasesover time, theoptimal level of a time-varying tax will depend on theinteractionamongdifferentfactors,suchasthenaturalrate of decay, the initial stock of accumulatedenvironmental damage, and the extent to whichconsumers disregard the future impact of today’sactions(thediscountrate).

The extraction and use of resources, such as fossilfuels, has a negative effect not only on the countryusing or extracting such resources, but also on theglobal environment. In sucha situation, an agreementamong nations to increase taxes uniformly beyond anationallydeterminedoptimumtaxlevelisnecessarytoprovideanefficientallocationoftheresourceovertime.

In order for anenvironmental policy tobeeffective, itshould be implemented rapidly after it has beenannounced.Thisistoavoidanaccelerationofresourceextraction and aggravation of the associatedenvironmental damage prior to implementation of thepolicy.

When biodiversity loss is a consequence of a decrease in the total stock of a resource, the effect of a tariff on the harvested good depends on the principal causes of a decrease in the total stock of the resource, and hence on habitat destruction.

Habitat destruction can be a direct result of over-harvestingoritmayariseasaresultoftheexpansionofsubstituteeconomicactivitiesthatcompromiseshabitatconversion. In the first case, a trade policy such as a


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tariffwouldbeoptimalbecause itwoulddecreasetherate of resource extraction and reduce habitat loss.However, in the second case the effect of a tariff isambiguousbecauseitaffectshabitatconservationboththrough reducing resource extraction and expandingothereconomicactivities.

If habitat is affected adversely by the conversion of resources to other uses, environmental standards and eco-label schemes could efficiently address the problem.

While mandatory environmental standards set qualityconditionstobeadheredtobyeachproducer,aneco-labelisacertificationschemethatprovidesinformationto consumers, helping them to identify environment-friendly products. An eco-label can only achieve itsobjective if consumers hold preferences forenvironmentalamenities.Inthatcircumstance,eco-labelschemesmaybeable toachievesimilarenvironmentalgoalstothoseofenvironmentalstandards.Moreover,insituations where governments cannot impose anenvironmental standard on foreign firms, an eco-labelschemeisthemostefficientpolicytoimplement.

the political economy of trade policy in natural resource sectors

the socially optimal rate of resource extraction may be hard to obtain when trade and conservation policies are influenced by special interest groups. the effect of trade opening on resource extraction in this context is ambiguous.

Anumberofstudiespointtothepossibilitythattherateofresourceutilizationmaybegreaterthanthesociallyoptimal rate because of poor governance or lobbyingactivities. This is particularly true in countries whereinstitutional checks and balances on governmentactivityareweak.

Trade openness affects both incentives to lobby thegovernment and the quality of institutions in whichpolicy-makersoperate.While theeffecton lobbying isambiguous,recentstudieshighlightapositiveeffectoftrade on institutional quality and hence on efficientresourceutilization.

In the presence of lobbying activities, international transfers are the most appropriate policy to address negative cross-border effects associated with the excessive extraction of resources.

By inducing the exporting government to increaseresource stocks, international transfers such as debt-for-nature swaps are the first-best policy to improvemanagement of a natural resource whose depletioncreates negative cross-border effects ignored by themarket(externalities).Atradesanctionmayhaveexactlytheoppositeeffectasithurtsthepoliticallyorganizedresourcesector.

national resource abundance and regional integration

A two-way relationship exists between natural resources and regional integration. Regional integration affects resource-rich and resource-scarce countries differently. these effects, in turn, shape the incentives for these countries to engage in regional integration.

The integration of two resource-abundant countrieswith low tariffs and non-tariff barriers on naturalresources,andsimilarproductionstructureswithlimitedmanufacturingactivity, is likely to leadto limited tradecreation and potentially large trade diversion effects.On the other hand, regional integration may enable aresource-abundant country to diversify its productionandexportstructurebyrelaxingtheconstraintsitfacesindevelopingamanufacturingsector.

Regionalintegrationmayassuageconcernsaboutover-exploitation of natural resources and other potentialnegative consequences of international trade on theenvironment as provisions on natural resourcemanagement are sometimes included in regional andbilateralfreetradeagreements.

See page 112.

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SectionE:Naturalresources,internationalcooperationandtraderegulation

trade in natural resources and Wto rules

the Wto does not have an agreement specifically regulating trade in natural resources, but a number of Wto rules covering goods and services are relevant. these have been analysed in terms of the five characteristics of natural resource markets that were identified in this report.

Unevenglobaldistribution

ArticleIIoftheGeneralAgreementonTariffsandTrade(GATT)constrainsWTOmembersfromapplyingtariffsatrateshigherthanthose“bound”intheirschedulesofconcessions. The General Agreement on Trade inServices(GATS)alsoestablishesschedulesofspecificcommitments on the terms on which markets may beaccessed. Article I and Article III of the GATT lay outrules on non-discrimination, as does Article II of theGATS. Article XI provides that no prohibitions orrestrictions other than duties, taxes or other chargesmaybeimposedontheimportationofanyproductorontheexportationorsaleforexportofanyproduct.Wheresuch restrictions are exceptionally permitted as amatter of public policy, Article XIII requires thatmeasures are applied in a non-discriminatory fashion.Article XVII seeks to ensure that state tradingenterprises conduct their activities in a non-discriminatory manner on the basis of commercialconsiderations.ArticleVoftheGATTsetsoutrulesthatapplytogoodsthatareintransit.

Exhaustibility

The Agreement on Subsidies and CountervailingMeasures prohibits export subsidies and sets outdisciplinesonsubsidies that causeadverseeffects tootherWTOmembers.Somenaturalresourcesthatareagriculturalproducts,suchascertainrawmaterialsandforestry products, are subject to the Agreement onAgriculture, which also includes rules on subsidies.WTOmembersarecurrentlynegotiatingspecificruleson fisheries subsidies as part of the Doha Round oftradenegotiations.

Some of the public policy exceptions in Article XX ofthe GATT are particularly relevant to the issue ofexhaustibility. Sub-paragraph (g) allows measuresrelating to the conservation of exhaustible naturalresources.Sub-paragraph (j)allowsWTOmembers totakemeasures thatareessential to theacquisitionordistributionofproductsingeneralorlocalshortsupply.However, anysuchmeasuresmustbeconsistentwiththe principle that all members are entitled to anequitable share of the international supply of suchproducts.

Externalities

Eco-labels may be used to manage the un-pricednegativeeffectsofeconomicactivityontheenvironment.TheAgreementonTechnicalBarriers toTradedefinestechnical regulations as documents that lay downproduct characteristics or their related processes andproduction methods. Similar language is used in thedefinitionofvoluntarystandards.Thesecondsentenceof both definitions refers to labelling requirements “astheyapplytoaproduct,processorproductionmethod”.

The Agreement on Sanitary and PhytosanitaryMeasuresrecognizesthatWTOmembershavetherighttoadoptsanitaryandphytosanitarymeasurestoprotecthuman,animalorplantlifeorhealth.ArticleXX(b)alsopermitstheadoptionofmeasuresthatarenecessarytoprotect human, animal or plant life or health. ArticleXX(d) permits the adoption of measures that arenecessarytosecurecompliancewithlawsorregulationswhich are not inconsistent with the provisions of theGATT. The rules in the Import Licensing Agreementmayberelevantwherelicencesareused,forexample,to control imports of forestry products made fromlegallyharvestedtimber.

The Agreement on Government Procurement mayimposeconditionsonthepurchasesofcentralandsub-central government entities as a means of minimizingexternalities, such as the negative environmentalconsequencesofcertainpractices.

Article XI(2)(a) provides an exception to the ban ofexportrestrictionsbyallowingWTOmemberstoimposethemtemporarily“topreventorrelievecriticalshortagesoffoodstuffsorotherproductsessentialtotheexportingcontracting party”. The Agreement on Agriculture alsocontainsprovisionsonexportrestrictions.

Dominance

Dual pricing mechanisms – establishing a differentdomesticpricefromtheexportprice–havebeenusedby some governments as a means of diversifying thedomestic production structure. Such mechanismsincludeexporttaxesandrestrictions,statemonopolies,and maximum domestic prices on natural resources.Some have suggested that dual pricing practicesconstituteanactionablesubsidy,butnoagreementorauthoritativelegalinterpretationexistsonthispoint.

ArticleXX(i)permitsmeasures inconsistentwithWTOagreements if these measures involve restrictions onexportsofdomesticmaterialswheresuch restrictionsare necessary to ensure essential quantities of suchmaterialstoadomesticprocessingindustry.

Volatility

Pricestabilization isoneof theprincipalobjectivesofinternational commodity agreements. Article XX(h) ofthe GATT provides a specific exception for measurestakenundersuchagreements.Thisprovisionmaybeoflimitedrelevancetoday,atleastforthenaturalresourcesectorscoveredbythisreport.


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Rules of international law relevant to natural resources

the Wto is part of a much broader framework of international cooperation and many aspects of natural resources are regulated by other rules of international law outside of the Wto.

The WTO does not regulate ownership of naturalresources. There is a vast corpus of customary andtreaty law regarding sovereignty over territories, landmasses,bodiesofwaterandtheseabed.Thiscorpusoflaw is relevant in terms of the allocation of propertyrightsovernaturalresourcesasbetweenstates.Inthe1960s and 1970s, several international instrumentswereadopted inwhichdevelopingcountriessoughttoreassert state sovereignty over natural resources inrelationtoforeigninvestors.

International commodity agreements establishedmechanismstostabilizethepricesofnaturalresourcesand were also seen as tools to correct the decliningterms of trade of developing country exporters. Theonly international commodity agreement related toproductscoveredbythisreportthatremainsoperationaltoday is the International Tropical Timber Agreement,and its objectives have been broadened. TheInternational Tin Agreement and the InternationalNatural Rubber Agreement were terminated.Agreements between producer countries are morerelevant today. OPEC is the most prominent of suchagreements.

Some trade agreements include obligations that gobeyond theobligations in theWTOrelevant tonaturalresources. For example, certain bilateral and regionalagreementsprohibitnewexporttaxesorabolishthemcompletely.TheEnergyCharterTreaty’sdisciplinesontransitgobeyondthosefoundinArticleVoftheGATT.

A large number of international agreements establishmechanisms for cooperation between states to dealwithinternationalexternalities.Manyoftheserelatetoenvironmental protection. Corruption is another issueonwhichstateshavecooperated.

Bilateral investment treaties seek to resolve what isknownasthehold-upproblem–asituationwherethecontractualagreementbetweentwopartiesisaffectedbyconcerns thatonepartywillgainunduebargainingpower once investment by the other party has beencommitted–andplayan important roleparticularly inrelationtomineralsandenergyresources.

the relationship between the Wto agreements and general international law has been the subject of much discussion in recent years and the debate is not firmly settled.

WTOagreementsofferavenues forWTOmembers toreconciletheirWTOobligationswiththoseunderotherinternational agreements. At a broader level, the UNInternational Law Commission has identified several

principles that may be of assistance when seeking tounderstand the relationship between differentinternationalnorms.

one of the issues that has received the most attention is the relationship between the Wto and multilateral environmental agreements.

The 1994 WTO Decision on Trade and Environmentstatesthat“thereshouldnotbe,norneedbe,anypolicycontradictionbetweenupholdingandsafeguardinganopen, non-discriminatory and equitable multilateraltradingsystemontheonehand,andactingforthepro-tectionoftheenvironment”.

A similar call for coherence between environmentalmeasures and the multilateral trading system isreflected in the Rio Declaration on Environment andDevelopment.Todate,notrademeasuretakenunderamultilateral environmental agreement has been foundtobe incompatiblewithWTOobligationsbyadisputesettlementpanelortheAppellateBody.

Regulating natural resources trade: challenges and policy implications

A number of challenges for international cooperation are highlighted here. the list is not exhaustive, nor is there any implication in the selection of these issues that they should necessarily be negotiated in the Wto, or even that they all fall within the scope of agreed Wto competence.

Exportpolicy

Thefirstchallengerelatestoexportpolicyintheformofexporttaxesandrestrictions.AkeyeconomicrationaleofWTO rules is to stimulate cooperation among tradingpartners in areas where they can harm each other byactingunilaterally.Alargecountrycanimproveitstermsoftradeattheexpenseofitstradingpartnersbyimposingexport restrictions and shifting economic rents. Thereductioninsupplywillpushuptheworldpriceanddriveawedgebetweenthispriceandthedomesticprice.Asinthe tariff case, two large countries restricting theirexports to each other could both end up worse-off.Commitmentsonexporttaxescouldbeexchangedeitheramongst exporters using such measures or forconcessionsonimporttariffs,asexporttaxesareoftenassociatedwithtariffescalationintheimportingcountry.Broadertrade-offswouldofcoursealsobepossible.

Two points should be made here. Firstly, the issuessurrounding export policy are not unique to naturalresources. They have more general application.Secondly, whether or not export taxes change worldprices,governmentsmayresorttothemotherthanforterms-of-tradeand rent-shifting reasons.Export taxesmay be intended to raise revenue, stabilize income,diversify the domestic and export structure of theeconomy,addressescalatingtariffsoftradingpartnersalong production chains, and meet environmental

executIve summARy

17

objectives.Thetheoreticalanalysisinthereportofthecase for export taxes (and sometimes quantitativerestrictions) also points out some of the potentiallimitationsofthesepolicychoices.

Sustainableexploitationofnaturalresources

While existing WTO rules offer flexibility toaccommodate the sustainable exploitation of naturalresources, there may be a case for expanding thisflexibilityincertainareas.Forinstance,certainsubsidiescan be an important domestic policy tool forgovernments to manage a natural resource or toaddress the environmental impact associated with itsuse. Provisions under Article 8 of the Agreement onSubsidies and Countervailing Measures that deemedenvironmental subsidies non-actionable – that is, notsubject to challenge in the WTO or to countervailingmeasures – expired at the end of 1999, and WTOmembers did not agree to extend them. It is unclearwhether the general exceptions in Article XX may beinvokedtojustifyenvironmental/conservationsubsidies.

Differentpolicieswithsimilaroutcomes

Another challenge arises where certain domestic andtrade measures are subject to different disciplines,even though they have the same economic impact.Where countries importing a natural resource do notproduceit,andcountriesexportingituseverylittleofit,trademeasuresanddomesticmeasurescanbeclosesubstitutes.Withnaturalresources,aproductionquota,forexample,isoftenequivalenttoanexportquotaandadualpricingschemeoftenhasaneffectsimilartothatofanexporttax.This,inturn,hasaneffectequivalenttothatofaconsumptionsubsidy.Inthesecases,regulatingonlyoneoftheequivalentmeasuresisofteninsufficienttoachieveundistortedtradeinnaturalresources.

Managingshort-runexigencieswithlong-runcosts

Becausenaturalresourcesareeitherfiniteorexhaustible,current policies and their future consequences bear aparticularly important relationship. International rulessuch as those negotiated at the WTO can provide ananchor tohelpgovernments ignoreshort-run incentivesand pursue sustainable policies. One example of ameasurethatmaybebeneficialintheshortrun,possiblyforpoliticaleconomyreasonsbutwhichdoesnotservethe long-run interestof thecountry, issubsidies for theexploitationofaresourcewithanopenaccessproblem.The WTO negotiations on fishing subsidies addressexactlythissortofproblem.TherecentG20mandatetoreviewconsumptionsubsidiesonfossilfuels,whichhaveanegativeenvironmentalimpact,hasasimilarpurpose.

Transitandtradeinnaturalresources

Althoughtradeinmostofthenaturalresourcescoveredbythisreportmovesrelativelyunimpeded,anumberofissues have arisen in relation to the transit acrossjurisdictionsoftradednaturalresources.Thisissuehasriseninparticularwithenergyproducts.ThefreedomoftransitobligationinGATTArticleVplaysanimportant

role in facilitating theflowofgoodsacross theworld.However, alternative views regarding the scope ofArticleVinthecaseoftransportviafixedinfrastructures,suchaspipelines, creates regulatoryuncertainty.Thisuncertaintycarrieseconomiccosts.

Improvinglegalclarityandcoherenceamonginternationalagreements

One issue here relates to the blurred nature of theborderbetweentheGATTandtheGATSwithrespecttoactivities surrounding the exploitation and processingofnaturalresources.Thisreducesthepredictabilityofmultilateral rules. A second, and perhaps moreimportant,issueconcernstherelationshipbetweentheWTOandotherinternationalagreements.ManyaspectsofnaturalresourcesareregulatedbyinternationalrulesoutsidetheWTOandanumberofchallengescanonlybe effectively confronted through better globalgovernance. Many discussions on international issuesfacing natural resources have to proceed on severalmultilateralfronts,andcoherenceisimportant.

See page 160.

SectionF:Conclusions

the analysis in this report argues strongly for cooperation. the importance of natural resources to virtually every aspect of human activity, and the particular characteristics of these products, make it vital that governments work together to find common ground and appropriate trade-offs. such cooperation should aim to ensure sound resource management, equity and mutual gain.

Thetradeaspectsofcooperationhavebeenaparticularfocus of the report, and the case has been made forseeking accommodation through effective multilateraltrade rules.Well-designed ruleson tradearenotonlyaboutsecuringthestandardgainsfromtrade;theyarealsoakeycomponentofcooperation indomainssuchas environmental protection and domestic policies tomanagescarceresources.

See page 200.


18

I The trade situation in 2009-10The economic and financial crisis that shook the world economy in the closing months of 2008 produced a global recession in 2009 that resulted in the largest decline in world trade in more than 70 years. The rate of trade growth had already slowed from 6.4 per cent in 2007 to 2.1 per cent in 2008, but the 12.2 per cent contraction in 2009 was without precedent in recent history. The WTO has projected a modest recovery in 2010 which should reverse some of the impact of the trade collapse.

I - tHe tRADe sItuAtIon In 2009-10

19

Contents A Introduction 20

B overview of output and price developments in 2009-10 22

c merchandise trade, volume (real) terms, 2009 24

D merchandise and services trade, value (nominal) terms, 2009 26


20

Tradeandoutputgrowthresumedinthesecondhalfof2009followingrecorddeclinesearlier in theyear.Therecovery through the first quarter of 2010 wasinsufficient to attain pre-crisis levels. The WTO hasprojectedafurtherrecoveryin2010fromthedepressedlevelsof2009,whichshouldreversesomebutnotallofthe impact of the trade collapse. One positivedevelopment in 2009 was the absence of any majorincreaseintradebarriersimposedbyWTOmembersinresponse to the crisis, despite high unemployment inmany countries. The WTO system of trade regulationplayed a significant role in helping to prevent anotherdescent into protectionism that so exacerbatedeconomicconditionsinthe1930s.

Thedramaticdeclineinworldtradein2009(seeFigure1)wasevengreater inUSdollar terms (-22.6percent)thaninvolumeterms(-12.2percent),thanksinlargeparttofallingpricesforoilandotherprimaryproducts.1Worldoutput as measured by gross domestic product (GDP)also fell by2.3percent in2009, thefirst suchdeclinesincetheendoftheSecondWorldWar.Takentogether,thesedevelopmentsamountedtothemostsevereglobaleconomicslowdownsincetheGreatDepression.

1. Explainingthesizeofthetradecollapse

Worldtradevolumesfellonthreeotheroccasionssince1965(-0.2percentin2001,-2.0percentin1982,and-7.0 per cent in 1975), but none of these episodesapproached the magnitude of last year’s plunge. Theslumpintradein2009waslargerthanmosteconometricmodelswouldhavepredictedgiventhesizeofthedropinGDP,anditwasalsolargerthanthedeclinepredictedbytheWTOintheearlystagesofthecrisis.

Economistshavesuggestedanumberofexplanationsforthetradecollapse,includingtheimpositionofsomeprotectionistmeasuresandreducedaccesstocreditto

finance trade transactions. However, the consensusthat has emerged centres on a sharp contraction inglobaldemandastheprimarycause.2Theweaknessindemandhaditsrootsinthesub-primemortgagecrisisin theUnitedStates,whichbecameapparent in2007and intensifiedtowards theendof2008.WhatbeganasacrisisintheUSfinancialsectorspreadtotherealeconomy,tootherdevelopedeconomies,andtotherestoftheworld inshortorder.Theimpactofthecrisisontradewasfurthermagnifiedbytheproductcompositionof thefall indemand,by thefact that thedeclinewassynchronizedacrosscountriesandregions,andbythegrowthofglobalsupplychainsinrecentdecades.

Sharp falls in wealth linked to the recession causedhouseholds to reduce their spending on consumerdurables such as automobiles (trade in automotiveproductswasdown32percentin2009),andalsomadefirmsreconsiderexpendituresoninvestmentgoodssuchasindustrialmachinery(down29percentin2009–seeTable1).Purchasesof these itemscouldbepostponedeasily in response to heightened economic uncertainty,and they may also have been more sensitive to creditconditions than other types of goods. The reduction indemandfortheseproductsthenfedthroughtomarketsthat supply inputs for their production, particularly ironandsteel(down47percentin2009).Shrinkingdemandforironandsteelwasalsolinkedtotheslumpinbuildingconstruction in countries where property markets hadbeenboomingbeforethecrisis.ConsumerdurablesandcapitalgoodsmakeuparelativelysmallfractionofglobalGDPbutarelativelylargepartofworldtrade.Asaresult,fallingdemandfortheseproductsmayhavehadagreaterimpactonworldtradethanonworldGDP.

Themagnitudeofthetradecontractionof2009mayalsohave been inflated somewhat compared with earlierdeclinesinthe1970sand’80sduetothespreadofglobalsupplychainsintheinterveningyears.Withtoday’smoreextensivesupplychains,goodsfrequentlycrossnationalborders several times during the production process

a. Introduction

Figure1:volume of world merchandise exports, 1965-2009 (Annualpercentagechange)

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I – tHe tRADe sItuAtIon In 2009-10

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before arriving at their final destination. Merchandisetradestatisticsrecordthevalueofgoodseverytimetheycrossnationalboundaries,sowhenthesedataareaddedtogether to arrive at a figure for total world trade, thenumber will be larger when supply chains are moreextensive due to a certain amount of double counting.Consequently, a given fall in demand in 2009 wouldprobablyproduceabiggermeasureddeclineintradethananequivalentfallindemandin1982or1975.

Theextentofthisdoublecountingisdifficulttogaugeduetoalackofreadilyavailabledata,butitisreflectedin the fact that trade has been growing faster thanproduction since the 1980s. As a result, the ratio ofworld exports to GDP has increased steadily since1985, and jumped by nearly one-third between 2000and2008,beforedroppingin2009asworldtradefellfasterthanworldGDP(seeFigure2).

A final factor that reinforced the trade slump was itssynchronizednature.Exportsandimportsofallcountriesfellatthesametime,leavingnoregionuntouched(seeFigure3).Itisintuitivelyclearthatthefallinworldtradewouldhavebeensmallerifcontractioninsomeregionshadbeenbalancedbyexpansioninothers,butthiswasnotthecasein2009.

Thesynchronizednatureofthedeclineiscloselyrelatedto the spread of international supply chains and

informationtechnology,whichallowsproducers inoneregiontorespondalmostinstantlytomarketconditionsinanotherpartoftheworld.Thisusuallycontributestoglobal and national welfare by encouraging the mostefficientuseofscarceresources,butinthecaseofthetrade collapse it may have acted as a transmissionmechanism.

Figure3:World merchandise exports by region, 2007Q1-2009Q4 (Year-to-yearpercentagechangeincurrentUSdollars)

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aIncludessignificantre-exports.bIncludesAfricaandMiddleEast.Source:IMF,InternationalFinancialStatistics;Eurostat,ComextDatabase;Nationalstatistics;GlobalTradeAtlas.

Table1:World trade in manufactured goods by product, 2008Q1-2009Q4(Year-to-yearpercentagechangeincurrentdollars)

2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2009

manufactures 16 18 13 -11 -28 -30 -22 0 -21

Ironandsteel 15 27 43 4 -39 -56 -55 -31 -47

Chemicals 19 24 20 -7 -24 -25 -17 8 -15

Officeandtelecomequipment 10 13 7 -14 -29 -22 -15 8 -15

Automotiveproducts 15 16 3 -26 -47 -46 -29 6 -32

Industrialmachinery 21 22 15 -8 -29 -36 -32 -15 -29

Textiles 11 9 3 -13 -27 -27 -17 0 -19

Clothing 11 11 8 -2 -11 -15 -12 -6 -11 Source:WTOSecretariatestimates.

Figure2:Ratio of world exports of goods and commercial services to GDP, 1981-2009 (Index2000=100)

1981 1985 1989 1993 1997 2001 2005 2009

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1. Economicgrowth

WorldGDPgrowthturnedsharplynegativein2009forthefirsttimesincethe1930s,droppingto-2.3percentfrom1.6percentin2008.Bothyearswerewellbelowthe 2000-08 average of 3.0 per cent. Although thecontraction in output started in the developedeconomiesinthefourthquarterof2008,itacceleratedin the first half of 2009 and eventually affected allcountries and regions to varying degrees. However,many developing countries only experienced slowerGDPgrowthratherthanabsolutedeclinesinoutput.

Figure4showsthequarterlyevolutionofGDP,aswellasexportsand importsofgoodsandservices for theindustrialized economies of the Organisation forEconomic Cooperation and Development (OECD).Positivequarter-on-quarterGDPgrowthresumedinthesecondquarterof2009 inOECDcountries,but year-on-year changes remained negative throughout theyear.AninterestingfeatureofFigure4isthattradeandoutputbegantheirdeclinesandstartedtheirrecoveriesat the same time. This provides some support for thenotion that the trade decline was mostly related tofallingdemandratherthanotherfactors.

Output of developed economies fell 3.5 per cent in2009aftergrowing just0.5percent in2008.Amongthe leadingdevelopedeconomies,Japansuffered thelargest decline in its GDP (-5.0 per cent) followed bythe European Union (-4.2 per cent)3 and the UnitedStates (-2.4 per cent). On the other hand, developingeconomies still managed to increase their collectiveoutputby2.6percentin2009,althoughthiswasdownsharply from the 5.6 per cent growth of the previousyear.ThecontinuedpositiveGDPgrowthofdevelopingeconomies can be partly credited to the strong

performances of China and India, whose outputincreasedby8.5percentand5.4percent,respectively,in 2009. Oil-exporting countries saw their collectiveGDPfallto2.0percentin2009,downfrom5.1percentin2008,while least-developedcountries(LDCs)grew3.7percent,downfrom6.7percentin2008.

North America’s GDP growth fell to -2.7 per cent in2009,whileSouthandCentralAmerica’sratedroppedto -0.8 per cent. The decline in Europe’s output wasevenlarger(-4.0percent),andthatoftheCommonwealthof IndependentStates (CIS) largerstill (-7.0percent).On the other hand, Africa managed to increase itsproductionofgoodsandservicesby1.6percent,asdidthe Middle East, which recorded GDP growth of1.0 per cent. Asia’s GDP growth was almost flat at0.1per cent, as thesharpdeclineof JapancancelledouttheexpansionsofChinaandIndia.

2. Pricesandexchangerates

After plunging in the early stages of the economiccrisis,pricesforprimaryproductsstabilizedandstagedasignificantrecoveryinthesecondhalfof2009.ThisisillustratedbyFigure5,whichshowsindicesofworldprimaryproductpricesfromtheInternationalMonetaryFund (IMF). Between July 2008 and February 2009,energy prices fell by 64 per cent and metals pricesdropped by 50 per cent, but between February 2009and January 2010 prices for energy and metals rose60 per cent and 65 per cent, respectively. Averagecommodity prices for 2009 were down for energy(-37 per cent), metals (-29 per cent), agricultural rawmaterials (-17 per cent) and food (-15 per cent). Theonlyprimaryproduct category registeringan increaseinpriceslastyearwasbeverages(1.7percent),whichincludescoffeeandtea(seeFigure6).

B. overview of output and price developments in 2009-10

Figure4:Real GDP and trade growth of oecD countries, 2008-09 (year-to-yearpercentagechange)

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GDP

Exports of goods and services

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Major currencies have undergone significantfluctuationsagainst theUSdollarsince thebeginningoftheeconomiccrisis,withtheexceptionoftheChineseyuan,whichhasbeeneffectivelypegged to thedollarsince July 2008. For example, after falling nearly20percentinvalueagainstthedollarbetweenJulyandNovember2008,theeurothenappreciated17percentbetween February and November 2009. Many othercurrencies followed a similar pattern, depreciatingagainst the dollar as the crisis worsened andappreciatingasconditionseased,probablydue to thedollar’s role as a safe haven currency in times ofeconomicuncertainty.Anexception to this rule is theJapaneseyen,whichappreciatedagainstthedollarasaresult of the unwinding of the so called yen “carrytrade”inwhichlargeamountsofyenwereborrowedinJapan and invested in assets denominated in othercurrenciesinordertoobtainahigherrateofreturn.Theliquidationof thesepositions increasedcapital inflowsinto Japan and put upward pressure on the country’scurrency(seeFigure7).

Figure5:export prices of selected primary products, January 2000-January 2010 (Index,January2000=100)

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Figure6:export prices of selected primary products, 2007-09 (Annualpercentagechange)

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Agriculturalraw materials

Metals

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2009

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Figure7:Dollar exchange rates of selected currencies, January 2000-January 2010 (Index,January2000=100)

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24

Worldmerchandisetradeinvolumeterms(i.e.excludingthe influence of prices and exchange rates) fell by12.2percentin2009(seeTable2).Thiswaswellbelowthe 2.1 per cent increase for 2008, and significantlylowerthanthe10yearaverageincreaseof4.1percent.Thedropintradewasalsolargerthanthe2.3percentdeclineinGDPfor2009,whichisnotsurprisingsinceworld trade generally grows faster than GDP whenoutput isacceleratinganddeclinesmorewhenoutputslows(seeFigure8).

AllcountriesandregionsinTable2sawthevolumeoftheir exports decline last year. North America andEuropefellmorethantheworldaverage(14.4percenteach)whilethesmallestdeclineswererecordedbyoil-

exporting regions such as the Middle East(-4.9 per cent), Africa (-5.6 per cent) and South andCentralAmerica (-5.7percent).Thedeclines forAsia(-11.1 per cent) and the CIS (-9.5 per cent) weresomewhatlarger,butstilllessthantheworldaverage.

The United States (-13.9 per cent), European Union(-14.8percent)andJapan(-24.9percent)allsawtheirexportsfallbymorethantheworldaverage,butChina’sdropwassmaller(-10.5percent).Collectively,thenewlyindustrializedcountries(NICs)experiencedarelativelysmall decline in exports (-5.9 per cent) despite theirvulnerability during the crisis due to the exportorientationoftheireconomies.ThereductioninIndia’sexportswasalsocomparativelysmall(-6.2percent).

C. Merchandise trade, volume (real) terms, 2009

Figure8:Growth in the volume of world merchandise trade and GDP, 1999-2009 (Annualpercentagechange)

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1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Avg. GDP growth 1999-2009

Avg. export growth 1999-2009

GDP

Merchandise exports

Source:WTOSecretariat.

Table2:GDP and merchandise trade by region, 2007-09 (Annualpercentagechange)

GDP Exports Imports

2007 2008 2009 2007 2008 2009 2007 2008 2009

World 3.8 1.6 -2.3 6.4 2.1 -12.2 6.1 2.2 -12.9

north America 2.2 0.5 -2.7 4.8 2.1 -14.4 2.0 -2.4 -16.3

UnitedStates 2.1 0.4 -2.4 6.7 5.8 -13.9 1.1 -3.7 -16.5

south and central America a 6.4 5.0 -0.8 3.3 0.8 -5.7 17.6 13.3 -16.3

europe 2.9 0.8 -4.0 4.2 0.0 -14.4 4.4 -0.6 -14.5

EuropeanUnion(27) 2.8 0.7 -4.2 4.0 -0.1 -14.8 4.1 -0.8 -14.5

commonwealth of

Independent states (cIs) 8.3 5.3 -7.1 7.5 2.2 -9.5 19.9 16.3 -20.2

Africa 5.8 4.7 1.6 4.8 0.7 -5.6 13.8 14.1 -5.6

middle east 5.5 5.4 1.0 4.5 2.3 -4.9 14.6 14.6 -10.6

Asia 6.0 2.7 0.1 11.7 5.5 -11.1 8.2 4.7 -7.9

China 13.0 9.0 8.5 19.8 8.6 -10.5 13.8 3.8 2.8

Japan 2.3 -1.2 -5.0 9.4 2.3 -24.9 1.3 -1.3 -12.8

India 9.4 7.3 5.4 14.4 14.4 -6.2 18.7 17.3 -4.4

Newlyindustrialized

economies(4)b 5.6 1.6 -0.8 9.0 4.9 -5.9 5.3 3.5 -11.4

aIncludestheCaribbean.bHongKong,China;RepublicofKorea;SingaporeandChineseTaipei.Source:WTOSecretariat.


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The situation was reversed on the import side, wheretheregionswiththelargestdeclinesin2009includedmajorexportersofoilandothernaturalresources–theCIS (-20 per cent) and South and Central America(-16.5 per cent – see Figure 9). This can be partlyexplainedbyfallingexportrevenuesasaresultofloweroil prices in 2009. North America, Europe and theMiddle East all saw their imports drop sharply(-16 per cent, -14.5 per cent and -10.6 per cent,respectively),butAfricaandAsiaonlysufferedsingle-digit declines (-5.6 per cent and -7.9 per centrespectively).

Thedeclines in imports for theUnitedStatesand theEuropean Union (-16.5 per cent and -14.5 per cent,respectively)weregreaterthantheworldaverage,whileJapan’s drop was nearly equal to the world rate(-12.8percent).Indiarecordedarelativelysmalldropinits imports (-4.4percent)while thevolumeofChina’spurchases from other countries actually increased(2.8percent).ThisincreasecanbepartlyexplainedbyChina’s stockpiling of minerals and other naturalresources while prices for these commodities weretemporarilydepressed.

Figure9:Real merchandise trade growth by region, 2009 (Annualpercentagechange)

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Middle East

Africa

South and Central America

Commonwealth of Independent States (CIS)

Asia

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EuropeExports

Imports

World exports



26

1. Merchandisetrade

The US dollar value of world merchandise trade fell23 per cent in 2009 to US$ 12.1 trillion, down fromUS$16.1trillionin2008(seeAppendixTable1).Someof this decline was due to changes in trade volumes,while much of the rest can be explained by fallingcommodity prices in 2009, particularly for oil. Afterrising to record levels in 2008, world crude oil pricesplunged37percentin2009,fromUS$95perbarreltoUS$ 60 per barrel on average. As a result, nominaltradedevelopmentsforparticularcountriesandregionsmay differ substantially from developments in volumeterms, particularly for oil exporterson theexport sideandoilimportersontheimportside.

NorthAmerica’smerchandiseexportsfell21percentin2009, from US$ 2.0 trillion to US$ 1.6 trillion, whileimports dropped 25 per cent from US$ 2.9 trillion toUS$2.2 trillion. Thepercentagedeclinesonboth theexport and import sides were roughly in line with theoveralldropinworldtrade,aswerethoseforSouthandCentralAmerica.Exportsofthelatterfell24percenttoUS$ 461 billion while the region’s imports dropped25 per cent to US$ 444 billion. The story for Europewassimilar,withexportsfalling23percenttoUS$5.0trillionandimportsshrinkingby24percenttoUS$5.1trillion.

Oil-producingregionsrecordeddeclinesinexportsthatweremuchlargerthantheoveralldeclineinworldtrade,includingtheCIS,whichsawitsexportsfallmorethananyotherregion(-36percenttoUS$452billion).TheCIS also had the largest percentage decline on theimportside,aspurchasesfromtherestoftheworldfell33percenttoUS$332billion.Africa’sexportsdroppedby32percenttoUS$379billion,butthedeclineinthecontinent’simportswassmallerthananyotherregion’s(-16percenttoUS$400billion).ResultsfortheMiddleEastweresimilartothoseforAfrica,withexportsfalling33 per cent to US$ 691 billion and imports dropping18percenttoUS$493billion.

Asia’s exports were down 18 per cent in 2009, fromUS$4.7trilliontoUS$3.6trillion,thesmallestnominaldeclineofanyregion.Asia’simportsalsofelllessthantheworldaverage,21percenttoUS$3.4trillion.Thisrelativelystrongperformance restedonChina’sabilityto minimize the impact of the economic crisis on its

trade flows. The country’s exports fell 16 per cent toUS$1.2trillion lastyear,while its importsdeclinedbyjust11percenttoUS$1.0trillion.

As many observers had predicted, China overtookGermanyastheworld’sleadingexporterin2009witha9.6percentshareinworldtrade(seeAppendixTable3).Theother topexporterswereGermany (9.0percent),theUnitedStates(8.5percent),Japan(4.7percent),and the Netherlands (4.0 per cent). Among majoreconomies,thecountrythatadvancedthemostinworldexport rankings was the Republic of Korea, whichmoved from 12th to 9th place. The country that fellfurthest was the Russian Federation, which droppedfrom9thto13thposition.

The United States remained the leading merchandiseimporterwitha12.7percentshareinworldtrade.China(8.0 per cent) took over second place from Germany(7.4 per cent), which fell to third place. France(4.4 per cent) and Japan (4.4 per cent) exchangedplaces,withFrancetakingoverthefourthpositionandJapan dropping to fifth. Appendix Table 4 showsrankingsinworldtradeexcludingEUintra-trade,whichplaces theEuropeanUnionatop the rankingsonboththeexportandimportsides.

2. Commercialservicestrade

Worldcommercial servicesexports fell13percent in2009, from US$ 3.8 trillion to US$ 3.3 trillion (seeTable3).Althoughsmallerthanthe23percentdropinmerchandise trade, it was the largest decline everrecorded for services in a data series going back to1980.Itwasalsothefirsttimesince1983thattradeincommercialservicesdeclinedyearonyear.

Transport recorded the largest drop among servicescategories, followed by travel and other commercialservices(seeTable4).Thedropintransportservicesisunsurprising since this category is closely linked totradeingoods,whichfellbyasimilaramount.Onemighthave expected a larger decline in other commercialservices,sincethiscategoryincludesfinancialservicesthat were at the centre of the recent crisis. However,these trade flows are often based on long-termcontractual relationships with suppliers, possiblymakingthemlesssensitivetoshort-termfluctuationsinthebusinesscycle.

d. Merchandise and services trade, value (nominal) terms, 2009

Table3:World exports of merchandise and commercial services, 2005-09 (Billiondollarsandpercentage)

Value Annualpercentagechange

2009 2005-09 2007 2008 2009

Merchandise 12147 4 16 15 -23

Commercialservices 3312 7 20 12 -13



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, 2009

AllcountriesandregionsinAppendixTable2recordednegativegrowthincommercialservicestradein2009with twoexceptions (China’s importswereunchangedfrom 2008, while Morocco was the only country toreportariseinimportsofservices).

Regional declines in exports were led by the CIS(-18 per cent to US$ 69 billion), followed by Europe(-14percent,US$1.6trillion),Asia(-13percent,US$751billion),MiddleEast(-12percent,US$96billion),Africa (-11 per cent, US$ 78 billion), North America(-10percent,US$542billion)andSouthandCentralAmerica (-8percent,US$100billion).On the importside,theCISagainhadthebiggestdecline(-21percent,US$91billion),followedbytheMiddleEast(-13percent,US$162billion),Europe(-13percent,US$1.5trillion),Africa(-11percent,US$117billion),Asia(-11percent,US$776billion),NorthAmerica(-10percent,US$430billion) and South and Central America (-8 per cent,US$111billion).

The United States was the largest exporter ofcommercialservicesin2009witha14.2percentshareof world trade, followed by the United Kingdom(7.2 per cent), Germany (6.5 per cent), France(4.2 per cent) and China (3.9 per cent). The UnitedStates also retained top spot on the import side(10.6 per cent of world trade), with Germany(8.2percent),theUnitedKingdom(5.1percent),China(5.1percent)andJapan(4.7percent)beingtheothercountriesinthetopfive(seeAppendixTable5).

Table4:World exports of commercial services by major category, 2009 (Billiondollarsandpercentage)

Value Annualpercentagechange

2009 2005-09 2007 2008 2009

commercial services 3312 7 20 12 -13

Transport 704 5 20 16 -21

Travel 854 6 15 11 -11

Othercommercialservices 1754 10 23 12 -10

Source:WTOSecretariat


28

AppendixTable1:World merchandise trade by region and selected country, 2009(Billiondollarsandpercentage)

exports Imports

value Annual percentage change value Annual percentage change

2009 2005-09 2007 2008 2009 2009 2005-09 2007 2008 2009

World 12147 4 16 15 -23 12385 4 15 16 -24

north America 1602 2 11 11 -21 2177 -1 6 8 -25

UnitedStates 1057 4 12 12 -18 1604 -2 5 7 -26

Canada 316 -3 8 9 -31 330 1 9 7 -21

Mexico 230 2 9 7 -21 242 1 10 10 -24

south and central America a 461 6 14 21 -24 444 10 25 30 -25

Brazil 153 7 17 23 -23 134 15 32 44 -27

OtherSouthandCentralAmericaa 308 6 13 20 -24 311 9 23 25 -25

europe 4995 3 16 11 -23 5142 3 16 12 -25

EuropeanUnion(27) 4567 3 16 11 -23 4714 3 16 12 -25

Germany 1121 4 19 9 -22 931 5 16 12 -21

France 475 1 11 9 -21 551 2 14 14 -22

Netherlands 499 5 19 16 -22 446 5 18 18 -23

UnitedKingdomb 351 -2 -2 5 -24 480 -2 4 2 -24

Italy 405 2 20 8 -25 410 2 16 8 -26

commonwealth of Independent states (cIs) 452 7 21 35 -36 332 11 35 32 -33

RussianFederationc 304 6 17 33 -36 192 11 36 31 -34

Africa 379 5 18 28 -32 400 12 23 27 -16

SouthAfrica 63 5 20 16 -22 72 4 12 12 -28

AfricalessSouthAfrica 317 5 17 31 -33 328 14 27 32 -13

Oilexportersd 204 3 17 34 -40 129 16 29 39 -11

Nonoilexporters 113 9 16 23 -17 199 13 27 28 -14

middle east 691 6 16 33 -33 493 10 25 28 -18

Asia 3566 6 16 15 -18 3397 6 15 21 -21

China 1202 12 26 17 -16 1006 11 21 18 -11

Japan 581 -1 10 9 -26 551 2 7 23 -28

India 155 12 23 30 -20 244 14 29 40 -24

Newlyindustrializedeconomies(4)e 853 4 11 10 -17 834 4 11 17 -24

memorandum items:

Developingeconomies 4697 7 17 19 -22 4432 8 19 22 -20

MERCOSURf 217 7 18 24 -22 186 13 31 41 -28

ASEANg 814 6 12 14 -18 724 5 13 21 -23

EU(27)extra-trade 1525 4 17 13 -21 1672 3 16 17 -27

LeastDevelopedCountries(LDCs) 125 11 25 32 -27 144 13 24 29 -11

a IncludestheCaribbean.ForcompositionofgroupsseetheTechnicalNotesofWTOInternationalTradeStatistics,2009.b The2007annualchangeisaffectedbyareductionintradeassociatedwithfraudulentVATdeclaration.Forfurtherinformation,refertothe

specialnotesofthemonthlyUK Trade First Release(www.statistics.gov.uk/StatBase/Product.asp?vlnk=1119).c Importsarevaluedf.o.b.d Algeria,Angola,Cameroon,Chad,Congo,EquatorialGuinea,Gabon,Libya,Nigeria,Sudan.e HongKong,China;RepublicofKorea;SingaporeandTaipei,Chinese.f CommonMarketoftheSouthernCone:Argentina,Brazil,Paraguay,Uruguay.g AssociationofSoutheastAsianNations:Brunei,Cambodia,Indonesia,Laos,Malaysia,Myanmar,Philippines,Singapore,Thailand,VietNam.

Source: WTOSecretariat.


29

AppendixTable2:World exports of commercial services by region and selected country, 2009(Billiondollarsandpercentage)

exports Imports

value Annual percentage change value Annual percentage change

2009 2005-09 2007 2008 2009 2009 2005-09 2007 2008 2009

World 3310 7 20 12 -13 3115 7 19 13 -12

north America 542 6 15 9 -10 430 4 9 7 -10

UnitedStates 470 7 16 10 -9 331 4 8 8 -9

south and central America b 100 9 18 16 -8 111 12 22 21 -8

Brazil 26 15 26 27 -9 44 18 28 28 -1

europe 1675 7 21 12 -14 1428 6 19 11 -13

EuropeanUnion(27) 1513 7 21 11 -14 1329 6 19 11 -13

UnitedKingdom 240 4 20 2 -16 160 0 15 1 -19

Germany 215 8 18 11 -11 255 5 16 11 -10

France 140 4 16 10 -14 124 4 16 10 -12

Spain 122 7 20 12 -14 87 7 23 9 -17

Italy 101 3 13 7 -15 114 6 21 8 -11

commonwealth of Independent states (cIs) 69 13 27 28 -18 91 11 30 26 -21

RussianFederation 42 14 27 30 -17 60 12 32 29 -19

Ukraine 13 10 26 27 -23 11 11 29 43 -32

Africa 78 9 19 19 -11 117 14 28 27 -11

Egypt 21 10 24 25 -15 14 9 27 25 -17

Morocco 12 13 24 12 -5 6 20 27 24 13

SouthAfrica 11 0 13 -8 -9 14 4 16 3 -16

middle east 96 11 16 20 -12 162 14 32 18 -13

Israel 22 6 10 14 -9 17 6 20 13 -12

Asia 751 9 22 14 -13 776 8 18 14 -11

Chinaa 129 15 33 20 -12 158 17 29 22 -0

Japan 124 5 10 15 -15 146 4 11 10 -11

HongKong,China 86 8 16 9 -6 44 7 15 11 -6

India 86 ... 25 18 ... 74 ... 21 26 ...

Singapore 74 8 26 3 -11 74 8 16 6 -6

Korea,Republicof 56 6 28 20 -25 74 6 21 12 -19

Taipei,Chinese 31 5 7 11 -10 29 -2 8 0 -15

aPreliminaryestimate.bIncludestheCaribbean.ForcompositionofgroupsseeChapterIVMetadataofWTOInternationalTradeStatistics,2009.Note: WhileprovisionalfullyeardatawereavailableinearlyMarchfor50countries,accountingformorethantwo-thirdsofworldcommercialservicestrade,estimatesformostothercountriesarebasedondataforthefirstthreequarters.Source: WTOSecretariat.


30

AppendixTable3:merchandise trade: Leading exporters and importers, 2009 (Billiondollarsandpercentage)

Rank exporters value share Annual per cent

change Rank Importers value share Annual per cent

change

1 China 1202 9.6 -16 1 UnitedStates 1604 12.7 -26

2 Germany 1121 9.0 -22 2 China 1006 8.0 -11

3 UnitedStates 1057 8.5 -18 3 Germany 931 7.4 -21

4 Japan 581 4.7 -26 4 France 551 4.4 -22

5 Netherlands 499 4.0 -22 5 Japan 551 4.4 -28

6 France 475 3.8 -21 6 UnitedKingdom 480 3.8 -24

7 Italy 405 3.2 -25 7 Netherlands 446 3.5 -23

8 Belgium 370 3.0 -22 8 Italy 410 3.2 -26

9 Korea,Republicof 364 2.9 -14 9 HongKong,China 353 2.8 -10

-retainedimportsa 91 0.7 -8

10 UnitedKingdom 351 2.8 -24 10 Belgium 351 2.8 -25

11 HongKong,China 330 2.6 -11 11 Canada 330 2.6 -21

-domesticexportsa 15 0.1 -9

-re-exportsa 314 2.5 -11

12 Canada 316 2.5 -31 12 Korea,Republicof 323 2.6 -26

13 RussianFederation 304 2.4 -36 13 Spain 290 2.3 -31

14 Singapore 270 2.2 -20 14 Singapore 246 1.9 -23

-domesticexports 138 1.1 -21 -retainedimportsb 114 0.9 -28

-re-exports 132 1.1 -19

15 Mexico 230 1.8 -21 15 India 244 1.9 -24

16 Spain 218 1.7 -23 16 Mexico 242 1.9 -24

17 Taipei,Chinese 204 1.6 -20 17 RussianFederationc 192 1.5 -34

18 SaudiArabiaa 189 1.5 -40 18 Taipei,Chinese 175 1.4 -27

19 UnitedArabEmiratesa 175 1.4 -27 19 Australia 165 1.3 -17

20 Switzerland 173 1.4 -14 20 Switzerland 156 1.2 -15

21 Malaysia 157 1.3 -21 21 Poland 147 1.2 -30

22 India 155 1.2 -20 22 Austria 144 1.1 -22

23 Australia 154 1.2 -18 23 Turkey 141 1.1 -30

24 Brazil 153 1.2 -23 24 UnitedArabEmiratesa 140 1.1 -21

25 Thailand 152 1.2 -14 25 Thailand 134 1.1 -25

26 Austria 137 1.1 -24 26 Brazil 134 1.1 -27

27 Poland 134 1.1 -21 27 Malaysia 124 1.0 -21

28 Sweden 131 1.0 -29 28 Sweden 119 0.9 -29

29 Norway 121 1.0 -30 29 CzechRepublic 105 0.8 -26

30 Indonesia 120 1.0 -14 30 SaudiArabiaa 92 0.7 -20

Totalofaboved 10244 82.2 - Totalofaboved 10323 81.6 -

Worldd 12461 100.0 -23 Worldd 12647 100.0 -23

aSecretariatestimates.bSingapore’sretainedimportsaredefinedasimportslessre-exports.cImportsarevaluedf.o.b.dIncludessignificantre-exportsorimportsforre-export.Source:WTOSecretariat.


31

AppendixTable4:merchandise trade: Leading exporters and importers excluding intra-eu(27) trade, 2009(Billiondollarsandpercentage)

Rank exporters value share Annual per cent

change Rank Importers value share Annual per cent

change

1 Extra-EU(27)exports 1525 16.2 -21 1 Extra-EU(27)imports 1672 17.4 -27

2 China 1202 12.8 -16 2 UnitedStates 1604 16.7 -26

3 UnitedStates 1057 11.2 -18 3 China 1006 10.5 -11

4 Japan 581 6.2 -26 4 Japan 551 5.7 -28


-retainedimportsa 91 0.9 -8


-domesticexportsa 15 0.2 -9

-re-exportsa 314 3.3 -11

7 Canada 316 3.4 -31 7 Korea,Republicof 323 3.4 -26

8 RussianFederation 304 3.2 -36 8 Singapore 246 2.6 -23

-retainedimportsb 114 1.2 -28

9 Singapore 270 2.9 -20 9 India 244 2.5 -24

-domesticexports 138 1.5 -21

-re-exports 132 1.4 -19

10 Mexico 230 2.4 -21 10 Mexico 242 2.5 -24

11 Taipei,Chinese 204 2.2 -20 11 RussianFederationc 192 2.0 -34

12 SaudiArabiaa 189 2.0 -40 12 Taipei,Chinese 175 1.8 -27

13 UnitedArabEmiratesa 175 1.9 -27 13 Australia 165 1.7 -17

14 Switzerland 173 1.8 -14 14 Switzerland 156 1.6 -15

15 Malaysia 157 1.7 -21 15 Turkey 141 1.5 -30

16 India 155 1.6 -20 16 UnitedArabEmiratesa 140 1.5 -21

17 Australia 154 1.6 -18 17 Thailand 134 1.4 -25

18 Brazil 153 1.6 -23 18 Brazil 134 1.4 -27

19 Thailand 152 1.6 -14 19 Malaysia 124 1.3 -21

20 Norway 121 1.3 -30 20 SaudiArabiaa 92 1.0 -20

21 Indonesia 120 1.3 -14 21 Indonesia 92 1.0 -28

22 Turkey 102 1.1 -23 22 SouthAfricaa 72 0.7 -28

23 Iran,IslamicRep.ofa 78 0.8 -31 23 VietNam 69 0.7 -15

24 SouthAfrica 63 0.7 -22 24 Norway 69 0.7 -23

25BolivarianRep.ofVenezuela 58 0.6 -39 25 Iran,IslamicRep.ofa 51 0.5 -10

26 Kuwaita 57 0.6 -35 26 Israela 49 0.5 -27

27 VietNam 57 0.6 -10 27 Philippines 46 0.5 -24

28 Argentina 56 0.6 -20 28 Ukraine 45 0.5 -47

29 Chile 53 0.6 -20 29 Egypt 45 0.5 -7

30 Nigeriaa 53 0.6 -36 30 Chile 42 0.4 -32

Totalofaboved 8504 90.3 - Totalofaboved 8602 89.6 -

Worldd(excl.intra-EU(27)) 9419 100.0 -22

Worldd(excl.intra-EU(27)) 9605 100.0 -23

aSecretariatestimates.bSingapore’sretainedimportsaredefinedasimportslessre-exports.cImportsarevaluedf.o.b.dIncludessignificantre-exportsorimportsforre-export.Source:WTOSecretariat.


32

AppendixTable5:Leading exporters and importers in world trade in commercial services, 2009(Billiondollarsandpercentage)

Rank exporters value shareAnnual percentage

change Rank Importers value shareAnnual percentage

change

1 UnitedStates 470 14.2 -9 1 UnitedStates 331 10.6 -9

2 UnitedKingdom 240 7.2 -16 2 Germany 255 8.2 -10

3 Germany 215 6.5 -11 3 UnitedKingdom 160 5.1 -19

4 France 140 4.2 -14 4 China 158 5.1 0

5 Chinaa 129 3.9 -12 5 Japan 146 4.7 -11

6 Japan 124 3.8 -15 6 France 124 4.0 -12

7 Spain 122 3.7 -14 7 Italy 114 3.6 -11

8 Italy 101 3.0 -15 8 Ireland 104 3.3 -5

9 Ireland 95 2.9 -7 9 Netherlands 87 2.8 -5

10 Netherlands 92 2.8 -11 10 Spain 87 2.8 -17


12 India 86 2.6 ... 12 India 74 2.4 ...

13 Belgium 75 2.3 -11 13 Korea,Republicof 74 2.4 -19

14 Singapore 74 2.2 -11 14 Singapore 74 2.4 -6

15 Switzerland 68 2.1 -11 15 Belgium 72 2.3 -12

16 Sweden 60 1.8 -16 16 RussianFederation 60 1.9 -19

17 Luxembourg 60 1.8 -16 17 Denmark 51 1.6 -19

18 Canada 57 1.7 -12 18 Sweden 47 1.5 -14


20 Denmark 55 1.7 -25 20 Brazil 44 1.4 -1

21 Austria 53 1.6 -13 21 SaudiArabiab 43 1.4 ...

22 RussianFederation 42 1.3 -17 22 Australia 41 1.3 -13

23 Australia 41 1.3 -7 23 Thailand 38 1.2 -18

24 Norway 38 1.1 -17 24 Austria 38 1.2 -12

25 Greece 38 1.1 -25 25 Norway 37 1.2 -16

26 Turkey 33 1.0 -6 26 Luxembourg 36 1.2 -13

27 Taipei,Chinese 31 0.9 -10 27 UnitedArabEmiratesb 36 1.1 ...

28 Thailand 31 0.9 -9 28 Switzerland 34 1.1 -6

29 Poland 29 0.9 -19 29 Taipei,Chinese 29 0.9 -15

30 Malaysia 28 0.8 -8 30 Malaysia 27 0.8 -12

Totalofabove 2765 83.5 - 31 Totalofabove 2540 81.6 -

World 3310 100.0 -13 32 World 3115 100.0 -12

aPreliminaryestimate.bSecretariatestimate.Note:WhileprovisionalfullyeardatawereavailableinearlyMarchfor50countriesaccountingformorethantwo-thirdsofworldcommercialservicestrade,estimatesformostothercountriesarebasedondataforthefirstthreequarters.Source:WTOSecretariat.


33

AppendixFigure1:monthly merchandise exports and imports of selected economies, January 2006 - January 2010 (Billiondollars)

Source:IMFInternationalFinancialStatisitics,GlobalTradeInformationServicesGTAdatabase,nationalstatistics.

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34

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endnotes1 Unless otherwise noted, world trade refers to world

merchandiseexports.Figuresforworldmerchandiseimportsaresimilarbutnotidenticaltoexportsduetotheinclusionofshippingandothercostsinimports,andtodifferencesintherecordingoftradeflows.

2 For a comprehensive analysis of the causes of tradecontraction,seeBaldwin,R.(2009), The Great Trade Collapse: Causes, Consequences and Prospects, London: Centre forEconomicPolicyResearch.

3 EuroareaGDPalsofellby4.0percent.


38

II Trade in natural resourcesThe World Trade Report 2010 focuses on trade in natural resources, such as fuels, forestry, mining and fisheries. The Report examines the characteristics of trade in natural resources, the policy choices available to governments and the role of international cooperation, particularly of the WTO, in the proper management of trade in this sector.

I - tHe tRADe sItuAtIon In 2009-10

39

Contents A. Introduction 40

B. natural resources: Definitions, trade patterns and globalization 44

c. trade theory and natural resources 72

D. trade policy and natural resources 112

e. natural resources, international cooperation and trade regulation 160

F. conclusions 200


40

Natural resources are fundamental for human life. Non-renewables such as oil and natural gas are transformed into the energy that is essential for the production of virtually any other good or service. Renewable resources such as forests, fisheries and aquifers are some of the world’s most precious natural assets. Properly managed, they also have the potential to provide an unending stream of products that contribute greatly to the quality of human life. Natural resources represent a significant and growing share of world trade and amounted to some 24 per cent of total merchandise trade in 2008. The volume of this trade has been quite steady over the past decade, but in value terms has grown annually at 20 per cent.

a. Introduction

II – tRADe In nAtuRAL ResouRces

41

A. In

tRo

Du

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n

Contents 1. Whyareportontradeinnaturalresources 42

2. ThemesandstructureoftheWorld Trade Report 2010 42


42

1. Whyareportontradeinnaturalresources

A number of characteristics peculiar to naturalresourcesinfluencethemannerinwhichtheyaretradedandthenatureofrulesappliedtothistrade.Theruleshave long been the subject of debates that haveintensified in recent years. Natural resources presentparticularchallengesforpolicy-makers,inpartbecausetheyarebothessential to theproductionprocessandactuallyorpotentiallyexhaustible.Theirextractionandusemustbecarefullymanagedinordertobalancethecompeting needs of current and future generations.The unequal distribution of natural resources acrosscountries and frequent volatility in their prices canconstitute sources of international tension. As worldoutputgrowthresumesfollowingthefinancialcrisisandglobalrecession,upwardpressureonnaturalresourcepriceswillalmostcertainlyre-emerge.

Competing international and inter-generationalinterests inherent in natural resources trade maketransparent,predictableandwell-designedtraderulesparticularly valuable. Trade in natural resources willtakeplaceregardlessofwhethertheglobalcommunityhas adequate rules, as the needs that motivate theseexchanges persist and increase over time. However,inadequateorcontestedrulesriskstokingthefiresofnatural resources nationalism, where powerasymmetries across countries and beggar-thy-neighbourmotivationsdominatetradepolicy.Inaworldwhere scarce natural resource endowments must benurturedandmanagedwithcare,uncooperative tradeoutcomes will fuel international tension and have adeleteriouseffectonglobalwelfare.

2. ThemesandstructureoftheWorld Trade Report2010

The World Trade Report 2010 examines internationaltradeandtradepolicyinnaturalresourcesectorssuchasfuels,forestry,miningproductsandfisheries.Ratherthananalysingthespecificsofeachsectorinturn,thereportaddressescross-cuttingthemesthatcharacterizedifferent natural resource sectors to varying degrees.Theseeconomiccharacteristics include: i) theunevengeographical distribution of many natural resources;ii) their exhaustibility; iii) the environmental and otherimpacts associated with the extraction and/orconsumptionofnaturalresources;iv)thedominanceofparticular resources in some national economies; andv)marketvolatility.Thesearethefivemajorthemesofthe report and they have been chosen because theyoftenmotivatepolicyinterventionsinthesesectors.

Thereportisorganizedintofourmainsections.Abriefdescriptionofeachofthesefollows.

Naturalresources:Definitions,tradepatternsandglobalization

Section B provides a broad overview of internationaltradeinnaturalresources. It introducesthedefinitionsand terminologyused in the report and illustrates theempiricalrelevanceofkeyeconomicfeaturesofnaturalresources. The section also provides a description ofhow commodity exchanges work, and a variety ofsummary statistics on the magnitude and direction ofworldtradeflowsinnaturalresources.Thesectionendswith a brief overview of the history of the intellectualdebatesurroundingnaturalresourcestrade.

Tradetheoryandnaturalresources

SectionC focuseson theeconomiccharacteristicsofnaturalresourcesandtheirimplicationsforinternationaltrade. It addresses the general questions of whetherand under what conditions trade provides an efficientmechanismforensuringaccesstonaturalresources.Inparticular, it analyses: i) the unequal distribution ofnaturalresourcesandtrade;ii)tradeinnon-renewableresources under perfect and imperfect competition;iii) trade when natural resources suffer from “openaccess” problems and other forms of environmentalexternality; iv) the economics of the so-called naturalresourcescurse facing resourceexporters; and v) thedeterminants and effects of resource volatility onexportingandimportingcountries.


43

A. In

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Tradepolicyandnaturalresources

Section D considers the policy choices available togovernments in addressing some of the predominantissues encountered in trade in natural resources. Itprovides a taxonomy of key trade and domesticmeasures such as export taxes, import tariffs,consumptiontaxesandinformationontheircurrentuse.Thesectionanalyzestheeffectsofthesepolicytoolsinthe context of various market failures, includingmonopoly power in a natural resources sector, openaccess, and environmental externalities. Finally, thesectionconsidershowcertainpoliticaleconomyfactorsenter the picture, including the influence of lobbygroupsinthedeterminationofnaturalresourcespolicy,andtheroleofregionaltradecooperationinaddressingeconomicproblemsthatcharacterizenaturalresources.

Naturalresources,internationalcooperationandtraderegulation

Section E discusses the international regulation oftrade in natural resources. It provides an overview ofhownaturalresourcesfitwithinthelegalframeworkoftheWTOandexamineshowtherightsandobligationsofWTOmembersrelatetoparticularfeaturesoftradeinnatural resources.Thesectionalsodiscussesotherimportantinternationalagreementsthatregulatetradein natural resources and their relationship to WTOdisciplines. The final part of the section reviews theliteratureonanumberofchallengesthathavearisen,ormay be anticipated, in relation to international tradecooperation in natural resources. Issues addressedincludethetreatmentofexport taxesandrestrictions,theregulationofsubsidies,thefacilitationoftradeandthe coherence of WTO rules and other internationalagreements.


44

This section provides a broad overview of the role that trade in natural resources plays in the global economy. It begins with a discussion of definitions and terminology, focusing on key features that distinguish natural resources from other types of traded goods. These features include the exhaustibility of natural resources, the uneven geographical distribution of resource endowments, the presence of externalities in the spillover effects of extraction and use of natural resources, the dominance of the natural resources sector in many national economies, and the high degree of price volatility in this class of goods. A variety of statistical data related to natural resources are presented in order to illustrate the magnitude and direction of global trade flows.

B. Natural resources: definitions, trade patterns and globalization


45

B. n

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Contents 1. Definitionsandkeyfeaturesofnaturalresources 46

2. Naturalresourcetradeflowsandrelatedindicators 54

3. Modesofnaturalresourcestrade 59

4. Naturalresources:Globalizationandtheintellectualdebate 63

5. Conclusions 70


46

Since most natural resources trade is conductedthroughorganizedcommodityexchanges,weexaminetherolethatfinancialmarketsplayindeterminingpricesandquantities.This isfollowedbyahistoricalaccountof trade in natural resources since the industrialrevolution, touching on the recurring themes oftechnologicalchange, trade liberalizationandscarcity.Thisaccountalsoelaborates theevolutionof thinkingabout how perceptions of natural resources haveevolved over time, including their role in determiningeconomic and political outcomes. Together, theseanalysesprovideessentialbackground information forthe theoretical and policy-related discussions insubsequentchapters.

1. Definitionsandkeyfeaturesofnaturalresources

Natural resources are difficult to define precisely,particularly in the context of international trade. Mostpeoplehaveanintuitiveideaofwhatnaturalresourcesare, but “common sense” definitions cannot be reliedupon since they eventually run into problems whendealingwithambiguouscases.Forexample, crudeoiland wood are clearly natural resources, but it is lessobvious how intermediate and final goods made fromtheseproductsshouldbeclassified.

All goods either embody natural resources (e.g.automobiles contain ironore)or require resources fortheirproduction(e.g.foodcropsrequirelandandwatertogrow),soallgoodscouldconceivablybeclassifiedasnaturalresources.Suchanapproachwouldbelogicallyconsistent but otherwise unenlightening. At anotherextreme,onecouldchoosetofocusstrictlyonresourcesintheirnaturalstate.However,evenclear-cutexamplesof natural resources would be difficult to classify assuchunderthisapproach,sincemostresourcesrequireatleastsomeprocessingbeforetheycanbetradedorconsumed. Regardless of the choice of definition, theline of demarcation between natural resources andothergoodswillalwaysbesomewhatarbitrary.

For the purposes of this report we define naturalresources as “stocks of materials that exist in thenatural environment that are both scarce andeconomically useful in production or consumption,either in their raw state or after a minimal amount ofprocessing”.1Notethequalifier“economicallyuseful”inthis definition. For example, sea water is a naturalsubstancethatcoversmuchoftheearth’ssurface,butitisoflimitedintrinsicordirectvalueforconsumptionorproduction.Goodsmustalsobescarceintheeconomicsensetoqualifyasnaturalresources;otherwisepeoplecouldconsumeasmuchas theywantedatnocost tothemselvesortoothers.

Airwouldnotbeconsideredanatural resourceunderthisdefinitionbecausepeoplecanobtainitfreelysimplybybreathing.Thisisnottosuggestthatair(especiallycleanair)orforthatmatterseawater(e.g.asacarbonsink)arewithoutvalue,but itdoesmeanthattheyarenotcommoditiesthatcanbetradedinmarkets. Inthis

report, the term “resources” is used interchangeablywith“naturalresources”.

Ausefuldefinitionshouldnotonlyidentifythenatureofnaturalresourcesbutalsodistinguishwhatisandwhatisnotanaturalresource.Undertheabovecriteria,itisclear that manufactured goods such as automobilesand computers would not be considered resources,sincebotharesubjecttomorethanaminimalamountofprocessing.However,thisshouldnotbetakentoimplythat all primary products are covered as naturalresources in the report. For example, while mostagriculturalgoodsincludingfoodareprimaryproducts,we do not classify them as natural resources for anumber of reasons. To begin with, their productionrequiresothernatural resourcesas inputs,particularlylandandwaterbutalsovarioustypesoffertilizer.Moreimportantly, agricultural products are cultivated ratherthanextractedfromthenaturalenvironment.

Twoimportantexceptionsinthisreportrelatetofishandforestry products, which are normally classified underagricultureinWTOtradestatistics,butwhicharetreatedhereasnaturalresources.Bothfishandforestryproductscanbecultivated, forexample inaquaculture forfishorthrough forest management for wood. However,traditionally they have simply been taken from existingnaturalstocks,andstillareforthemostpart.Unfortunately,itisimpossibletodistinguishbetweencultivatedandnon-cultivated varieties of these products in standarddatabases on international trade, but some effort hasbeenmadetoidentifytheseinthecaseoffish.

Natural resourcescanbe thoughtofasnaturalcapitalassets,distinctfromphysicalandhumancapitalinthattheyarenotcreatedbyhumanactivity.Naturalcapitalmay be a potentially important input in a country’s“productionfunction”–thatis,Y = f (K, L, N),where “Y”isoutput, “K” iscapital, “L” is labourand “N” isnaturalresources.Itisimportanttodistinguishbetweennaturalresourcesasfactorsofproductionandnaturalresourcesasgoodsthatcanbetradedinternationally.Forinstance,minerals, oil, and various other materials can beextractedandenterintotrade.However,otherresourcesmayformtheeconomicbasisforvarioussectorsofthedomestic economy, and therefore are only involved intrade in an indirect way (Josling, 2009). For example,climateandscenerycanbeexported through tourism.Similarly,agriculturalland,whichisthearchetypal“fixed,immobile” natural resource, can be exported throughagriculturalcommoditiesgrownonthatland.Hence,atafundamentallevel,naturalresourcesareoftenareasonfortraderatherthantradablegoodsintheirownright.

A more precise statistical definition that identifiesexactly which products are to be counted as naturalresources in trade data is provided in a StatisticalAppendix,butthemainproductgroupscoveredinthisreportarefish,forestryproducts,fuels,oresandotherminerals, and non-ferrous metals. Taken together, theproductgroupsoresandothermineralsandnon-ferrousmetals are referred to as mining products. Broaderconceptionsofnaturalresourceswillalsobeemployedfrom time to time, particularly as they relate to non-


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tradable resources such as scenery, bio-diversity ornon-tradedgoodssuchaswaterorland.

As noted earlier, natural resources falling under ourdefinition typically share a number of key features,including exhaustibility, uneven distribution acrosscountries,negativeexternalitiesconsequencesinotherareas,dominancewithinnationaleconomiesandpricevolatility.Wenowexamineeachof thesefeaturesandillustratethemwithsomeconcreteexamples.

(a) Exhaustibility

In resource economics, a distinction is usually madebetween renewable and non-renewable resources. Arenewableresourceisaresourcethateitherincreasesinquantityorotherwiserenews itselfoverashort (i.e.economicallyrelevant)periodoftime.Hence,iftherateof extraction takes account of limitations in thereproductivecapacityoftheresource,renewablescanprovideyieldsoveran infinite timehorizon.Ofcourse,the timeframe must be economically relevant, sincesomeresourcesmayberenewableinprinciplebutnotinpractice.Forexample,ittakeshundredsofmillionsofyearsfordeadtreestobetransformedintocoalandoil(BlundellandArmstrong,2007),andhundredsofyearsforcertainkindsof trees togrowtomaturity (Conrad,1999),sooldgrowthforestswouldnotbeconsideredrenewable resources despite the fact that they dorenew themselves over time. Classic examples ofrenewableresourcesarefisheriesandforests.

Non-renewableresourcesaredefinedasallresourcesthat do not grow or otherwise renew themselves overtime.Anotherwayofputtingthisisthatnon-renewableresources exist in finite quantities, so every unitconsumed today reduces the amount available forfuture consumption. The most common examples ofnon-renewable resources are fossil fuels and mineraldeposits.Thetermexhaustibleissometimesusedasasynonymfornon-renewable,but it isworthnotingthatrenewableresourcesmayalsobeexhaustibleiftheyareover-exploited.

Ingeneral,thesustainablemanagementofanyresourcerestsonacapacity tomonitor theevolutionofstocksand take corrective action in cases of significantdegradation or decline. In the case of man-madephysical assets, the cost of maintaining, renewing,expandingandimprovingthecapitalstockisanexplicitpart of production costs (capital depreciation isaccounted for as an expense). For natural resources,however,thisisnotalwaysthecase.Thevalueofnaturalcapital is often not accounted for at the level of theindividualfirmorinnationalaccounts.Thisimpliesthatneithertheircontributiontogrowthnortheextentandimpact of their degradation are fully measured andrecognizedbypolicymakers.

Anothertypeofcostthatisrelatedtoexhaustibilitybutnotexplicitlyaccountedfor innaturalresourcesuseisthe effect of rent-seeking behaviour. The scarcity ofnatural resources generates economic rents (i.e. the

premium that the resource owner receives aboveopportunitycost,orthecostofthenextbestalternativeuse of the relevant assets). Policies, including trademeasures,thatalterthesupplyanddemandandhencethe price of resources alter the distribution of rentsacross time and countries, sometimes lead tointernationaltension.

Technological change can effectively increase thesupplyofresourcesbycontributingtonewdiscoveriesand allowing extraction of stocks that could not bereached before. According to the BP World EnergyReview (2009), proven world oil reserves2 rose from998 billion barrels in 1988 to 1,069 billion barrels in1998and1,258billionbarrelsin2008,thankslargelyto new discoveries and advances in extractiontechnology.Changes in technologycanalso influencetherateofdepletionofaresourcebyeitherincreasingitsrateofuse(e.g.electricalenergyforincreaseduseof electronics, computers, etc.) or decreasing it (e.g.improvements in the efficiency of automobiles).Technological developments like these would changetherateatwhicharesourcewasusedup,butitwouldnotalterthefactofitsexhaustibility.

Manypetroleumexpertsbelievethatworldoilproductionhas or soon will reach its maximum point, known as“peakoil”(Hackett,2006).Onceoilproductionpeaks,itisbelievedthatfuturesupplieswillbecomemoreandmoredifficulttoobtain,causingtheflowofoiltodeclineinexorablyaccordingtoalogisticdistributionknownasthe Hubbert curve. This bell-shaped curve is namedafterM.KingHubbert,whoaccuratelypredictedinthe1950s that United States oil production would peakaround 1970 and decline thereafter (see Figure 1).More pessimistic peak oil theorists predict enormouseconomicdisruptions in thenear futureasa result ofrapidly dwindling supplies, while more optimisticobservers put the date of world peak oil productionmanyyears,ifnotdecades,inthefuture.Peakoiltheoryhas been less successful at predicting maximum oilproductionincountriesotherthantheUnitedStatesorattheworldlevel,butfewwoulddisputethenotionthatoilproductionwillbegintodeclineatsomepointinthefutureifcurrentratesofconsumptioncontinue.

Anotherexampleofarenewableresourcethatmaybeindecline is fish. According to statistics from the UnitedNations Food and Agriculture Organization (FAO), totalworldfisheriesproductionrosefrom98milliontonnesin1990to140milliontonnesin2007,anincreaseof42percent.Duringthesameperiod,totalworldexportsoffishjumped60percentfrom33milliontonnesto53milliontonnes.Theshareof trade inworldfishproductionalsoadvanced from 34 per cent in 1990 to 38 per cent in2007.Despiterisingproductionandtrade,annualcatchesfromoceansandfreshwaterfisherieshavebeenmostlyflatduringthisperiod,ataround90million tonnes,withnearly all growth in recent years accounted for byaquaculture, otherwise known as “fish farming” (seeFigure2).Thiscouldindicatethattheworld’soceansandfreshwaterfisherieshavereachedpeakproductionandareindangerofover-exploitationinthefaceofgrowingdemand.


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(b) Unevendistributionacrosscountries

Many natural resources are concentrated in a smallnumberofcountries,whileothershavelimiteddomesticsupplies. For example, Appendix Table 1 shows thatnearly 90 per cent of the world’s proved oil reservesare located in just 15 countries (out of slightly morethan 200 in the world today), and 99 per cent of oilreservesarefoundin40countries.3Internationaltradecanhelptoalleviatethesekindsofdisparitiesinnaturalendowmentsbyallowingresourcestomovefromareasof excess supply to areas of excess demand, whichmay also serve to promote the most efficient use oftheseproducts.However, sincenatural resourcesareindispensable inputs for production and are alsonecessaryformaintainingahighqualityofhumanlife,theunequaldistributionofresourcescancausefrictionamongnations.

The nature of the friction associated with naturalresources may be different from that observed in thecase of other types of goods. In most trade disputesinvolvingagriculturalormanufacturedgoods,acountryseeks to restrict imports.Many reasonsmaybegivenforthis,includingfiscalneeds,supportforaninfantora“strategic” industry, public considerations (health,environment, safety etc.), or as a response to tradepractices that the importing country perceives to beunfair.Conversely,most importingcountriesareeagertoobtainnaturalresourcesfromforeignsuppliers.Butexporting countries may be reluctant to allow theirresources to flow freely to other nations, also for avariety of reasons. These include fiscal needs, thedesire for economic diversification through additionalprocessing of raw materials, ensuring adequatedomesticsupplies,andprotectingtheenvironment.

Theunevengeographicaldistributionoftradednaturalresources is further illustrated by Maps 1 to 5 in the

Figure1:monthly united states oil production, Jan. 1920-Jan. 2010 (Millionbarrels)

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Figure2:World fisheries production, 1990-2007 (Milliontonnes)

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Appendix,whichshownetexportersandnetimportersbyproduct,basedonmerchandisetradedatafromtheUN Comtrade database. The distribution of fuels andnon-ferrousmetals isparticularlynoteworthy,sinceallof the world’s largest industrial economies are netimporters of these goods. With few exceptions,European countries are net importers of all types ofnatural resources, as are Japan and the Republic ofKorea.TheUnitedStates isanetexporterof forestryproducts and mineral ores, but a net importer of allother tradableresources. IndiaandChinaareonlynetexporters of fish, while they are net importers of theotherresourceproductsdealtwithinthisreport.Russiaisanetexporter,exceptoffish.Amongmajordevelopedeconomies,onlyCanadaisanetexporterofalltypesofnaturalresourcesdiscussedhere.

Waterismostlynon-tradedbutit isalsoveryunevenlydistributed across countries. According to the UnitedNations,humanity isfacingadrasticproblemofwaterscarcity (United Nations, 2009). The vast majority oftheearth’swaterresourcesaresaltwater,withonly2.5percentbeingfreshwater.Approximately70percentof thefreshwateravailable is frozen in the icecapsofAntarcticaandGreenland, leaving just0.7percentoftotalworldwaterresourcesforconsumption,andofthis0.7 per cent, roughly 87 per cent is allocated toagricultural purposes. The world’s limited reserves ofclean,freshwaterforhumanconsumptionareshrinkingfast, posing a serious threat to public health, politicalstabilityandtheenvironment.

Amongthemainfactorsaggravatingwaterscarcityarepopulation growth, increasing urbanization, and highlevelsofpercapitaconsumption.Climatechangeisalsoexpected tocontribute togreaterwaterscarcity in thefuture, as rising temperatures lead to droughts,desertification and increasing demand for water. Theproblem of water scarcity is more acute in somecountriesthaninothers,whichisillustratedbyMap6intheAppendix.ItshowsthatpercapitawatersuppliesaremanytimesgreaterincountrieslikeCanada,RussiaandBrazilthantheyareintheMiddleEastandlargepartsofAfrica.Forexample,Canada’ssupplyof87,000m3perpersonperyear is roughlynine timesgreater than the9,800m3availabletocitizensoftheUnitedStateseveryyear.However,theUSsupplyisnearly14timesgreaterthan that of Egypt, at 700 m3 per person per year.Moreover, Egypt’s water supply is roughly seven timesgreaterthanthatofSaudiArabia,withresourcesofjust95 m3 per person per year (UN Food and AgricultureOrganization,AQUASTATdatabase).

International trade could conceivably help to alleviatelocalproblemsofwaterscarcitybymovingresourcestowhere they are most needed. However, countries areunableorunwilling todoso,as large-scaleshipmentsare essentially non-existent. Reasons for this lack oftradeare largely technical,sincewater isbulkyand istherefore difficult to transport. Water scarcity orabundancealso tends tobesharedbymostcountrieswithin a given region, so water would have to betransportedlongdistancestomakeadifferencetotheproblemofscarcity.

Althoughwateritselfmaynotbetradable,internationaltrade can have an indirect and beneficial effect ondomesticsuppliesofwater.Exportsofwater-intensiveproducts(e.g.agriculturalgoods)fromregionsofwaterabundance to regions where water is scarce cangenerate savings in importing countriesby freeingupresources for other uses. For example, from 1997 to2001,Japan’s importsofwater-intensivegoodssavedthecountry94billionm3ofwaterthatwouldhavebeenrequiredifJapanhadproducedthegoodsdomestically(Hoekstra,2008b).

(c) Externalities

Anexternalityoccurswhentheactionsofoneeconomicagentaffectotheragentsindirectly,ineitherapositiveor negative way (Nicholson, 2001). Another way ofexpressingthisisthattheoutcomesofcertainactivitiesmay impose external costs on, or provide externalbenefits to, consumers or firms not involved in therelevant production or consumption decision. These“externalities”canbenegativeorpositive.Anexampleof a negative externality would be when a productionprocess results in pollution that adversely affects thehealthofpeoplewho livenearby,or thatdamagesthenatural environment in a way that reduces the well-being of individuals indirectly. A positive externalitymightoccurwhenhomeownersmakeimprovementstotheir properties that raise the market value ofneighbouringhousesaswell.

From a perspective of social well-being, externalitiescause goods to be over-produced or under-produced,depending on whether the externality is positive ornegative.Thisisbecausethemarketpriceofthegoodinquestiondoesnot reflect its truecostorbenefit tosociety. A good whose production and use imposesexternalcostsonotheragentswouldtendtobeover-produced because these additional costs are notincludedinthebuyer’scalculations.Ontheotherhand,goodsthatprovideexternalbenefitstendtobeunder-produced because their market price is too low. Thesolutiontotheproblemofexternalities,whetherpositiveornegative, isto internalizeallcostsandbenefits intothepriceof thegood,but this isdifficult toachieve inpractice without the intervention of an external agentsuchasagovernment.

Natural resource economics is mostly concerned withnegative externalities arising from the extraction andconsumption of resources, but positive externalities inthisareaarenotinconceivable.Forexample,over-fishingof one species of fish may benefit another competingspecies and improve the welfare of other fishingenterprises.Anotherexamplewouldbewhenaminingcompanybuildsa road thatenablesnearby farmers toshiptheirgoodstomarket.Sincethiskindofunintendedconsequenceisrare,theremainingdiscussionwillfocusexclusivelyonnegativeexternalities.ExternalitieswillbediscussedingreaterdetailinSectionC,butthefollowingexamplesillustratetheprobleminthecontextofnaturalresources.


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The burning of fossil fuels produces a variety ofpollutants that directly harm human health, while alsoemitting largequantitiesofgreenhousegases (mainlyCO2) that contribute to global warming. Since globalwarming affects everyone on the planet, includingpeople who consume little fuel, the consumption offuelsresultsinlargeexternalities.

According to statistics from the International EnergyAgency, annual world CO2 emissions from fuelcombustion more than doubled between 1971 and2007, rising from 14.1 billion tonnes to 28.9 billiontonnes (International Energy Agency (IEA), 2009a).Duringthisperiodtheshareofdevelopingcountriesinworldemissionsincreasedfrom34percentto55percent(seeFigure3).This increasecanbeattributedtopopulation growth, rising GDP, and increasing percapita CO2 emissions in a number of developingcountries. Global CO2 emissions per person grew byaround 17 per cent between 1971 and 2007, withsharper increases towards the end of the period on

accountof rapidgrowth insomeemergingeconomies(see Figure 4). Per capita CO2 emissions of mostdevelopedeconomiesrosethroughthe1970s,buthavesinceeitherstabilizedordeclinedslightly.

The above figures are not adjusted for levels ofeconomic activity. The influence of this factor isobservable in terms of the carbon intensity of worldoutput,ortheCO2/GDPratio(seeFigure4).Theratiodeclined33percentatthegloballevelbetween1971and 2007. To the extent that globalization raisesconsumptionoffossilfuelsthroughhigherincomesandindustrialization, it can be seen as having a negativeimpactontheenvironment,buttheincreasedefficiencyofproductionandthespreadoftechnologyassociatedwith globalization may create some countervailingbenefits.

Another example of a negative externality is Hardin’swellknown“tragedyofthecommons”(Hardin,1968)inwhich lack of ownership rights over a common pool

Figure3:total world co2 emissions by level of development, 1971-2007 (MilliontonnesofCO2)

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Figure4:World co2 / GDP and co2 per capita, 1971-2007 (kgofCO2per2000USdollarsandtonnesofCO2percapita)

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resource leads to depletion of that resource. Thetragedy of the commons was first used to explainovergrazingonpublicland,buttheconceptcanalsobeapplied to other common pool resources such asforests. Table 1 shows the countries with the largestdeclinesinforestlandbetween1990and2005,basedon data from the World Bank’s World DevelopmentIndicators database. Countries in South America andAfrica experienced the biggest declines during thisperiod,whileotherregionsrecordedsmallerdrops,orinsomecasessmallincreases.Europesawitsforestarearisemorethananyotherregion,butthereisconsiderableuncertainty surrounding increases in other areas,particularly in Russia. It should be noted that forestsdiffersignificantly inthenumberofplantspeciestheycontainandthenumberofanimalspeciesthat inhabitthem,sothatagivendeclineinforestedlandmayhaveagreaterimpactonbiodiversityinsomeregionsthaninothers.Asof2005,11percentof theworld’s forestsweredesignatedfortheprotectionofbiodiversity(FAOGlobalForestResourcesAssessment,2005).

(d) Dominanceofnaturalresources

Another important feature of natural resources is thedominant position of this sector in many nationaleconomies.Manyof thesecountries tend to relyonanarrowrangeofexportproducts.Table2showsexportconcentration indices from the 2008 UNCTADStatistical Handbook, along with shares of naturalresources in total merchandise exports for selectedeconomies. Concentration indices are based on thenumberofproductsintheStandardInternationalTradeClassification(SITC)atthe3-digitlevelthatexceed0.3per centofagivencountriesexports, expressedasavaluebetween0and1,withvaluescloserto1indicatinggreater concentration. It is clear that with very fewexceptions, countries with the highest exportconcentrationscoresalsohavehighsharesofnaturalresourcesintotalexports.

AppendixTables8and10showleadingtradersoffuelsand mining products in 2008 and also illustrate theimportance of these products for exporting andimporting countries alike. For example, the share offuels inSaudiArabia’s totalmerchandiseexportswassome90percent in2008,whiletheequivalentshareforIranwas82percent.ExportsharesforKuwait,theBolivarianRepublicofVenezuela,Algeria,NigeriaandAngolawereallinexcessof90percent.Althoughnotas high as the shares for exports, fuels made up asignificant part of imports for the leading developedeconomiesin2008,includingtheUnitedStates(23percent)andJapan(35percent).

Shares of mining products in total exports are muchsmallerthantheequivalentsharesforfuels,butminingproducts still dominate exports in many countries,including Zambia (80 per cent), Chile (60 per cent),Niger(58percent),Jamaica(56percent)andPeru(43percent).

Thedominanceofnaturalresourcesinexportsconformswith predictions from trade theory that countries willspecializeintheproductionofgoodswheretheyhaveacomparative advantage, and export them in exchangeforothergoods.However,thefactthatmanycountriesarebothexportersandimportersofnaturalresourcesishardertoexplain.TheGrubel-Lloyd(GL)indexprovidesausefulmeasureof thiskindof “intra-industry” trade.Foragivencountry,theshareofintra-industrytradeinsectoriisdefinedasfollows:

GLi=1-(|exporti–importi|/(exporti+importi))

Ifacountryonlyexportsorimportsgoodi,thentheGLindexforthatsectorwouldbeequalto0,whereasifacountryimportsjustasmuchasitexportsitwouldhaveaGLscoreof1forthatsector.

Table1:countries with the largest declines in forested land, 1990-2005(1000sq.kmandpercentageoflandarea)

1000sq.km %oflandarea

Brazil -423 Honduras -24

Indonesia -281 SolomonIslands -21

Sudan -88 Korea,Repof -17

Myanmar -70 Indonesia -15

Congo,Dem.Rep. -69 Cambodia -14

Zambia -67 Zimbabwe -12

Tanzania -62 Nicaragua -12

Nigeria -61 Philippines -11

Mexico -48 Timor-Leste -11

Zimbabwe -47 Myanmar -11

BolivarianRep.ofVenezuela -43 Ecuador -11

Australia -42 Liberia -9

Bolivia -41 Zambia -9

Philippines -34 Benin -9

Cameroon -33 Ghana -8

Source: World Bank World Development Indicators.


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Table3showsGLindicesfornaturalresourcesinmajoreconomiesat the3-digitSITC level.Figurescloser to1indicatemoretradeinsimilarproducts,whereassmallerfiguresindicatelessintra-industrytrade.Someproductshave relatively high scores, including fuels and non-ferrousmetals.Thiscouldbeexplainedby the fact thatthese products may be differentiated at lower levels ofaggregation, but it is also possible that large diverseeconomies contain some regions that export naturalresourcesandothersthatimportthem.Canadaprovidedanexampleofthiswhen,in2006,theprovinceofOntarioimported electricity from the United States while theprovince of Quebec exported the same product. ThisconjectureissupportedbyTable4,whichshowsaverageGLindicesfornaturalresourcesandmanufacturedgoodsforalargergroupofcountries.TheaverageGLscoresformanufactured goods are consistently higher than thescores for resources,butsmallercountriesalso tend tohave lower average GL values in both manufacturedgoodsandnaturalresources.

(e) Volatility

Thefinalcharacteristicofnatural resourcesexaminedhere istheiroccasionalextremepricevolatility.This isespeciallytrueforfuels,whichhaveexperiencedsharpprice rises from time to timesince the1970s,only tocollapseatalaterdate.Pricesformineralsandmetalshave also fluctuated dramatically in recent years,although their importance for the world economy isperhapslessenedbytheirsmallershareinworldtrade.Price volatility for forestry products and fish is much

lessthanforothertypesofnaturalresources.Accordingto the International Monetary Fund’s InternationalFinancial Statistics, fuel prices jumped 234 per centduring 2003-08, while mining products rose 178 percent.Duringthesameperiod,pricesoffishandforestryproductsadvancedattherelativelymodestratesof38percentand26percent,respectively.

Figure5showstheevolutionofpricesforWestTexasIntermediate (WTI) crude oil from 1970 to 2009. Thefirstbigpriceincreaseoccurredin1973,whenmembersof the Organization of Petroleum Exporting Countries(OPEC) proclaimed an embargo against the UnitedStatesandothercountriesthatsupportedIsraelintheArab-Israeliwar.Pricesagainrosesharplyin1979-80followingtheIranianrevolutionandtheoutbreakoftheIran-Iraqwar.Thiswasfollowedbyasteepslidebetween1982and1986,duringwhichoilpricesfellroughly75percentinrealterms.Aprolongedperiodofweaknessended in 2003, when prices began their climb to therecord levels of mid-2008. This was followed by yetanothercollapsebroughtonbytheglobalrecession.

The most noteworthy features of this chart are thesustained deviations of oil prices from their long-runaverage. Between 1979 and 1986 prices wereconsistentlyabovetheiraveragelevelduringtheperiod1970-2009. Then, with the exception of a brief spikethatcoincidedwith Iraq’s invasionofKuwait,oilpricesstayed below average from 1986 until 2005. Since2005priceshaveremainedaboveaverageexceptforabriefperiodinFebruary2009.

Table2:export concentration and share of natural resources in merchandise exports, 2006(Indicesandpercentage)

UNCTADConcentrationIndex(0-1)

Shareofnaturalresourcesintotalexports(percent)

World 0.08 24

Angola 0.96 100

Iraq 0.95 100

BolivarianRep.ofVenezuela 0.91 96

Sudan 0.87 95

Congo 0.87 ..

SãoToméandPríncipe 0.87 47

Nigeria 0.86 92

Yemen 0.85 91

LibyanArabJamahiriya 0.84 97

Gabon 0.84 95

Bahrain 0.79 90

Iran 0.78 86

Tajikistan 0.77 67

SolomonIslands 0.77 81

Maldives 0.77 99

SaudiArabia 0.76 88

Guinea-Bissau 0.75 1

Oman 0.75 79

Mali 0.75 75

Mauritania 0.74 87

Source: UNCTADHandbookofStatistics2008andWTOSecretariatestimates.


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A number of possible explanations for these largeswings in oil prices have been put forward, includinggeopolitical uncertainty, shocks to the flow of oil,changes in demand and speculation. There is noconsensus in the relevant literatureonwhichof these

forcesismostimportant,butrecentresearchsuggeststhatchangesinsupplyarerelativelyunimportant,whilechanges in demand associated with global businesscycleshavesignificanteffects(Kilian,2009).

Table3:Grubel-Lloyd (GL) indices for selected economies, 2008 (Index,0-1)

united states european union (27)

Stone,sandandgravel 0.93 Briquettes,lignite,peat 0.96

Othercrudematerials 0.92 Petroleumproducts 0.93

Ironore,concentrates 0.91 Wood,simplyworked 0.89

Naturalabrasives 0.83 Non-ferrouswaste,scrap 0.86

Fuelwood,woodcharcoal 0.78 Silver,Platinum,etc. 0.86

Petroleumproducts 0.73 Electriccurrent 0.84

Pulpandwastepaper 0.69 Nickel 0.84

Residualpetroleumproducts 0.68 Naturalabrasives 0.82

Nickelore,concentrates,etc. 0.67 Stone,sandandgravel 0.78

Fish(fresh,chilled,frozen) 0.67 Residualpetroleumproducts 0.77

Ores,concentratesofbasemetals 0.65 Copper 0.73

Aluminium 0.64 Ferrouswaste,scrap 0.72

Nickel 0.64 Pulpandwastepaper 0.68

Petroleumgases 0.62 Coalgas,watergas,etc. 0.65

Silver,platinum,etc. 0.60 Lead 0.63

Japan china

Lead 0.95 Petroleumgasses 0.91

Aluminiumore,concentrates,etc. 0.85 Crustaceans,molluscs,etc. 0.85

Petroleumproducts 0.84 Fish(fresh,chilled,frozen) 0.85

Residualpetroleumproducts 0.84 Coal,notagglomerated 0.81

Pulpandwastepaper 0.71 Residualpetroleumproducts 0.80

Non-ferrouswaste,scrap 0.68 Fuelwood,woodcharcoal 0.78

Preciousmetalores,concentrates 0.66 Silver,platinum,etc. 0.74

Nickel 0.62 Wood,simplyworked 0.73

Zinc 0.61 Othercrudeminerals 0.68

Petroleumgases 0.54 Naturalgas 0.66

Naturalabrasives 0.53 Petroleumproducts 0.63

Coke,semi-coke 0.51 Lead 0.62

Aluminium 0.42 Aluminium 0.61

Copper 0.42 Naturalabrasives 0.46

Silver,platinum,etc. 0.40 Liquifiedpropane,butane 0.42

Source:UNComtradedatabase.

Table4:Average GL indices for manufactured goods and natural resources, 2008 (Index0-1)

Naturalresources Manufacturedgoods

Australia 0.28 0.33

Bahamas 0.06 0.13

Brazil 0.29 0.52

Canada 0.49 0.59

China 0.34 0.47

EuropeanUnion(27)extra-trade 0.47 0.68

Iceland 0.09 0.14

India 0.27 0.53

Japan 0.29 0.49

RussianFederation 0.25 0.32

SouthAfrica 0.33 0.46

SriLanka 0.16 0.20

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2. Naturalresourcetradeflowsandrelatedindicators

Having defined natural resources in general terms asthe sum of forestry products, fish, fuels and miningproducts, we now present a variety of descriptivestatistics on international trade in these products.Merchandise trade data are first shown at the worldlevel,butarethenprogressivelybrokendownbyproductand region to give a more detailed picture of globaltrade flows. Tables on trade of individual countries byproduct are provided in a statistical appendix, whichalso contains illustrative maps showing a variety ofresource-relatedindicators.

Two definitions of natural resources are used in themerchandise tradestatistics,withoneslightlybroaderthan the other. Tables showing country and productsharesinworldnaturalresourcestradeusethenarrowerdefinition that only includes forestry products, whiletables on trade by geographic region use the slightlybroader definition that includes all agricultural rawmaterials.Thisissolelyforreasonsofdataavailability,and the difference is minimal at the world or regionallevel.

Somegreyareasinproductcoverageshouldbenoted.Inadditiontorawfossilfuelssuchascoal,crudeoilandnaturalgas,thefuelsproductgroupalsoencompassesrefinedpetroleumproductsandelectricity.Itmayseemoddatfirsttocountelectricity(seeBox1)andrefinedfuels as resources, since their production requiressubstantial capital inputs, and the final output isproducedbyhumanactivityratherthansimplyextractedfromthenaturalenvironment.However,fossilfuelsarerarely consumed in their raw form, so we may stillconsiderrefiningandelectricitygenerationtorepresenttheminimumamountofprocessingnecessarytoallowthesegoodstobetraded.

NominaltradeflowsareexpressedincurrentUSdollarsand are strongly influenced by changes in exchangerates and commodity prices. This is especially true offuels,whichrepresentthelargestcomponentofnaturalresourcestradeindollarterms,makingupsome77percentofworldnaturalresourcestradeand18percentoftotalmerchandisetradein2008.

(a) Worldtradeinnaturalresources

The dollar value of world exports of natural resourcesincreasedmore thansixfoldbetween1998and2008,risingfromUS$613billiontoUS$3.7trillion,thanksinlarge part to steadily rising prices for primarycommodities(seeFigure6).Higheroilpricesinparticularhelpedpushtheshareoffuelsinworldnaturalresourceexportsto77percentin2008(US$2.9trillion),upfrom57percentin1998(US$429billion).Althoughpricesformetalshavealsorisensharply inrecentyears, theyhavenotkeptpacewithfuels,andasaresultthe2008shares of ores and other minerals and non-ferrousmetals in natural resources trade fell to 8.2 per cent(US$ 308 billion) and 9.6 per cent (US$ 360 billion),respectively.Sharesfortheseproductswerealsobelowtheir respective long-runaveragesof8.3percentand13.3percent.

The value of global fish exports rose from US$ 53billionin1998toUS$98billionin2008,whileexportsof forestry products increased fromUS$52billion toUS$106billion.Despitethegrowingdollarvalueoffishandforestryexports,sharesoftheseproductsinworldnaturalresourcestradefellfrom8.6percentto2.6percentandfrom8.5percentto2.9percent,respectively,due to the even faster growth of fuels and miningproducts.

Higher commodity prices also boosted the share ofnaturalresourcesinworldmerchandisetradefrom11.5percentin1998to23.8percentin2008(seeFigure7).Meanwhile, the share of fuels in world trade jumped

Figure5:nominal and real crude oil prices, Jan. 1970-oct. 2009 (Currentdollarsperbarreland2008dollarsperbarrel)

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Box1: Is electricity a natural resource?

Electricity isgenerated fromnatural resourcessuchascoal,gas,water,anduranium,butshould italsobeconsideredanaturalresource?Sinceitsproductionrequiresothernaturalresourcesasinputs, it isperhapsmorenaturaltoviewelectricityasamanufacturedgood.However,electricityarguablyshouldbecountedasanatural resource since some processing must be applied to most resources before they can be traded orconsumed.Inthisrespect,electricitycansimplybeseenastransformedcoal,naturalgas,etc.Electricityalsoallows energy resources that are normally untradable (e.g. flowing water in rivers used for hydroelectricgeneration)tobetradedacrossnationalborders.

Electricityhasanumberofunusualpropertiesthatdistinguishitfromothergoods.First,itisintangibleandcanonly be stored in very small quantities. (An exception is pumped-storage of hydro energy, where water ispumpeduphill intoareservoirduringlowdemandperiodsandreleasedlaterduringhighdemandperiodsinorder to generate additional electricity to balance supply and demand more efficiently.) Also, it must beproducedatthesametimethatitisconsumed,makingitmorelikeaservicethanagood.Electricityisclassifiedas a fuel in international trade statistics, but it is not recorded systematically by all countries. As a result,merchandisetradestatisticsonelectricitymaybeincompleteorinaccurate.

Generationfacilitiescanbeclassifiedasbase-loadcapacityorpeak-loadcapacitydependingonthetypeoffuelused.Base-loadcapacityhaslowmarginalcostbutusuallyhasverylargefixedcosts.Examplesincludehydroelectricandnuclearpowerplants.Peakcapacityhashighmarginalcostbutisusuallymuchmoreflexiblein termsofschedulingoutput.Naturalgas isoftenused forpeak-loadgeneration.Patternsof internationaltradeinelectricitydependtosomeextentonthetypeofgeneratingcapacitythatacountrypossesses.Somecountriesexportlargequantitiesofnuclearenergy(e.g.France)orhydroelectricpower(Canada),resultinginlargevolumesoftradebutlowercostperunit.Othercountriesmayengageininternationaltradeonlyduringtimesofpeakdemand(e.g. tomeetair-conditioningdemandsonhotsummerdays) inordertomaintainthestabilityof theirelectricitygrids. Insuchcases, thevolumeofelectricity tradecouldbequitesmallbut thedollarvaluemightbelarge.

International trade in electricity is limited by physical constraints, including geographic proximity andinfrastructurerequirements.Onlyneighbouringcountriestradeelectricity.Furthermore,powersystemsacrosscountries must be interconnected. Importantly, international trade in electricity can result in better use ofcomplementary resources (e.g.usingflexiblehydrogeneration toexportpeakpowerand importing thermalpowerduringoff-peakhours),thebalancingofannualdemandvariationsandofcurrentversusfutureneeds,andthepoolingofreservecapacity.

Figure6:World natural resources exports by product, 1990-2008 (Billiondollars)

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from6.5percent to18.2percent.Totalmerchandiseexports increased from US$ 5.3 trillion to US$ 15.7trillion during the same period, implying an averageannualgrowthrateof12percent,whilenaturalresourceexportsgrew20percentperyearonaverageoverthisperiod.ExportsofmanufacturedgoodsincreasedfromUS$4.1trillionin1998toUS$10.5trillionin2008,anaveragegrowth rateof10percentperyear,orabouthalf the rateof increaseofnatural resources.Despitethe rapid growth of natural resources trade,manufactured goods still made up the bulk of worldmerchandiseexportsin2008,at66.5percent.

The growing share of oil in world trade is mostly theresultofhigherpricesratherthanincreasedquantities.This is illustrated by Figure 8, which shows worldproductionoffossilfuelsincludingcrudeoilsince1970.Output of oil has been remarkably steady in recentyears,butthishascoincidedwithrisingdemandonthepartofmajordevelopingcountriessuchasChinaandIndia, which has put upward pressure on prices.Constant oil production also fails to keep up withdemandduetonormalpopulationgrowth. Itshouldbenotedthattherelationshipbetweenworldoiltradeandproduction is not one-to-one, but given the unevendistribution of these resources across countries, it isreasonable to link the two. The share of world oilproductionthatisexportedhasinfactbeenremarkablysteady over time, rising from 50 per cent in 1970 to55percent in2000,and remainingunchangedsincethen.Coalandnaturalgasproductionhascontinuedtoexpandinrecentyears,mostlytomeetgrowingdemandforelectricitygeneration(InternationalEnergyAgency(IEA),2009b).

For a longer-term perspective on natural resourcestrade,wemustresorttoestimation,sincebreakdownsof merchandise trade statistics by product are notreadily available for the years before World War II.UsinghistoricaldatafromtheUnitedNationsandtheGeneralAgreementonTariffsandTrade (GATT), it ispossibletoconstructadataseriesgoingbackto1900

Figure7:World merchandise exports by product, 1990-2008 (Billiondollars)

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that shows the split between manufactured goods,natural resources and other primary products, with amoredetailedbreakdownofnaturalresourcesavailablebeginningin1955(seeFigure9).Thesedatashowthatmanufacturedgoodsonlymadeupabout40percentofworldmerchandiseexportsat thebeginningof thelast century, with the remaining 60 per cent beingprimary products, including natural resources andagricultural products. However, between 1955 and2000theshareofmanufacturedgoodsinworldtradeincreased steadily from 45 per cent to 75 per cent,largely at the expense of agricultural products. Theshare of natural resources also tended to fall after1955, but the decline was less pronounced than foragricultural goods and was punctuated by increasescoincidingwithoilpricerises.

Between1955and2004theshareofnaturalresourcesinworldtradefellfrom22percentto14percent,butroseto30percentin1980andto24percentin2008duetohigherpricesforoilandothercommodities.Therising share of natural resources between 1900 and1955isprobablyexplainedbytradeinfuels,whichwasnegligible at the beginning of the century but whichexpanded as use of the automobile became morewidespread.

Thepre-warsharesfornaturalresourcesinFigure9areveryroughestimatesandthereforeshouldbeinterpretedwithcaution.Thedefinitionofmanufacturedgoodsalsodiffersslightlyintheearlierperiodsinceitincludesnon-ferrous metals, which means that the rise ofmanufacturedgoodsdepictedinFigure9maybeslightlyunderstated.Whethertheshareofmanufacturedgoodswill continue to rise is difficult to say, but this chartsuggests a large part of international trade in naturalresourcesmaybeintheformofmanufacturedgoods.

(b) Naturalresourcestradebyregion

Due to the uneven distribution of natural resourcedepositsacrosscountries,thepatternofexportsisquitedifferent from one region to another. For some regions(e.g. the Middle East, Africa, the Commonwealth ofIndependent States), resources represent a significantproportion of merchandise exports, while others (Asia,Europe and North America) have more diverse exportprofiles (seeTable5).SouthandCentralAmerica isanintermediatecase,withresourcesmakingupasignificant,butnotdominantshareofmerchandiseexports.In2008,the Middle East had the largest share of resources inmerchandiseexports,at74percent,withtotalshipmentsofresourcesvaluedatUS$759billion.

Figure9:shares of product groups in world merchandise trade since 1900 (Percentage)

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Table5:natural resources exports by region, 2008a (Billiondollarsandpercentage)

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World 3855.4 25

MiddleEast 758.7 74

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Asia 630.4 14

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aThistableusesthebroaddefinitionofnaturalresourcestoincludeallagriculturalrawmaterialsratherthanjustforestryproducts.Asaresult,theworldtotalisslightlylargerthantheUS$3734.2showninAppendixTable1.Source: WTOSecretariatestimates.


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ThetotalvalueofAfrica’sexportsofnaturalresourceswasjustunderUS$406billion,representing73percentof thecontinent’sexports.Resourceexports fromCIScountries were worth US$ 490 billion, equal to70percentof totalmerchandiseexports.Europehadthe smallest share of resources in total exports at14percent,althoughthevalueofthistradewasgreaterthananyotherregionatnearlyUS$892billion.Asia’sshareofresourcesinexportswasrelativelylow,atjustover14percent,butthetotalvalueofresourceexportswasthesecondlargestofanyregionatnearlyUS$630billion. South and Central America exported naturalresourcesworthUS$281billion,ornearlyhalfof theregion’s total exports. In general, more industrializedregions have smaller shares of resources in exportsthanlessindustrializedregions.

Regions that predominantly export natural resourcestend to ship these goods to other regions, whereas

regions that produce more manufactured goods havemuchhigher intra-regionalsharesinnaturalresourcestrade (see Figure 10). For example, 82 per cent ofEurope’sexportsofnaturalresourceswereshippedtoother European countries. Similarly, 78 per cent ofAsia’sexportswereintra-regional,aswere62percentof North America’s exports. On the other hand, theintra-regionalsharesfortheMiddleEast,AfricaandtheCISwere2.3percent,5.3percentand11.8percent,respectively.Theintra-regionalshareofSouthAmericawas higher than those of other resource exportingregions at 22 per cent, but this is still well below thelevelsrecordedbyindustrializedregions.

Fuelswere the largestcomponentofnatural resourceexportsforallregionsin2008(seeFigure11).Resourceexports from the Middle East were almost entirelycomposedoffuels,witha98percentshareinresourceexports. South and Central America had the smallest

Figure10:natural resources exports of regions by destination, 2008 (Percentage)

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shareoffuelsinnaturalresourceexports(58percent)due to significant exports of ores and other minerals(20 per cent) and non-ferrous metals (12 per cent).Shares of fuels in natural resources trade for Asia,EuropeandNorthAmericawereallbetween61percentand64percent.NorthAmericahadthelargestshareofrawmaterialsinitsexports,at10.8percent,followedbyEuropeat9.9percentandAsiaat8.7percent.

(c) Leadingexportersandimportersofnaturalresources

Appendix Tables 2 and 3 show the top 15 exportersandimportersofnaturalresources,bothincludingandexcluding the member states of the European Union.The largest exporter of natural resources in 2008(including EU members) was Russia, with exports ofUS$ 341.2 billion or 9.1 per cent of world naturalresources trade. The share of natural resources inRussia’smerchandiseexportsroseto72.9percentin2008asthevalueofresourceexportsjumped34percentyear-on-year.RussiawasfollowedbySaudiArabia(exports of US$ 282 billion, or 7.6 per cent of worldtrade),Canada(US$177.7billionor4.8percent),theUnited States (US$ 142.5 billion or 3.8 per cent),Norway (US$ 130.6 billion or 3.5 per cent) andAustralia(US$114.3billionor3.1percent).

The leading importer of natural resources in 2008(also including EU members) was the United States.Thecountry’sresourceimportswereworthUS$583.4billion, or 15.2 per cent of world natural resourcestrade.USimportsofnaturalresourcesincreased27.9percentin2008whiletheshareofnaturalresourcesin total imports rose to 27 per cent, mostly due tohigher oil prices. Other leading importing countriesincludeJapan(importsofUS$350.2billionor9.1percent of world trade), China (US$ 330.3 billion or 8.6percent),Germany(US$231.5billionor6.0percent),Republic of Korea (US$ 182 billion or 4.7 per cent),France (US$ 148.5 billion or 3.9 per cent) and India(US$135.4billionor3.5percent).

IfweconsidertheEuropeanUnionasasingletrader,itranksfourthinworldexportsofnaturalresourcesafterRussia,SaudiArabiaandCanada.TheEuropeanUnionexportedUS$176.6billionworthofnaturalresourcestotherestoftheworldin2008andimportedUS$766.6billion, making it the largest single market for naturalresources, with a share in world imports (excludingtrade within the EU) of nearly 23 per cent. Tables onleading exporters and importers by product are alsoprovidedintheAppendix.

Appendix Table 12 shows imports of resources byregion and supplier for some of the world’s largesteconomies (the European Union, the United States,JapanandChina.) It shouldbenoted that thefiguresfortheEuropeanUnionincludetradewithintheEU:in2008,nearly37percentofEUimportsoriginatedfromwithin the trading bloc. EU imports overall totalledUS$ 1.1 trillion for the year. The top five suppliers ofresourcestotheEUwereRussia(16percent),Norway

(8percent),Libya(4percent)andtheUnitedStates(2 per cent). Most of the European Union’s importsof natural resources come from Europe, theCommonwealth of Independent States and Africa,whichtogethermadeupalmost80percentofresourceimportsin2008.

Total US imports of natural resources in 2008 werevalued at US$ 583 billion. The country’s top fivesuppliers of resources were Canada (24 per cent),SaudiArabia (10per cent), theBolivarianRepublic ofVenezuela (9 per cent), Mexico (8 per cent) and theEuropean Union (7 per cent). Japan’s imports for theyearcametoUS$350billion,anditsleadingsupplierswere Saudi Arabia (14 per cent), the United ArabEmirates (13 per cent) Australia (12 per cent), Qatar(8percent)andIndonesia(7percent).ChinaimportedUS$331billionworthofnaturalresourcesfromothercountries in 2008. Top suppliers include Australia(10 per cent), Saudi Arabia (8 per cent), Angola(7percent),Russia(6percent)andBrazil(6percent).

3. Modesofnaturalresourcestrade

Many natural resources are fairly homogeneous andmay be classified as “commodities”. Unlike the manyvarietiesofmanufacturedproducts–automobiles, forexample–theyaresuitedtocentralizedtradingandtheformationofaunifiedprice.Inaddition,characteristics,suchastheunevengeographicaldistributionofnaturalresources around the world, and the consequentaccumulation of market power, has triggered theevolution of alternative modes of trade that reducemarketrisks,suchasdisruptionsinthesupplyofcriticalnaturalresourceinputs.It isimportanttokeepinmindtheseparticularmodesofnaturalresourcestradewhenconsidering the consequences that some of the keyfeatures of natural resources, such as volatility, mayhavefortradeandtradepolicy.

Thissub-sectionfirstdescribestheroleofcentralizedspotandfuturesmarketsincommoditiestrade,notablyinthecontextoforganizedexchanges.Italsoprovidesan account of the evolution of these exchanges,describestheirgeographicaldistribution,andhighlightstheirprincipalfunctions.Theseincludepricediscovery,liquidity, management of risk, financial intermediationand clearing house guarantees. Second, we analyzealternativearrangementsfortradeincommoditiesthatmay be important for strategic reasons or qualitycontrol. These include bilateral long-term contracts,which are relevant for certain energy and metalcommodities.Wealsoexploretheprevalenceofverticalintegrationinsomenaturalresourcesectors.

(a) Commodityexchanges

(i) Key definitions

A commodity is typically defined as a homogeneousproductwhichcanbeexchangedamongconsumersandproducers. The term “commodities” is often used in therelevantliteraturetorefertoagriculturalgoods,butitalso


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includesanumberofotherproductsthatareclassifiedasnatural resources in this report. Examples are fuels,forestryproducts,mineralsandmetals.Giventheirmostlyhomogeneous nature and the fact that their quality canusuallybeeasilyverified,tradeincommoditiesisfacilitatedby organized market places where trade is centralized(UNCTAD,2006).Aconcentrationofbuyersandsellersinoneplace reduces the transactionscosts thatwouldbeincurred in the search for a suitable counterparty(ThompsonandKunda,2000).

Trades inorganizedcommodityexchangesarecarriedout either electronically or verbally in a trading pitbetween buyers and sellers who are anonymous toeachother(Stroupe,2006).Tradesarecarriedoutboth“on the spot” and via “futures” contracts, usually on adaily basis. In “spot” markets, physical delivery to theimportingnation,viatankersorpipelines,isimmediatelyarranged (Neuhoff and von Hirschhausen, 2005).Commodity producers, marketers, trading companies,local distribution companies and consumers are themajorparticipantsinthesemarkets.

In“futures”markets,contractsrepresentacommitmenttobuyorsellagivenquantityofanunderlyingproducton a given date in the future at a price agreed uponnow(Valdez,2007).4Thisenablesmarketparticipantsto“hedge”oreliminatepriceuncertainty.Forexample,agasdistributormaypurchaseafuturescontracttosetapricecapon thegas it buys in some futureperiod.Futures contracts dating anything between a fewmonthsandseveralyearsaretraded.Mostoften,thesecontracts are settled in cash and do not result inphysical delivery of the underlying commodity as theexistingpositionofatraderisnegatedwiththepolar-opposite contract and his or her account is closed(Smith,2009). Infuturestrading,othersinthemarketbesides those involved in the commodity businessinclude hedge funds, banks and commodity indexfunds.These“non-traditional”investorsusecommoditymarkets to diversify their total investment portfolio.Their possible contribution to increased commodityprice volatility has given rise to controversy (seeSectionC.5).

(ii) Evolution

The evolution of modern commodity markets may betraced back to the beginning of agriculturalmechanizationandtheindustrialrevolutioninpresent-dayadvancedcountries.Atthetime,tradeinagriculturalcrops was a hit-or-miss proposition. In the UnitedStates, for example, farmers went to Chicago to selltheir goods because of its central location. However,havinglittleideaofcropdemand,farmerstookwhateverpricetheycouldgetandunsoldcropswenttowasteinthe streets. In the mid-19th century, a central graincommoditiesmarket,whichallowedfarmerstoselltheircrops directly and on the spot for cash, was created.Thismarket,namedtheChicagoBoardofTrade,istheoldest organized commodity exchange in the world(Nathan, 2008). It reduced transactions costs andenabled buyers and sellers to find a ready market.

Subsequently,forwarddeliveryalsobecameanoption.Over time, these forward contracts evolved as morefarmers began committing their grains to futureexchanges for cash. For example, if a producer nolongerneededthecommodity,heorshewouldsellittoanotherproducerwhodid.Thisdynamic,coupledwiththeuncertaintyofpricechangeovertime,ledtotheriseoffuturescontracts(UNCTAD,2001).

(iii) Geographical distribution

The old exchanges are located mainly in the UnitedStates (Chicago Board of Trade, Chicago MercantileExchange,NewYorkMercantileExchange (NYMEX)),the United Kingdom (London Metal Exchange,International Petroleum Exchange) and Japan (TokyoCommodity Exchange). The 1980s and 1990s saw aproliferation of commodity exchanges in emergingeconomies such as the Dalian Commodity Exchange,theZhengzhouCommodityExchange,andtheShanghaiFuturesExchange inChina,andvariousexchanges inEast Asia (for example, in Kuala Lumpur, now part ofBursa Malaysia Derivatives), in Latin America (forexample,BolsadeMercadorias&FutorosinBrazilandBolsadeCerealesinArgentina)andinEasternEurope(UNCTAD,2006).

The21stcenturyisseeingtheonsetofathirdwaveintheevolutionofcommodityexchanges,drivenprimarilyby developments in information technology. Examplesinclude the National Multi-Commodity Exchange ofIndia, established in 2002, the Dubai Gold andCommodityExchange(2004)andtheDubaiMercantileExchange(2005).Africahasseentheleastsuccessindeveloping its commodity exchanges, with the SouthAfrican Futures Exchange (SAFEX), established in1987, being the only major commodity exchange(UNCTAD,2006).

Despite the development of organized commodityexchangesindifferentpartsoftheworld,thereisstillahigh degree of market concentration with the bulk ofcommodity trading occurring in just four countries,namely the United States, the United Kingdom, JapanandChina.Infact,thetop11commodityexchanges,intermsofmarketturnover,arelocatedinoneorotherofthese four countries (Lewis, 2005). Moreover, theseexchangesaredominatedbycertaincommoditygroups.Forinstance,intheUnitedStates,energyandagriculturalfutures constitute the lion’s share of turnover. In theUnited Kingdom, commodity trading is highly skewedtowards the metals sector. In Japan the focus is onenergycommoditiesandpreciousmetals,andinChinatradingisdominatedbyagriculturalcommodities(Lewis,2005).

(iv) Key functions

Price discovery

Organizedcommodityexchangesformnaturalreferencepoints for determining market prices – the pricediscoveryprocess–becausetheyenablemarketsupply


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and demand forces to determine spot and futuresprices. Exchange trading may bring about greatervolatility in commodity prices. At the same time, byenablingeffectivecompetition(ThompsonandKunda,2000), it may also result in lower prices, relative tothosenegotiatedbypartiesinabilateralcontract.

Liquidity

Organizedexchangeshavefacilitatedthecreationofacommonglobalpoolintowhichnearlyallexportersselltheircommoditiesandoutofwhichnearlyallimporterspurchasecommodities,onadailybasis(Stroupe,2006).Hence, they provide more liquidity, as disruptions insupply from one producer country may be offset byalternative supplies from elsewhere. This function oforganized exchanges may have implications for pricevolatility,akeyfeatureofresourcecommodities,whichisanalyzedinSectionC.5.

Insurance against risk

An important function of futures markets is to allowsuppliers and customers to hedge their futurerequirements for buying and selling commodities at afuturecontractprice.By locking in thepricefor futuredelivery, market participants can hedge againstunfavourable price movements that may occur beforethedeliverydate(Valdez,2007).Forinstance,ifafuturepricerisecancausealosstotheprospectivebuyerofacommodity,thepurchaseofafuturescontractensuresthatthebuyercanlockinthepriceatthecurrentlevel.Inthiscase,themarketisusedasaninsurancemechanism.Futures contracts may also be bought and sold forspeculativereasons,orinotherwordsforprofit(orloss)bybettingagainstfuturepricemovements.

Clearing house feature

Every organized trading exchange operates with aclearinghouse,whichtakesinitialmarginsordepositsfrom both parties of a contract. Subsequently, if thecontractmoves into loss,extramargin isdebitedonadailybasisfromtherelevantpartyinordertorestoretheamount of the initial margin available (Valdez, 2007).Hence,clearinghousesprovidefinancialintermediationservicestomajorplayersincommoditymarketsand,ifsufficiently well-capitalized, minimize risk ofcontemporarydefault.Theyalsomanageriskassociatedwith exchange transactions by being a centralcounterpartytoallexchangeneeds–thatis,thebuyerto every seller and the seller to every buyer (Valdez,2007). Furthermore, clearing houses protect theintegrityofthemarketplacebyensuringthattradesareexecuted in accordance with the rules (Neuhoff andvon Hirschhausen, 2005)5 and guaranteeing thatcontractsarehonoured(Valdez,2007).

(b) Othertradingarrangements

Besidesorganizedexchanges,commoditiesaretradedviaspotandfuturescontractsinover-the-counter(OTC)markets. For certain commodities, bilateral trades are

important,notablytakingtheformof long-termsupplycontractsbetweencountries.Finally,commoditiesmayalso be traded in the context of vertically integratedsupplychains.

(i) Over-the-counter (OTC) markets

OTCtradeisnotconductedthroughacommontradingfacility, but directly between two parties, which in thecase of commodity markets include both traditional(producers and consumers) and non-traditional (indexfundsandhedgefunds)participants.Unlikeorganizedexchanges,OTCmarketsarecharacterizedbyalackofliquidity,theabsenceofcompetitionandnoprotectionagainstdefault.Inaddition,theyarelargelyunregulated(Valdez, 2007). Although OTC markets arefundamentally bilateral trading arrangements, thenegotiation process is often highly automated withdealers being interconnected among themselves aswell as with major customers. This enables traders tosurveythemarketalmostinstantaneously(Dodd,2002).

(ii) Long-term contracts

Until theearly1970s,tradeinenergycommoditiessuchas oil and natural gas, and in metals, such as copper,aluminiumand ironorewasconductedprimarily throughlong-term contracts between producer and consumercountries, mostly via state or multinational companies(Stroupe, 2006). These long-term take-or-pay contracts(ToP)joinsellersandbuyersinabilateralcontract,typicallyfor about 15 to 20 years, during which time both havestrictly definedobligations. In particular, thesecontractsrequirebuyerstopayforapre-specifiedminimumquantityofthecommoditywhetherornotitisactuallytaken.Atthesametime,inmostcases,someformofpriceindexationisusedtoprotectthebuyeragainstpricechangesonalong-term basis (Masten, 1988). Hence, the buyer bears thevolumeriskandthesellerbearsthepricerisk.Furthermore,underthissystem,ifoneexportingstatefailstohonouritsdelivery commitments to another, then the affectedconsumer state has to acquire replacement supplies(Stroupe, 2006). These arrangements are generallyassociated with limited market liquidity and significantdifficultiescanresultfromsupplydisruptions.Long-termcontractswithpriceindexationcanalsohaveimplicationsforpricevolatility.

Anumberof factorsmayexplain theuseof long-termcontracts. First, several of the sectors involved arecharacterized by non-competitive producer structures(Golombek et al., 1987). Second, because of theirstrategicnature,thevalueofthesecommoditiesinlong-termcontractsmayfarexceedthesalepriceinamorecompetitive market (Parsons, 1989). Third, long-termcontractsincommoditiestrademayfunctionasadevicetoavoidtherisksofopportunisticbehaviourwhentherearehighsunkinvestments(Kleinetal.,1978;Williamson,1983). Fourth, from the perspective of an importingcountry, long-term contracts are likely to increase thesecurity of supply. Fifth, from the point of view of theexportingcountry, long-termcontractsmay serveasabarrier to entry for new market participants. Finally, a


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preference for long-term contracts over exchangetrading may relate to the nature of transportinfrastructure.Forexample,theexistenceofapipeline6betweentwocountriesmayfavourlong-termcontracts,whiletheavailabilityoftankersthatcanreachanywhereintheworldmayencouragetradingthroughexchanges.

Overtime,bilaterallong-termsupplycontractsnegotiatedbetween exporting and importing states have beencomplemented and sometimes replaced by trading onorganizedexchanges.ThiswastruefortheUnitedStates,theUnitedKingdomandWesternEurope ingeneral.7 Ithas been argued that more exchange trading at theexpenseoflong-termcontractsmayleadtoapaucityoflong-terminformationaboutfutureproductioncapabilities,andprovideanincentiveforsupplierstooverstatefutureproductioncapacityinordertoensurehighdemandandless investment by competitors (Neuhoff and vonHirschhausen,2005).Box2providesanaccountofthistransitioninthemarketforcrudeoil.

However, bilateral long-term supply contracts forcertain natural resource products (energy products,metals and minerals) still exist, involving for instance,Russia or countries in Asia and Africa (Alden, 2009;Stroupe2006;EnergyReport,2009).Thesignatoriesto these contracts are governments of resource-abundantcountriesandprivateinvestorsorfirmsfromabroad. Host country governments grant licences tothesefirmsforexplorationandextraction,andspecifythe accompanying fiscal regime. Contracts typicallytaketheformofaninitialpaymentforthelicenceand,subsequently, a royalty or tax on corporate profits(Collier and Venables, 2009).8 Of late, some of thesebilateral long-term supply contracts have beencharacterizedbypre-specifiedexchangesakintobarterarrangements. For example, the China InternationalFund is financing infrastructure investments worthUS$ 7 billion in Guinea in exchange for access to itsnaturalresourcessuchasbauxite(Alden,2009).

Evenmorerecently,therehasbeenanincreaseinlarge-scale acquisitions of farmland (a natural resource) inAfrica,LatinAmerica,andCentralandSouth-EastAsia

via contracts between host country governments andprivatefirms, sovereignwealth fundsand state-ownedenterprises from abroad. This is driven by the lack ofarablelandandcompetingusesforagricultural landinthecountriesmakingthepurchases(Cotulaetal.,2009).

(iii) Vertical integration

Supplychainsmayinvolveseveralproductionstagesincertain natural resource sectors. For instance, in thecase of energy commodities (oil and natural gas),mineralsandmetals,theyincludeexploration,extraction,processing or refining, distribution and marketing.Hence,producerssellandconveytheiroutputtorefinersor processing units. Subsequently, refiners sell theirproductstowholesaleandretailmarketers,whointurnselltheseproductstofinalconsumers(Smith,2009).

Each stage in the supply chain may be located in adifferentregionoftheworld,onthebasisofcomparativeadvantage(WTO,2008)(seeSectionC.1).Hence,firmscan lower costs of production by locating differentstages of the production process in a country wherethere isa relativeabundanceof inputsused relativelymoreintensivelyinthatstageofproduction(JonesandKierkowski,2001).Firmscancarryoutthisprocess inoneof twoways:vertical integrationofvariousstagesoftheproductionprocesswithinasinglefirmorarm’s-lengthcontractsbetweenseparate,independentfirms.The rationale for choosing between the two is alsobased on comparative advantage (Coase, 1954). Forvertical integration to make economic sense, internalsuppliers must be more cost-efficient than externalsuppliers.

In addition to the more general efficiency argument,trade in natural resource commodities may take placewithinfirmsforseveralreasons.First,verticalintegrationreduces risk as profits in the different stages of thesupply chain tend to fluctuate in different ways. Forexample, in thecaseofoil,whencrudepricesare low,refining and marketing margins are likely to be higher(Al-Moneef, 1998). This is especially relevant forresource commodities that are characterized by high

Box2:the evolution of the market for crude oil trade from long-term contracts to exchange trading

Priortotheearly1970s,crudeoilmarketswerecharacterizedbybilaterallong-termsupplycontracts(withadurationof10or20years,ormore)betweenexportingandimportingcountries,usuallythroughmultinationaloilcompanies.Eightbigoilcompanieswerethe“commonsuppliers”anddominatedcrudeoiltrade.Theysoldlarge quantities of oil not needed for their own operations to other integrated oil companies, independentrefinersandtraderstobalanceoutworldmarkets(Mohnfeld,1980).However,thestrengtheningofOPECandtheArab-Israeliwarof1973ledtoawaveofnationalizationinagroupofoilexportingnations.This,inturn,facilitatedatargetedembargooftheUnitedStatesandadramaticincreaseincrudeoilprices.

Following a brief period of strict price controls, the United States administration initiated a process ofderegulation.Oilspotandfuturesmarketswerecreated,andtheNewYorkMercantileExchange(NYMEX)becamethefirstcentraloiltradingexchange.Overtheyears,aproliferationofmanysuchorganizedexchangeshavefacilitatedthecreationofaglobalpoolofoil,denominatedinUSdollars.Atthesametime,Russiaanditsproducingandconsumingpartnerscontinuetotradeoilthroughbilaterallong-termsupplycontracts.Inaddition,thereisatrendtowardstheestablishmentofnewoilexchangesintheMiddleEastandAsiaasrivalstotheNew York and London exchanges. These more recently established exchanges may denominate trade incurrenciesotherthanUSdollars(Stroupe,2006).


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price volatility. Second, as opposed to arm’s-lengthtrade, vertical integrationensuresaccess to resourcesorsecurityofsupply(Al-Moneef,1998).

Third, to sell an intermediate good to a particulardownstream firm, an upstream supplier may make alocation or site-specific costly investment upfront, inorder to minimize inventory and transportation costs.Extractionorprocessingplantsforminingproductsaregoodexamplesinthiscontext(Joskow,2005).Fourth,ashiftfromspotmarketexchangetoverticalintegrationmayalsobeattributabletothefactthatproducerswishto control their supply chains more tightly to satisfyconsumerdemand forqualityandsafety (MénardandKlein, 2004). In the oil and gas sector, for instance,manydrillingcompaniesarebroadeningtheirfunctionsto include reservoir development and resourcemanagementfunctions.9Box3providesabriefaccountofChevron,whichisavertically integratedoilandgascompany with different segments located in differentpartsoftheworld.

Tosummarize,theabovediscussionhasshownthattheway in which natural resources are traded may differfrom manufactured goods transactions on account ofcertain specific features. These include thehomogeneity, storability, the uneven distribution ofsuppliesandthestrategic importanceofmanynaturalresources. Inlightofdecliningtransportcostsandthemovetowardsmoreliberalizedmarkets,alargepartofnatural resources trade is now conducted at a globallevel,oftenviaorganizedcommodityexchanges.Atthesametime,certaincommoditymarketscontinue tobecharacterized by widespread government interventionand market power. The reasons for this may be botheconomic and non-economic, ranging from industrialdevelopmentconsiderationstogeopoliticalfactors.

4. Naturalresources:Globalizationandtheintellectualdebate

(a) Globalizationofnaturalresources

Overthepasttwocenturies–andespeciallyoverrecentdecades–therehasbeenadramaticexpansionofthevolume and range of natural resources tradedinternationally. At one time only the most valuableresourceswereshippedtodistantmarkets.Todayvastquantitiesofalmosteveryrawmaterial imaginableare

tradedaroundtheplanet–fuellingtherapidspreadofindustrialization and development that is defining themodern economic era. Although a number of factorshave contributed to the “globalization” of naturalresources – including population growth, colonization,industrialization,andtheriseofdevelopingcountries–the following section looks at two key developmentsthat have underpinned this process: first, the far-reaching improvements in transport technology sincethemid-19th centurywhichhavedramatically reducedthecostsofcommoditiestrade;andsecond,thetrendtowards more liberal natural resource markets,especiallysince the1980s,whichhaveopenedupanincreasinglyglobalmarketplacefornaturalresources.

(i) Shrinking distances

The rise of a world market for natural resources is arelatively recent phenomenon. For most of humanhistory,bulkrawmaterialsweretoocostlytotransportover great distances, which effectively tied economicproduction to the location of key natural resources,suchaswood,coalorironore.Amajorfactorinbreakingdown these constraints is what Nils-Gustav Lundgrendescribesasthree“revolutions”intransporttechnology(Lundgren, 1996) The first such revolution occurredroughly between the 16th and 18th centuries with aseries of incremental improvements to sailing shipdesignandefficiency.Althoughhighcostsstillmadeittoo expensive to ship all but the most expensivecommodities, such as coffee, cocoa, spices andprecious metals, across the oceans, sail transportgradually linked thecoastalareasofNorthandSouthAmerica,AfricaandAsiawithEurope,creatingforthefirsttimethebroadoutlinesofa“worldeconomy”.

Asecondtransportrevolutionoccurredinthemid-19thcenturywhenthe introductionofsteampower to landand sea transportation transformed the economics ofmovinglow-valuegoodscheaplyacrossgreatdistances.Asrailwaysreplacedoverlandtransportbyhorses,andasmetalsteamships took theplaceofwoodensailingvessels, a wide range of primary commodities,particularly agricultural products, in North America,South America, Africa and Asia were suddenlyeconomically accessible to the world’s industrialcentres.This,inturn,greatlyexpandedtheincentivetoengage in overseas trade, exploration and investmentand significantly widened the scope for industrialexpansion. Transatlantic transport costs fell roughly

Box3:chevron – A case of vertical integration

Chevron has extensive oil and gas exploration and production operations throughout the world.10 It is thelargestprivateproducerofoil inKazakhstan,thetopoilandgasproducer inThailand,the largestholderofundevelopednaturalgasresourcesinAustralia,amongthelargestholdersofdeepwateracreageinNigeria,anditholdsleasesinthedeepwateroftheGulfofMexico.Furthermore,Chevronworksinallsegmentsofthedownstreamindustry—manufacturing,marketingandtransportation.Thecompany’srefiningresourcesareconcentrated inNorthAmerica,WesternEurope,SouthAfricaand theAsia-Pacific rim, servingcustomersaroundtheworld.Chevronmarketsrefinedproductsprimarilyunderthreebrands:Chevron,TexacoandCaltex.Under transportation, Chevron Pipe Line Co. transports crude oil, natural gas, natural gas liquid, CO2,petrochemicalsandrefinedproductsintheUnitedStatesthroughanextensivesystemofpipelinesandstoragefacilities.Inaddition,ChevronShippingCo.managesaworldwidefleetofvesselsthattransportretailproducts.


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60percentinthedecadesbetweenthe1870sandthebeginningofthe20thcentury,transformingagriculturaltradeasNorthAmericanandEasternEuropeangrainsuddenly become competitive in European markets,andacceleratingtheprocessofindustrialspecialization(Lundgren,1996).

Athirdrevolutionintransporttechnologyoccurredafterthe 1950s with the dramatic increase in the averagesizeofmerchantships.TheclosureoftheSuezCanalin1956-57 (and again in 1965) played a major part inlaunching this process. Suddenly faced with theexpenseoftransportingoil,coal,ironoreandotherbulkcommoditiesovermuchgreaterdistances,theshippingindustry decided to invest in huge, specialized bulkcarriers, aswell as in theharbour facilitiesneeded tohandlethesenewvessels.Whereasoiltankersaveraged16,000 deadweight tonnes (dwt) in the early 1950s(theirdesignpartlyconstrainedbytheneedtonavigatetheSuezCanal), theyaveragedover100,000dwtsbythe 1990s – with modern “super-takers” exceeding500,000 dwts and capable of carrying over 3 millionbarrels of oil. The same technological advances havetransformedbulkfreighters,withshipsgrowingfromanaverage of less than 20,000 dwts in 1960 to about45,000dwtsintheearly1990s.

Just as the advent of steam transport dramaticallyreducedthecostofagriculturaltradeafterthemid-1800s,new transport design technology has dramaticallyreducedthecostsofshippingavastrangeof low-valuebulk commodities in the post-war period. Freight ratesdecreased by 65 per cent in the period between the1950sand1990s,whilebulkcommoditytradegrewfromabout500milliontonnesto3,977milliontonnes–a657per cent increase.11 Overall the cost of transportingnaturalresourceshasfallenanastonishing90percentbetween 1870 and 1990. This, in turn, has massivelyexpanded the volume of raw materials traded, thedistancescovered,andthecommoditiesinvolved.Almostevery conceivable bulk commodity – from iron ore andphosphatefertilizers,tocrudeoilandnaturalgas–isnowroutinelyshippedvastdistancesacrosslandandoceans.Even resource waste – such as metal scrap, miningtailings, or rejects from forestry and agriculture – isincreasinglytradedglobally.

(ii) More open markets

Asecondmajorfactorinfluencingglobaltradeinnaturalresources has been the ebb and flow of governmentintervention in national and international commoditymarkets.Whileitisdifficulttogeneralize,theextentandtype of government intervention in resource marketshasappearedtodependnotsimplyonideologicalviewsandtrends,butontherelativeabundanceorscarcityofnaturalresourcesonworldmarkets.

Certaininterventions,suchasinternationalcommodityagreements,havebeendevised todealwithproblemsofglobalsurplusesandpricevolatility.Others,suchasexport restrictions, have been shaped by resourcescarcity,thestrategiccompetitionamongcountriesfor

critical raw materials and the quest for economicdiversification. Ifthegeneraltrendtowardsmoreopenmarkets in recentdecadeshasbeendriven inpartbythe relative abundance and price declines of manycommodities, it remains an open question whetherrecentcommoditypriceincreasesandsignsofgrowingscarcity,especiallyforstrategicrawmaterials,willgiverisetogreatergovernmentinvolvementandinterventioninresourcemarketsinthefuture.

An era of relatively free trade in natural resourcesduringthe19thcenturycametoanendinthefirsthalfofthe20thcentury.WiththeoutbreakoftheFirstWorldWarandtheefforttocutoffenemysupplies,countriesbecame increasingly concerned with securing accessto strategic sources of food, fuels and raw materialsneeded to feed their populations and to supply theirarmies. The dramatic collapse in prices for manycommodities after the war but especially during theGreat Depression of the 1930s also led governmentsaround the world to intervene in markets to assistfarmers andminers. This trend continued through theSecondWorldWarandthebeginningoftheColdWarinthe late 1940s, as governments again took action tosecure access to raw materials, both at home andoverseas,forstrategicandsecurityreasons.

The break-up of pre-war empires, and the resultingprocess of decolonization in the 1950s and 1960s,precipitatedanewwaveofgovernment interventioninnatural resource markets, as newly independentcountries in Africa and Asia sought to gain control ofmineralandenergysectorswhichhadpreviouslybeeninforeignhands.Underpinningmanyoftheinterventionsduringthisperiodwasapervasivefaithintheabilityofgovernments and state planning to correct perceivedfailuresinmarketsystems(Skidelsky,1996).

Thevariousinterventionsoverthisperiodwerediverse,wide-ranging and complex. A number of countries, inboth the developed and developing world, imposedexporttariffsorrestrictionsonwheat,sugar,rubber,tinand other commodities in an effort to controlinternational supplies and bolster prices. From the1920stothe1980sanumberofattemptsweremade– with varying degrees of success – to negotiateinternationalcommodityagreementsbetweenexportingand importingcountries for keycommodities, suchascoffee,rubberortin,tomanageinternationalsupplyandtradeflows.Onereasonwhytheseeffortsoftenfailedwas because consumers were interested in reducingprice volatility, while producers wanted to increaseprices.Forstrategicandeconomic reasons,anumberof countries also imposed export restrictions ordomesticpricecontrolsonkeycommodities,suchasoil.Concernsaboutgrowing relianceon foreign suppliersalso encouraged some countries to amass strategicstockpilesofoil,tinandotherkeyresources.

Another mechanism for influencing global commoditymarkets was foreign aid – either in the form ofguarantees by importing countries to buy pre-determined quantities of a given commodity, or in theformoffoodaidorothertypesofaid,wherebyexporting


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countrieseffectivelyshiftedtheircommoditysurplusesontopoorerdevelopingcountries(Radetzki,2008).

However,thetrendtowardsgovernmentinterventioninnaturalresourcemarkets–andindeedineconomiesingeneral – had started to recede by the 1980s for avarietyof reasons.Onewasthe ideologicalshiftawayfrom state planning and controls towards marketmechanismstoachieveeconomicgrowth.

With the partial exception of the energy sector,commodity markets have witnessed a general trendtowards greater openness. Successive rounds ofmultilateral trade negotiations have resulted in lowaverage tariff levels on most trade in raw materials.Internationalcommodityagreementshavealsodeclinedin number and importance, and greater emphasis hasbeen placed on hedging on commodity exchanges tohelp stabilize prices. Government-controlled strategicstockpiles have also fallen out of favour. Now largelylimited topetroleum, theyareasmall fractionofwhatthey were several decades earlier. Ideology is not theonly explanation for this change. A long-term trendtowards falling international prices across manycommodities, combined with declining strategicconcernsinthepost-ColdWarera,hasreinforcedthisgeneral shift away from state ownership and controlandtowardsmarketmechanismstobolsterinvestment,improveefficiencyandsecuregreaterpricestability.

While the retreat of governments from activeintervention in natural resource markets has beensignificant, it is hardly universal or even necessarilypermanent. The most obvious exceptions relate toagricultural commodities where developed-countrytariffs, subsidies and regulations continue tosignificantly distort global trade. The energy sectorrepresents another obvious example of stateintervention in international commodity markets. NotonlyamongOPECmembers,butamongotherenergy-producing states, governments remain the dominantplayersintheoilandgasindustry,notonlyowningandmanagingthemainassets,butactivelyshapingglobalmarkets through controls on output and investment(Institute of International Economics, 2004). Recenteffortsbysomecountriestostrengthentheirgripoverdomesticnaturalresourcesortolimitsuppliesonworldmarkets–especiallyofoilandgas–mayforeshadowanew wave of state involvement in natural resourcemarkets, especially as current high prices and profitsincreasetheincentivestodoso(Radetzki,2008).

(iii) Summary

Theon-going“globalization”ofnaturalresourcestradecontinuestotransformnotonlythenatureofcommoditymarkets but also the structure of the global economy(Krugman, 1991). The huge expansion in the volumeand range of natural resources on world markets inrecent decades has helped to open up and equalizeaccess to raw materials, lowering prices for manyresources, encouraging investment in new,geographically dispersed sources, and generally

contributingtoglobaleconomicexpansion.Proximityofnaturalresources,suchascoalorironore,isalsomuchless significant to industrial production today than itwas a century ago, gradually de-coupling industrialdevelopment from natural resource endowments,freeing up industries to establish themselves in themost cost-efficient locations around the world, andaccelerating the trend towards internationalspecialization (Radetzki, 2008; Sachs and Warner,1995). At the same time, the expansion of naturalresourcestrade–anditscontributiontogrowingglobalconsumption – may have implications for resourcedepletionandnegativeenvironmentalspillovers.

(b) Theintellectualdebate:scarcityorsurplus?

For over two centuries, a wide-ranging intellectualdebatehastakenplaceaboutthe impactofeconomicgrowthon theearth’s limitednatural resources.Somehave argued that unrestrained economic growth willleadinevitablytoresourcedepletionandenvironmentaldegradation. Others have contended that economicgrowthandtechnologicalprogresscanhelptomanagescarce resources and develop alternatives. A centralpointofdisagreementiswhethermarkets,aspresentlystructured,areequippedtodealwiththesepressures.Present-day concerns about the relationship betweenglobalization, resource scarcity and environmentalissues(suchasclimatechange)havegivenanewsenseof immediacy and relevance to these long-standingdebates.

(i) Free-market optimism

AdamSmithwasthefirsteconomisttosystematizetheargument for the central role of free markets inallocating resources, including natural resources,efficientlyandproductively.InhisWealth of Nations,hefamouslyarguedthatthepursuitofselfinterestwithinafreemarketplacewasthekeytoeconomicgrowthandsocialimprovement–“asifbyaninvisiblehand”.12

BuildingontheideasoftheFrenchphysiocrats,Smithrejectedtheprevailingmercantilistbeliefthatanation’swealth isfixed,socountriesshould try topartwithaslittleof it–and tohoardasmuchof it–aspossible.Instead,hearguedthatwealthiscreatedbyproductivework, the division of labour and international trade. Inparticular, he shared the physiocrats’ view that theproductivity of land (often synonymous with naturalresources in his writing) and the expansion ofagricultural output were central to prosperity – thusallowingagreaterproportionofthepopulationtoearnits livingfrommanufacturing.13Theproblemwasnotashortageofland,butratherashortageofinvestmentinlandproductivity.This,inturn,oftenreflectedproblemsof government interference in markets and resultingdisincentivestoentrepreneurship.

Althoughhisworkdidnotfocusexplicitlyonconcernsabout resource depletion or the limits of economicgrowth, Smith was essentially optimistic about


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mankind’s ability to prosper within the context ofexisting resource endowments – a view reinforced byhisday-to-dayobservationsabouthowtheworldaroundhim was being transformed by dramatic advances inmanufacturing,agricultureandmining(Kula,1998).Hisfaithinindividualeffortsandingenuity,andinthepowerof the market’s “invisible hand” to allocate resourcesefficiently, had a decisive impact on future thinkingabout resource management, and remains highlyinfluentialtothisday.

(ii) Malthusian pessimism

The ideas of Thomas Malthus ran directly contrary toSmith’sbelief in themarket’sability tohelp resolve thetension between growing human consumption and theearth’sfiniteresources–andindeedagainstthebroaderEnlightenment faith in an improving and perfectablesociety.Malthussawtheideaofendlessprogressasnotonly naïve, but dangerous because of the inexorablepressuresofpopulationgrowthandtheplanet’s limitedcapacity to support it. In his Essay on the Principle of Population, he argued that the impact of growingpopulationonafixedsupplyoflandandotherresourceswouldresultinstarvation.Economicgrowth,internationaltradeandsocialimprovementwerenosolutionbecausetheywouldonlyleadtofurther,unsustainablepopulationgrowth. This would, in turn, be checked by widespreadfamine,diseaseanddeath.14Malthusbelievedtherewasalong-termtendencyforthelivingstandardsofthemassofpeople tobedrivendown toasubsistence level–alevelatwhichthepopulationcouldonlyreproduceitself,notexpand,andtheeconomywouldattainasteadystate,with a constant population size and with constant,subsistence-levellivingstandards(Permanetal.,1996).

Malthus’s pessimism about the ability of economicgrowthtotranscendtheplanet’snaturallimitationswasas influential in itsday–and indeedbeyond–aswasSmith’s optimism. For example, David Ricardo sharedhisbeliefthatdiminishingnaturalresourcesasaresultof expanding economic activity would eventually haltboth population and economic growth. Althoughagricultural output could be expanded by exploitingexisting landmore intensivelyorbybringingnew landinto cultivation, Ricardo argued that the returns toincreased inputs would steadily diminish, resulting instagnantgrowthandlivingstandards(Ricardo,1817).

Likeotherclassicaleconomists,JohnStuartMillbelievedthat economic development was destined to reach aneventualequilibriumor steadystate.Hiscontribution tothedebatewastoquestionthedesirability,notsimplythefeasibility, of limitless economic growth (Mill, 1848).Writingatatimewhenoutputperpersonwasrising,notfalling, Mill accepted that technological innovation, thediscovery of new sources of raw materials, and theapplicationof fossil fuels toproductionprocesseswereplaying an important role in overcoming diminishingreturns fromnatural resourceconstraints.However,Milladopted a broader conception of the role of naturalresourcesintheeconomy.Foreshadowinglaterthinkingonconservation,hearguedthatthequalityofthenatural

environmentnotonlyshapedproductivity,butthegeneralliving standards and conditions of present as well asfuturegenerations.AccordingtoMill,theproblemwasnoteconomicgrowthinthedevelopedworld–wherematerialprogress was already reaching its apogee – but itsdistributionandimpacts(Permanetal.,1996).

Karl Marx, almost more than any previous economist,recognized the transformational power of capitalismand technology’s ability to overcome resourceconstraints–althoughhesharedtheclassicaltradition’sbasicassumptionthateconomicprogresswouldreachan eventual end or steady state. He argued that theimmiserizationoftheworkingclasswastheresultnotofpopulation pressures on fixed natural resources, butrather of the theft of surplus labour and value by thecapitalistclass(Marx,1867).Marxagreedthatacrisisincapitalismwasinevitable.However,whereasMalthusand Ricardo thought the crisis would result fromdiminishingreturnsinthefaceofagrowingpopulation,Marx argued that the crisis would flow from fallingprofits and the limited purchasing power of theimpoverishedmasses(Kula,1998).

(iii) Neo-classical economists: Cautiously optimistic

Not everyone shared the classical economists’pessimismaboutthelimitsofeconomicgrowth.HenryCarey, who became increasingly critical of classicalpolitical economy, believed in thepossibility of steadyeconomic progress and the potential for harmonizingdiverseeconomicinterests.InchallengingtheMalthus-Ricardo theory that economic expansion would leadinexorably to population growth, depleted resourcesand stagnating living standards, he noted that thehistory of agriculture and mining had been one ofsteadily increasingproductivityover time, theresultofcapital accumulation and improved methods (Carey,1840). Agricultural production had generally migratedfrom poorer to richer farmlands, a process aided bycontinuously improving agricultural and transportationtechnologies. A similar pattern was evident in themining industry. Even as old mines were graduallyexhausted,newandrichermineswereconstantlybeingdeveloped, as a result of new investments, theapplication of new technologies and the discovery offreshdeposits.15

However,neo-classicaleconomistsalsorecognizedthemarket’s limitations in solving all of the problemsassociated with resource allocation and depletion –especially through their work on the exhaustion ofresources and spillover effects. As early as the mid-1800s,Millhadrecognizedthatminingwasadifferenteconomicactivityfromfarmingormanufacturing,inthesensethatitwasanon-renewableresourcethatcouldeventually be exhausted (Perman et al., 1996).Extraction today meant a reduction in future profits;conversely, extraction tomorrow would involve areductioninpresentprofits.Inhiswidely-readbookThe Coal Question, William Jevons built and expanded onthis insight, drawing attention to the imminent


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exhaustionofenergysuppliesanddevelopingconceptsofresourcedepletionthathaverecentlybeenrevisitedinworkon“peakoil”.

Itwas inThe Coal Question that Jevonsfirstoutlinedtheso-called“JevonsParadox”–i.e.,thatimprovingtheefficiencyofresource-useleadstoanincrease,ratherthan a decrease, in the consumption of that resourcebecause of falling prices, eventually resulting in itsdepletion. Harold Hotelling offered a somewhatdifferent and more optimistic perspective on theexhaustion of resources. In his seminal article, “TheEconomicsofExhaustibleResources”,heargued thatrationalspeculators,anticipatingfutureshortagesofanon-renewable resource, will conserve or store thatresource in expectation of rising future prices. Theserisingpricesgeneratedbyspeculators’decisionstoputsupplies aside will in turn reduce consumption andencourage the search for cheaper substitutes(Hotelling,1931).

AlfredMarshalltookafurthersteptowardsaneconomicanalysis of resource depletion and environmentaldegradationbyhighlightingtheproblemofunintendedspilloversor “externalities”– i.e., thecostsorbenefitsconferredonothersthatarenottakenintoaccountbythe person taking the economic action. His student,Arthur Pigou expanded Marshall’s concept ofexternalities, and made the case for governmentintervention to correct for such market failures. Thelackofmarketincentivestostopsomeonefromcreatinganegativeexternality(suchaspollution)ortoencouragesomeone to create a positive externality (such asrecycling)waswhygovernmentshadakeyroletoplayin natural resources and pollution management,typicallybyinfluencingprivatebehaviourthroughtaxesorsubsidies(Pigou,1929).

(iv) Neo-Malthusians: Limits to growth

Neo-Malthusian ideas were resurrected in a highlypublicwayin1972withTheClubofRome’spublication,The Limits to Growth.Attemptingtomodeltheimpactofa rapidly growing population and economic expansionon finite natural resource supplies, it predicted thatexistingtrendscouldnotcontinueindefinitely,andthat“exponentialgrowthwouldeventually leadtoeconomicandenvironmentalcollapse”(Meadowsetal.,1972).Thestudyalsoappearedtoclaimthattheworldwasalreadyonthebrinkofrunningoutofkeyresources(oilin1975,gold in 1981, silver and mercury in 1985 and zinc in1991)–aconclusiontowhichthe1973oilcrisisseemedto lendsupport.Similarconclusionswere reached inaUS multi-agency assessment of the earth’s futurepublished in1980entitledGlobal 2000. This forecastthat theworld in2000wouldbe “morecrowded,morepolluted,lessstableecologically,andmorevulnerabletodisruption than the world we live in now” and that“serious stresses involving population, resources, andenvironment[were]clearlyvisibleahead”.16

Even mainstream economists, such as John KennethGalbraith(1974)andEzraMishan(1967;andPotterand

Christy, 1962) questioned the ability of the planet’sresourcestowithstandthestrainsofmodernsociety’sunrelenting and single-minded pursuit of economicgrowth.17 More recently, the focus of concern hasexpandedfromdwindlingsuppliesofnaturalresourcestounsustainableconsumption–anditsadverseimpacton the environment. Land, water and air pollution,speciesextinctions,andglobalwarmingallpointedtoafuture where unrestrained economic growth wouldoutstrip the ecosystem’s ability to sustain it.Malthusianism had returned to the economicsmainstream(Turner,2008).

Atthesametime,anumberofeconomistswerearguingfor the need to study economics within the widercontextofnaturalsystems.In1966,KennethBouldingpublished a short but influential article entitled “TheEconomicsoftheComingSpaceshipEarth”inwhichhecompared the planet to a small spaceship where alleconomic activity takes place within the context ofultimately exhaustible natural resources. He urgedeconomiststoshifttheirthinkingawayfromtheconceptof an open economy with unlimited resources to aconcept of a closed economy “without unlimitedresources of anything, whether for extraction or forpollution, and in which, therefore, man must find hisplaceinacyclicalecologicalsystem”(Boulding,1966).

Boulding argued that economics could only beconstructively understoodas a sub-systemof amuchbroadernaturalsystem,andthattotrytodisaggregateeconomic theory from the natural world in which itoperated risked environmental catastrophe. He iswidelyregardedasoneofthefoundersofecologicalorenvironmental economics, and subsequent work onsustainable development and “green accounting”(variously referred to as Natural Capitalism18 or TotalEconomic Value) often take as their starting pointBoulding’stheories.

(v) A resourceful earth

A number of modern economists have criticized theassumptions,methodsandconclusionsof theClubofRome.Onecriticismisthatcommoditieshaveseeminglybecomemore,notless,abundantonworldmarketsovertime.

InThe Resourceful Earth,JulianSimon,oneofthemostprominent sceptics of the Club of Rome’s claims,pointedoutthatalmostallcommoditieshadexperiencedfallinglong-termpricesoverthepreviouscentury,whichhearguedwas“primafacieevidence”ofgreaternaturalresourcesabundance,not increasingscarcity.19Simonwasnotthefirsttomakethisobservation. Intheearly1960s, the claims about growing resource scarcityweretestedbyPotterandChristy(1962),andBarnettand Morse (1963), who analysed the long-term pricetrendsacrossa rangeofnatural resources.Assumingthatrisingpriceswouldprovegrowingresourcescarcity,their finding in fact revealed that, with one or twoexceptions (such as timber), prices had followed adownward trend over the past century, implying that


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naturalresourcesupplieswerebecomingmoreplentiful,and that “technology could overcome increasingshortages of natural resources ad infinitum”. At thesame time, the researchers cautioned that a steadyincreaseintheproductionofnaturalresourcesdidnottake intoaccount thepossibleadverseeffectson theenvironmentofincreasedconsumption.

More recently, William Nordhaus (1992) has levelledsimilarcriticismsatthelatesteffortstoupdatetheClubofRome’sprojections, inthe1992publicationBeyond the Limits.Whilestressingthat“ourestimatesarecrude,themodelsareprimitive,thefutureisuncertainandourignoranceisvast”,hesuggeststhat“environmentalandresource constraints on economic growth should beonly modest over the next half century” and that “itwould take either a massive slowdown in productivitygrowthoramassiveunderestimateoftheconstraintstogrowthbeforetheresourceconstraintswouldproduceadeclineingloballivingstandards”(Nordhaus,1992).

A more fundamental criticism was that the Limits to Growth theory failed to take into account mankind’scapacity to innovate, adapt and harness technology toexpandtheuseofnaturalresourcesortofindsubstituteproducts.Asaneconomiclaw,diminishingreturnsholdsonlyforaconstantstateoftechnologyandnotforaworldin which methods and approaches are constantlyimproving.Inthepessimists’models,notedRobertSolow(1986), population, capital and pollution always growexponentially,buttechnologyrarelydoes.OrasNordhausputsit,“forthepasttwocenturies,technologyhasbeentheclearvictorintheracewithdepletionanddiminishingreturns”.Resourcescarcity,farfrombeingaproblem,wasthe motor that encouraged investment in finding newresources,developmentoftechnologiestoharnessnew,alternative resources, and improvement in efficiency sothat resource consumption was reduced. As a result,suppliesexpanded,productiongrewmoreefficient,andcostsdeclined.

(vi) Summary

TheworldofAdamSmithandThomasMalthuswasverydifferent fromourcurrentone,but theirconcernsandinsightsremainhighlyrelevant.Worriesaboutpeakoil,global warming and the many other resource andenvironmentalchallengesfacingustodayhavereigniteda two-centuries-longdebateaboutwhethercontinuedeconomicdevelopmentwillsaveordestroytheplanet.

It would seem that neither the pessimists nor theoptimistsofferacompleteorsatisfactoryanswer.WhatMalthusandhissuccessorsfailedtotakeintoaccountisanunfetteredeconomy’sadaptivepower,andtheextentto which technology and innovation have managed toovercome seemingly insurmountable resource andenvironmental constraints. Certainly the classicaleconomists’ assumption that an economy’s potential(the “economic pie”) is essentially fixed, that thechallengeismerelytoallocateresources(the“piecesofthepie”)moreefficiently,andthat,becauseofresourcelimitations, economic growth and living standards will

soonerorlaterreachanequilibriumorplateauhassofarbeen proved wrong. The planet’s population is overseventimeslargertodaythanitwastwocenturiesago,andyetmostpeoplelivelivesthatarelonger,healthierand materially richer than those of all but the mostprivilegedandwealthyinAdamSmith’sday.

Despitethefactthattodayweusefarlargerquantitiesofminerals,metalsandotherrawmaterialsthaninthepast–anddespiterepeatedwarningsoftheimminentexhaustionofthesematerials–themarketstillprovidesviable supplies of most natural resources. What thepessimists also failed to see is that as income andeducationallevelsimprove,peopletendtomodifytheirbehaviour,limitingthesizeoffamilies,curtailingcertainkinds of consumption, and investing more income inpreserving natural resources and protecting theenvironment.

However, what Adam Smith and his successors oftenunderestimated is the scope for market failure – and,indeed, the extent to which existing markets areundevelopedorincomplete.Asrecentlyas1974,RobertSolowarguedthatbecauseeverynaturalresourcehasapotentialsubstitute in themarketplace therecanbeno problem of depletion: “Exhaustion is just an event,not a catastrophe” (Solow, 1974). The problem is thatthe resources which are most threatened withexhaustion today, such as the atmosphere and theoceans, are precisely those without markets. Burningfossil fuels pollutes the air everyone breathes andwarms the atmosphere everyone needs. Loggingactivity erodes soil and diminishes greenhouse-gas-absorbing forests. Over-fishing may lead to anirreparable lossofbiodiversity. Ineachcase,thereareno viable markets to mediate between those causingthedamageandthosebeingharmed–especiallyfuturegenerations.

Whilemostresourceallocationdecisionstoday,suchasburningfossilfuels,entailconsequencesfortomorrow,thepeoplemakingthemdonotalwayshavetolivewiththeconsequencesof theirdecisions.AsPigou (1929)arguedahalfcenturyago,itseemstobehumannatureto underestimate – and hence under-provide for –futureneeds.Currentmarketsfornaturalresourcesareby definition incomplete if only because futuregenerationscannotparticipateinthem.

(c) Theintellectualdebate:Naturalresourceexportsandeconomicdependency

Another important intellectual debate has focused onthe question of whether natural resources are a“blessing”ora“curse”fortheeconomicdevelopmentofcountries.Althougheconomistshavetraditionallyseennatural resourceendowmentsasakeydeterminantofcomparativeadvantageandcriticaltoeconomicgrowth,some have argued that excessive dependency onnaturalresourceexportscanactuallytrapcountriesinastateof“underdevelopment”.


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(i) Singer-Prebisch thesis

The “underdevelopment” thesis was first advanced byRaul Prebisch (1950) and Hans Singer(1950) in the1950s. Noting that the price of primary commoditieshadcontinuedtodeclineovertimerelativetothepriceofmanufacturedgoods,theyarguedthattheresultingdecline in the terms of trade of primary commodity-exportingdevelopingcountrieslockedthemintoastateofunderdevelopment.

One source of the problem was the highly competitivenature of many commodity markets which meant thatproductivity improvements tended to result in decliningprices rather than higher incomes (versus the moremonopolistic organization of markets for manufacturedgoods, where productivity improvements could becapturedinhigherincomes).Anotherproblemwasthatasincomes rose, the demand for manufactured exportsgrewfasterthanforcommodityexports.Becausefallingcommoditypricesmeantthatdeveloping-countryexportshadtogrowcontinuallyinordertobuyagivenquantityofmanufactured goods, poor countries were unable toaccumulatethesurpluscapitalneededforinvestmentsintheinfrastructure,technologyandindustrialcapacitythatwasaprerequisiteforfurtherdevelopment.20

Itwasthesedifferencesinpowerbetweencommodity-dependent developing countries and manufacturing-intensive industrialized countries – between the“periphery” and the “core” – that trapped poorercountriesinacycleofdecliningexportearnings,weakinvestment and underdevelopment. In order to breakthis cycle, Prebisch and Singer urged developingcountriestodiversifytheireconomiesandlessentheirdependence on primary commodities by developingtheirmanufacturingindustry–includingthroughusingselectiveprotectionmethodsandattemptingtoreplaceimports with domestically produced goods. Moregenerally, theSinger-Prebischthesis impliedthenovelconcept that it was the intrinsic structure of worldmarkets,notthefailingsofindividualcountries,thatwasresponsible for widening inequalities in the globaleconomy.

(ii) Dependency theory

TheSinger-Prebischthesishasunderpinnedagrowingbody of economic thought, broadly referred to as“dependencytheory”,whichbuiltontheinsightthattheapparentfailureofmanycountriestodevelopwastheresultofunequalpowerrelationsbetweena“periphery”ofpoorandunderdevelopedcountriesanda “core”ofwealthy, industrialized states. Because of thesestructural inequalities, resources flow from theperipherytothecore,enrichingindustrializedcountriesattheexpenseofthepoor,denyingdevelopingcountriesthecapitalandtechnologyneededtoindustrialize,andperpetuating existing inequalities and disparities.Against the neoclassical idea that open trade andeconomic expansion benefits all countries and thatgrowthinindustrializedcountrieswilleventuallyleadtogrowth in poorer countries (the “stage theory” of

development), dependency theory holds that existingeconomicrelations–andthenatureofglobalintegration– lock developing countries into a state of perpetualunderdevelopmentandeconomicsubservience.

Undertheumbrellaofdependencytheory,anumberofexplanations have been advanced for how and whystructural inequalities are perpetuated in the globaleconomy.Aswehaveseen,Prebisch(1950)andSinger(1950)focusedonpoorercountries’decliningtermsoftrade and how this contributes to underdevelopment.PaulBaran(1957)highlightedthewaysthatdevelopingcountries’ “economic surplus” is extracted byindustrialized countries, and how the internationaldivisionoflabour(betweenskilledworkersinthecentreand unskilled workers in the periphery) reinforcedependency. Together with Samir Amin, he alsoemphasizedhowelitesinperipheralcountriescooperatewithelitesatthecentretoperpetuatenaturalresourceexploitation. Arghiri Emmanuel (1972) introduced theconcept of “unequal exchange” to the debate,suggesting that it was historically established wagelevelsthatsetprices,nottheotherwayaround,furthercontributing to developing countries’ deterioratingtermsoftrade.

Morerecently,MatiasVernengo(2004)suggestedthatthedependencyrelationshipisareflectionlessoftradeor technological inequality than of the differences infinancialstrengthbetweenthecoreandtheperipheralcountries – in particular, the inability of developingcountriestoborrowintheirowncurrency.AndreGunderFrank(1971;1972)andother“world-system”theoristsbroadenedthisanalysis,viewingthestratificationoftheworldeconomyinto“core”and“peripheral”countriesastheglobalreflectionofMarx’sclassdivisions–i.e.,theowners versus the non-owners of the means ofproduction.Similarideasaboutthestructuralnatureof“core” and “peripheral” relations can also be found inJohanGaltung’s(1971)structuraltheoryofimperialism.

Dependency theorists also differed in their proposedsolutions to unequal international economic relations.Writers ranging from Prebisch and Singer to OsvaldoSunkel(1969)andFernandoHenriqueCardoso(1979),viewedtheproblemintermsofthenatureoftheglobaleconomy and the history of international economicdevelopment.Poorercountriesneededtoembarkonaseparateorautonomousdevelopmentpathandreducetheirdependenceontradewithdevelopedeconomies,including by embarking on programmes of infantindustry protection and replacing imports withdomestically produced goods. In contrast, Marxisteconomists,suchasBaranandGunderFrank, tendedtoseetheproblemofdeveloping-countrydependencyasendemictothecapitalistsystemitself.Themovementtowards worldwide socialism – and an end to foreigndominationandimperialism–wasapreconditionfortheeliminationofunderdevelopment.


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5. Conclusions

Naturalresourcesareindispensableforthefunctioningofmoderneconomies,andforachievingandmaintaininghighstandardsoflivinginallcountries.Theyareprimaryinputsintheproductionofallmanufacturedgoods(e.g.ores and other minerals). They provide the energyneeded to transport people and goods from place toplace, to light our cities, and to heat our homes andplaces of work (fuels). They are also a potentiallyunendingsourceofvaluablematerialsandahabitatforwildlife and plant species (forests, oceans). Finally, inthecaseofwater,theyarenecessaryforsustainingalllifeontheplanet. It isnoexaggerationtosaythatthewaytheworldmanages itsnatural resourceswillgoalongwaytowardsdeterminingthesustainabilityof theglobaleconomy.

In thissectionwehaveexaminedsomeof the factorsthatmakenaturalresourcestradedifferentfromtradein other types of products, surveyed data on globaltrade flows, taken a closer look at some of themechanisms through which resources are actuallytraded in commodity exchanges, and sketched thehistory of this trade since the industrial revolution.Taken together, these analyses provide some insightinto why trade in natural resources is sometimescontroversial.

Onthepositiveside,tradeinresourcesallowscountrieswithlimiteddomesticsuppliestobenefitfromtheuseofthesematerials.Tradealsocontributestoefficiencyinproduction,providesexportingcountrieswithearningsthat can be re-invested in future production, andenables them to diversify their economies. On thenegativeside,bycontributingtoproduction,trademayexacerbate a number of adverse consequencesassociated with resource use, such as air pollutioncausedbytheburningoffossilfuels,orareductioninbiodiversitybroughtaboutbythedestructionofnaturalhabitats. Itshouldbeborne inmind,however, that thesolution tosuchproblems isnot likely to reside in thecontraction of trade, but rather in the propermanagementofscarceresourcesandthemitigationoftheharmfulenvironmentaleffectsofeconomicactivity.

The intellectual and political debate about naturalresources,summarizedinSectionB.4,hasseenpublicattitudes and expert opinion alternate betweenoptimism and pessimism about whether preciousnaturalresourceswillcontinuetobeavailableforfuturegenerations. Growing concern for the environment,combinedwiththesteadyriseinnaturalresourcepricesinrecentyears,hasonceagainbroughttheseissuestotheforefrontofpublicconsciousness.

While trade in natural resources will almost certainlycontinue to grow in the future, improved internationalcooperationanddomesticregulationshouldbeabletocontribute to efficiency gains, the elimination of theadverseconsequencesofextractingandusingnaturalresources,andperhapsincreasedstabilityinthemarketpricesofthesegoods.Thissectionhaspresentedsome

essentialbackground informationon these issues,butfor a deeper understanding of the challenges facingpolicymakers a coherent theoretical framework isneeded.ThedevelopmentofthistheoreticalapparatusisthesubjectofSectionC.


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endnotes1 Another way of expressing the idea that natural resources

must be scarce and economically useful is that they mustcommandapositivepriceinmarketsandcanbeusedeitheras inputs in production or directly as a source of utility toconsumers.

2 Proved reserves are defined as “quantities of oil thatgeological and engineering information indicates withreasonable certainty can be recovered in the future fromknown reservoirs under existing economic and operatingconditions”.

3 Thedistributionofotherfuels issimilarlyconcentrated,with20 countries possessing 90 per cent of global natural gassupplies and just nine countries having 90 per cent of theworld’scoalreserves(BritishPetroleum,2009).

4 These are distinct from “forward” contracts, which are nottraded in organized exchanges, but over-the-counter, i.e.directlybetweenabuyerandseller(Valdez,2007).

5 The clearing houses are under the watch of independentregulators.

6 Thesearelikelytobeimportantforlandlockedroutes.

7 In the case of natural gas, however, while markets in theUnited States and the United Kingdom, are dominated byorganizedexchanges,thoseinotherEuropeancountriesaredominated by long-term contracts (Neuhoff and vonHirschhausen,2005).

8 Such contracts may be characterized by an acute “hold-up”problem, i.e. governments are unable to commit not torenegotiatethetermsofanycontractandhenceinvestorsarelikely tobedeterredby theconsequent risk.This is likely toresult in a systematic bias towards under-exploration anddevelopment(CollierandVenables,2009).SeeSectionE.3.

9 Smith(2009)notesthatverticalintegrationintheoilindustryhas declined somewhat during the past two decades. Thismay simply be because several large oil producers haveagreementstoswapcrudeoilstreamstominimizetransportcosts.

10 Seewww.chevron.com.

11 Long-distanceironoretraderosefrom23percentofworldproductionin1960to36percentin1990.Tradeincoalrosefrom2percentin1960to13percentin2005.Tankersnowcarrysome2billionbarrelsofoilannually–upfromlessthan400millionbarrelsin1950.Naturalgas,thebulkiesttradednatural resource, is the latestcommodity tobesubjected tothe forces of globalization due to declining transport costs.Until the 1980s, transport by pipeline was the dominantdelivery mode, which meant that natural gas trade had alimitedgeographical reachandmarkets remainedregionallysegmented.However,advancesinliquefiednaturalgas(LNG)technology and the ability to transport gas economically inlargetankersarerapidlyerasingtheseremaininggeographicalbarriers.In2005,26percentofglobalnaturalgasproductionwastradedinternationally,morethanaquarterofthisasLNG(Lundgren,1996;Radetzki,2008).

12 As Smith explained, “every individual ... neither intends topromote the public interest, nor knows how much he ispromotingit....Heis,inthis,asinmanyothercases,ledbyaninvisible hand to promote an end which was no part of hisintention.Bypursuinghisowninteresthefrequentlypromotesthatofsocietymoreeffectivelythanwhenhereallyintendstopromoteit”(Smith,1776).

13 Hearguedthat “therewouldbenoattemptbycapitalists toinvest inmanufacturesdesigned for distant saleas longasagricultureresourcesremainedunused”(Smith,1776).

14 “Thepowerofpopulationisindefinitelygreaterthanthepowerintheearthtoproducesubsistenceforman”,Malthusargued:“No fancied equality, no agrarian regulations in the utmostextent, could remove the pressure of it even for a singlecentury”(Malthus,1798).

15 “Increasedcapitalenables theminer todescenddouble thedistancesandthevalueisnowgreaterthanatfirst.Afurtherapplicationofcapitalenableshimtodescendsuccessivelyto300,500,600,1,000or1,500feet,andwitheversuccessiveapplication the property acquires a higher value,notwithstandingthequalityofcoalthathasbeentakenout”(Carey,1840).

16 The Global 2000 Report was commissioned by PresidentCarter in 1977. An additional report under the title Global Future: Time to Act was published in 1981 (Council onEnvironmental Quality (CEQ) and the U.S. Department ofState,1980).

17 “Growth,being thecentralgoalofsociety,nothing,naturallyenough, is allowed to stand in its way”, observed Galbraith:“That includes itseffect, including itsadverseeffect,ontheenvironment, on air, water, the tranquillity of urban life, thebeautyofthecountryside”(Galbraith,1974;Mishan,1967).

18 Natural Capitalism is a movement that sees the world’seconomy as being within the larger economy of naturalresources and ecosystem services that sustain us. Thisimplies that we should attribute value to all things – fromhuman intelligence and cultures, to hydrocarbons, minerals,trees, and microscopic fungi. The authors argue that onlythroughrecognizingthisessentialrelationshipwiththeearth’svaluable resources can businesses, and the people theysupport,continuetoexist(Hawkenetal.,2009).

19 In1980,JulianSimonbetbiologistPaulEhrlich thatafteradecade,asetofnaturalresources(decideduponbyEhrlich)wouldbe cheaper in constant dollars than theywereat thestart.Simonwonthebet(Simon,1984).

20 A modern variant of this terms of trade thesis has been putforwardbyDaronAcemogluandJaumeVentura.Inattemptingtoexplaintherelativestability(andinequality)ofworldincomedistribution since the 1960s, they argue that countries thataccumulate capital faster than average experience fallingexport prices and declining terms of trade – which in turndepressestherateofreturntocapitalanddiscouragesfurtheraccumulation(AcemogluandVentura,2002).


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This section looks at key features of natural resources trade from a theoretical perspective. Does trade provide an efficient mechanism for ensuring access to natural resources? What is the impact of trade on finite or exhaustible resources, including under conditions of “open access” where there is a common ownership of – and access to – a natural resource? Is there a relationship between trade and its impact on the environment? Does trade reinforce or reduce problems associated with resource dominance in certain economies? And how does trade affect resource price volatility? These broad questions are addressed by surveying the relevant theoretical literature on the determinants and effects of trade in natural resources.

C. Trade theory and natural resources


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Contents 1. Tradetheoryandresourcedistribution 74

2. Tradetheoryandresourceexhaustibility:Theproblemoffinitesupplies 75

3. Tradetheoryandresourceexhaustibility:Theproblemofopenaccess 81

4. Naturalresourcesandtheproblemofenvironmentalexternalities 87

5. Thenaturalresourcecurse 91

6. Naturalresourcesandpricevolatility 97

7. Conclusions 107


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1. Tradetheoryandresourcedistribution

Countries’ differing natural resource endowments –and their uneven geographical distribution – play acriticallyimportantpartinexplaininginternationaltrade.Traditionaltradetheoryemphasizesthatdifferencesinfactorendowmentspromptcountriestospecialize,andtoexportcertaingoodsorserviceswheretheyhaveacomparativeadvantage.Thisprocessallowsforamoreefficientallocationofresources,whichinturnleadstoan increase inglobal socialwelfare– the “gains fromtrade”.

Relativedifferencesincountries’resourceendowmentsarekeytothestandardversionoftheHeckscher-Ohlintheoryofinternationaltrade.Thisstatesthatacountrywillexportthegoodwhichrequirestheintensiveuseofthecountry’srelativelyabundant(andthereforecheap)factor for its production, and import the good whichrequires the intensive use of the country’s relativelyscarce (and therefore expensive) factor for itsproduction. This includes cases in which the naturalresourceisdirectlyexported(afteraminimalamountofprocessing), rather than being used as an input inanothergoodthatislatersoldininternationalmarkets.

Hence, endowments of immobile and scarce naturalresourcesmayformasourceofcomparativeadvantagethatguidesthepatternofinternationaltrade.Consistentwith this theory, Leamer (1984) finds that the relativeabundanceofoil leadstonetexportsofcrudeoiland

thatcoalandmineralabundanceleadstonetexportsofraw materials. Trefler (1995) finds similar results withrespect to trade in resource-intensive goods. Whilemostofthereportfocusesontradeinnaturalresources,Box4providesanexampleofthestaticgainsassociatedwithtradeingoodsthatembodyaresource(water).

The Heckscher-Ohlin theory has been modified andextendedbyintroducingotherfactorsbesidesresourceendowments,suchastransportationcosts,economiesof scale and government policy,1 that also influencecomparative advantage. For example, distance fromworldmarketscanbeadecisivefactorwhenthenaturalresourceinquestionisbulky,suchasnaturalgas,andwhen transportation costs are high. Complementaryinputs, such as technology, capital and skilled labour,are also significant when a natural resource sector ischaracterized by difficult or technically complexextractionprocesses.

Variables such as education, infrastructure andinstitutionshavealsobeenobservedtoaffectsectoralpatternsofnaturalresourcestrade(LedermanandXu,2007). Only when these other determinants ofcomparative advantage are in place will a resource-abundantcountrytendtoexportresourcestocountrieswitha relativeabundance incapitalandskilled labourand import capital-intensive goods in return (Davis,2009). In short, natural resource endowments mayrepresent a necessary but not sufficient condition forthe production and export of resources or resource-intensivegoods.

Box4:virtual trade in water

Tradecanhelptoaddressproblemsrelatedtotheunequalgeographicaldistributionofanaturalresourcewhenitisthegoodsembodyingthatresourcethatareexchangedratherthantheresourceitself–asisthecasewithtradein“virtualwater”.

Growingfoodwherewaterisabundantandtradingitwithareaslackinginfreshwaterhasthepotentialtosavewaterand tominimizenew investments indams,canals,purificationsystems,desalinationplantsandotherwater infrastructure.Ricardo’s theoryofcomparativeadvantagehasbeenextendedtoexplain theeffectofwateravailabilityoninternationaltrade(Wichelns,2004).Thistheoryof“virtualwatertrade”suggeststhattheimportationofawater-intensivecommodityisattractiveiftheopportunitycostofproducingthatcommodityiscomparatively high due to scarce freshwater reserves or low water productivity. Similarly, exporting thesecommoditiesisattractivewhenfreshwaterreservesareabundantorproductivityishigh.

It follows that countries facing freshwater scarcity should import water-intensive products and export lesswater-intensiveproducts.Theycanconsequentlysavedomesticfreshwateranddirect it towardsproducingwater-intensiveproductswithhighermarginalbenefit.Giventhatagricultureaccountsforalmost90percentoftotalfreshwaterusage,internationaltradeinagriculturalcommoditiescouldplayamajorroleinaddressingtheproblemofwaterscarcity.

Thereisclearempiricalevidencethattradeinwater-intensiveproductssavesfreshwater(Hoekstra,2010).Themostcomprehensivestudyonthissubjectfoundthatsome352billionm3ofwaterisalreadysavedeachyearbytradeinagriculturalproducts(Chapagainetal.,2006).TableAshowsthenetwatersavingsachievedthroughvirtualwatertradeforaselectionofcountries.Japan,whichwasthe largestnet importerofwater-intensivegoodsovertheperiod1997-2001,wasabletosavealmostfourandahalftimesitsdomesticuseofwaterthroughtradeinvirtualwater(Hoekstra,2010).


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2. Tradetheoryandresourceexhaustibility:Theproblemoffinitesupplies

Adefiningfeatureofnon-renewablenaturalresourcesis theirfiniteavailability–and the fact thatextractionandconsumptiontodayirreversiblyalterstheextractionand consumption possibilities of future generations.The traditional model of trade discussed above doesnot directly address this problem of exhaustibility andthe inter-temporal trade-offs involved. Understandinghowtradeimpactsontheexploitationofnon-renewablenaturalresourcesinvolveslookingbeyondthestandardversionof theHeckscher-Ohlinmodel,andadoptingadynamicapproach that takes intoaccount thechangeovertimeintheavailabilityofafiniteresource.

(a) Efficientresourceextraction:TheHotellingrule

Inhispioneeringworkontheeconomicsofexhaustibleresources,Hotelling(1931)developedaframeworkforpredictingthebehaviourofpricesandextractionpathsin light of inter-temporal trade-offs – or “depletionopportunitycosts”.2 Indoingso,headdressedtwokeyquestions: how should a resource be extracted overtime in order to maximize the welfare of current andfuture generations, and can economic competitionsustainthesocialoptimumlevelofextraction?Althoughheworkedwithinaclosed-economymodel,hisinsightsprovide a benchmark for understanding how tradeimpacts on non-renewable resources in openeconomies.

Inresponsetothefirstquestion,considerthecaseofasocialplannerwhochoosesaresourceextractionrateto maximize the welfare of current and futuregenerations.Theplannerunderstandsthat,dueto thefixedsupplyoftheresource,anychangeintherateofextraction inoneperiodwill triggeranoppositeeffectat some later period, with negative consequences forthe welfare of later generations (i.e. an increase inconsumption of the resource today may benefit thecurrentgeneration, but itwill reduce theconsumptionpossibilities of a future generation). According to theHotellingrule,thesocialoptimumisachievedwhenthepriceoftheresourcenetofextractioncostsgrowsatarateequaltotherateofinterest.This,inturn,determinestheefficientpathofextractionofthenaturalresource.Inessence,whenthepresentvalueofoneunitextractedis equal in all periods, there is no social gain fromincreasing or reducing the amount of the resourceavailableineachperiod(DevarajanandFisher,1981).

The second question is, how does the extraction ratedescribed above compare with that of a competitive,profit-seekingentrepreneur?Inotherwords,shouldweassumethatcompetitionwillleadtoover-exploitationofnon-renewable natural resources? To answer thisquestion, imagine that the world lasts two periods:todayandtomorrow.Assumethatthemarginalcostandtheaveragecostofresourceextractionarenegligible,so that they can be set equal to zero. Under thisscenario, the resource owner faces the dilemma ofwhether toextractall theresourcetoday, tomorrowortosplittheextractionbetweenthetwoperiods.Hisfinaldecisionwilldependonthepriceoftheresourceinthetwoperiods: thehigherthepricetomorrow, thehigherthe profits from future extraction and the lower theincentivetoexploittheresourcetoday.

However, trade invirtualwatercanalsohaveanegative impactonwaterconservationwhen the incentivestructures are wrong. For instance, according to Hoekstra and Chapagain (2008a), Thailand experienceswater shortages partly because too much water is used to irrigate rice crops for export. Similarly, KenyadepleteswaterresourcesaroundLakeNaivashatogrowflowersforexport.Inanotherstudy,NascimentoandBecker (2008) find that fruit exporters in the São Francisco River region in Brazil are prospering in partbecauseofanartificiallylowpricingsystemforwater.Inshort,tradeinvirtualwatercanexacerbate,ratherthan reduce,waterscarcityproblemsunlessexportingcountriesaccount fully for theopportunitycostsoffreshwateruseandaddressanypotentialnegativeenvironmentalimpacts.Aproperlymanagedwatersectoriskeytoensuringthatvirtualwatertrademaximizestheproductivityofthisscarceresource–apointwhichwillbeexploredindetailinSectionsC.3andC.4.

TableA:examples of nations with net water saving as a result of international trade in agricultural products, 1997-2001

Country

Totaluseofdomesticwaterresourcesinthe

agriculturalsector1

(109m3/yr)

Watersavingasaresultofimportofagricultural

products2

(109m3/yr)

Waterlossasaresultofexportofagricultural

products2

(109m3/yr)

Netwatersavingduetotradeinagricultural

products2

(109m3/yr)

Ratioofnetwatersavingtouseofdomesticwater

(percent)

China 733 79 23 56 8

Mexico 94 83 18 65 69

Morocco 37 29 1.6 27 73

Italy 60 87 28 59 98

Algeria 23 46 0.5 45 196

Japan 21 96 1.9 94 448

1Source: HoekstraandChapagain(2008a).2Source: Chapagainetal.(2006).Agriculturalproductsincludebothcropandlivestockproducts.


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Figure12capturestheessenceofthedilemmaofwhento extract resources. The horizontal axis is the totalamount of the resource. Consumption in Period 1 ismeasuredfromlefttoright,whileconsumptioninPeriod2ismeasuredfromrightto left.Thetwoverticalaxesmeasurethepriceoftheresource.Ontheleft,thereisthepriceinPeriod1,whiletherightaxisisthepriceofPeriod2discountedtothefirstperiod(i.e.thepresentvalueofthefutureprice).Finally, thetwolinesarethedemand curves of the resource in the two periodswhich,asusual,aredownwardslopingas thequantitydemandedincreasesasthepriceoftheresourcefalls.

The equilibrium is at point E, where the two demandcurves intersect and where a producer is indifferent

betweensellinganextraunitoftheresourceinthefirstorinthesecondperiod.TheequilibriumpricepEissuchthatp=p2/(1+r) where r is the interest rate, while theequilibrium consumption (and extraction) of the twoperiodsaregivenbythesegments(O1-QE)forPeriod1and(O2-QE)forPeriod2respectively.Itisinstructivetounderstand why the competitive equilibrium is the onethatcorrespondstotheHotellingrule.Ifp2isgreaterthan(1+r)p1,itwillbemoreprofitablefortheresourceownertoextract tomorrow and not today, which will reduce thepriceoftheresourcetomorrowandincreasethepriceoftheresourcetodayuptothepointwheretheequalitywillberestored;whileifp2islessthan(1+r)p1,itwillbemoreconvenient to increase the extraction of the resourcetoday,withtheoppositeeffectonprices.

In a competitive setting, price is usually equal to themarginalcostofproduction.Butinthisframework,theprice ishigherbecausetheresourceownertakes intoaccount the depletion opportunity cost in addition tothemarginalcostofproduction(i.e.theextractioncost).If he did not take the depletion opportunity cost intoaccount,currentprofitswouldcomeattheexpenseoffuture profits, which is inconsistent with the profit-maximizing behaviour of competitive entrepreneurs.Since the depletion opportunity cost is taken intoconsideration by producers, the competitive outcomewillbeequaltothesocialoptimum.Inessence,Hotellingdemonstratedthatacompetitiveproducerbehaveslikeasocialplanner,takingintoaccounttheconsequencesofdepletingresourcesbyextractinglesstoday.

However, inpracticetheHotellingrulehasnotprovedanaccuratepredictoroftheevolutionofobservedpricetrends for non-renewable resources. According to hismodel,pricesofnon-renewableresourcesshouldhaveincreasedover time,whereas in fact theyhavemovederratically.This is largelybecausetheHotellingmodeldoes not take into account other important factorsinfluencingpricetrends,suchasthefactthatthemarket

structureof non-renewable resource sectors is bettercharacterized as imperfect (such as monopoly oroligopolisticproducers)ratherthanperfectcompetition,thaton-going technological changesaffect incentivesto extract resources, that extraction costs tend toincrease over time (e.g. digging deeper mines)(Hotelling, 1931; Peterson, 1975; Weinstein andZeckhauser, 1975) and that uncertainty regardingfuturesupplyanddemandaffectsdecisions(ArrowandChang,1978;Hoel,1978;DevarajanandFisher,1981;Weinstein and Zeckhauser, 1975).3 Several of thesespecificpointswillbeanalysedbelow.

(b) Heckscher-Ohlinmodelinthecontextofnaturalresources

DothemainpredictionsoftheHeckscher-Ohlintheorycontinuetoholdwhenexhaustiblenaturalresourcesareusedas factorsofproduction– including thesituationwheretheyaresolddirectlyininternationalmarkets?

Onestudydevisedthefollowingthreescenariostotestthetheory’svalidity(KempandLong,1984).Inthefirstscenario (defined as the Anti-Heckscher-Ohlin

Figure12:Perfect competition and the Hotelling rule

p1

p2

/(1+r)

pE

D1

D 2

O1 Period 1 Consumption QE Period 2 Consumption O2

Total Resource Stock

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model), each final good is produced using only twoexhaustibleresources. Inthesecondcase(referredtoastheHybridmodel),oneofthetworesourcesusedinproduction is exhaustible (as in thefirstmodel),whiletheother isnot (as in thetraditional theory).Thethirdscenario assumes that the production of final goodsrequires that two non-exhaustible resources arecombined with an additional exhaustible resource(Generalized Heckscher-Ohlinmodel)(KempandLong,1980;KempandLong,1982).

Whatwasfoundundereachscenario4isthatacountrywhich is initially relatively well endowed with a non-renewable resource will specialize in that resourcesector–and/or in theproductionofgoodswhicharerelativelyintensiveintheuseofthatresource.Inotherwords, even when finite resources are involved, tradepatterns(i.e.whatcountriesexportandimport)arestillexplained by comparative advantage driven bydifferences in resource endowments.5 Welfare gainsfrom trade are still possible because specializationallowsfortheefficientallocationoflimitedresources.

Importantly, in this environment there is no over-exploitationofthenaturalresourceasextractionisset(eitherbyasocialplannerorbycompetitiveproducers)to maximize social welfare of present and futuregenerations.Thisisnottosaythattradeneverleadsto

over-exploitation of finite resources, but rather thatover-exploitationisaffectedbytradeopeningonlywhenmarket failures (such as imperfect competition orexternalities) or political economy failures (such asrent-seekingorcorruption)areinvolved.6

(c) Imperfectlycompetitivemarkets

So far the discussion has not departed from thetraditionalassumptionsthatmarketsareperfect,firmsproduce under constant returns to scale and that allstagesofproductionoccurinthesamelocation.Undertheseassumptions,theeconomicliteratureshowsthatthe predictions of standard trade theory hold true –namely, that under free trade, countries specializeaccordingtotheircomparativeadvantageandexchangedifferentgoods.

However,severalfeaturesofnaturalresourcemarketsmakethemparticularlypronetovariousformsofmarketpower. First, the fact that natural resources are oftenconcentrated infewcountries increasesthescopeforcollusion and limits the scope for the development ofperfectly competitive markets. Second, the relativelyscarce supply of many natural resources createspotential for extracting “scarcity rents” (see Box 5)whichinturnencouragesrent-seekingactivities.Third,duetothehighfixedcostsofextraction,productionand

Box5:What is a rent?

Ineconomics,theconceptofeconomicrentisequivalenttothatof(positive)economicprofit–thatisareturninexcessofnormalprofit,wherethelatteristhereturnthatanentrepreneurshouldearntocovertheopportunitycostofundertakingacertainactivityratherthanitsbestalternative.Inotherwords,anyrevenueexceedingtotalcostsincludingtheopportunitycost(ornormalprofit)iseconomicrent(oreconomicprofit)(McConnellandBrue,2005).

Economistsgenerallydistinguishthreetypesofrents:

1. Differential or Ricardian rent

Theclassicalnotionofdifferentialrentisrelatedtoland.Theideaisthatgreaterrentaccruestolandofhigherproductivity and better quality (e.g. greater fertility), with marginal land receiving no rent. More generally,differential or Ricardian rents arise when producing firms operate under different conditions – that is, atproductionsiteswithmoreorlessfavourablecharacteristics.Forexample,theremaybedepositsfromwhichitiseasierandcheapertoextractoilormineralresources;asaconsequence,somefirmsfacelowerorhighercoststhanothersandearnmoreorlessthanothers,respectively.

2. Scarcity rent

Scarcityrentsarisewhentherearerestrictionsonthesupplyofanaturalresource,sothatdemandexceedssupply. These restrictions can be natural or legal. Natural limitations exist because natural resources aregenerally available in finite amount, whereas legal limitations can derive from an export or a productionrestriction.

3. Quasi-rent

Quasi-rents are attributable to entrepreneurial skills and managerial efforts. Firms can adopt innovativepracticesandundertakestrategicinvestmentsinadvertising,trainingofemployeesandsoon,therebyattaininghigherprices(e.g.betterreputation,higherproductivity)orlowercosts(e.g.bettertechnology).

Ingeneral,theresourcerentisthetotalofthedifferentialrentandthescarcityrent.Quasi-rentscanalsoberesource rentswhen theyaccrue tonatural resources.Thefundamentaldifference is thatwhiledifferentialrentsandscarcity rentsexisteven inmarketscharacterizedby freeentryandperfectcompetition (as theyrelatetotheinnatecharacteristicsofnaturalresources),quasi-rentsaredriventozeroascompetitorsadoptprofitablestrategiesaswell(VanKootenandBulte,2000).


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transportation that many resource-based companiesface,naturalresourcesectorstendtoexhibitincreasingreturnstoscale7–whichcaninturnleadtoimperfectcompetition. Finally, some natural resource marketshave a monopsonistic structure – that is, they arecharacterized by a dominant buyer – representinganotherdeparturefromperfectcompetition.

Thefollowingdiscussionlooksattheoptimalextractionpath for finite natural resources under imperfectcompetition,andthenexplainstheimplicationsfortradein thesekindsof commodities.Since the literatureonnaturalresourcestradeunderimperfectcompetitionisfragmentary, the question of how trade impacts onresource sustainability can only be answered forspecificcircumstances.

(i) Market structure and optimal extraction of exhaustible natural resources

Cartels provide the simplest case of imperfectcompetition that can be analysed in an inter-temporaleconomic model – the model which, as noted above,best reflects theexhaustiblenatureofnon-renewablenatural resources. Because other forms of imperfectcompetition, such as duopolies or oligopolies, involvestrategic interactions among agents, they introduce anumber of analytical complexities which limit themodel’sapplicabilityandrelevance.8

Ingeneral,economictheorysuggeststhatan imperfectmarket structure will generate a dynamically inefficientoutcome with a bias towards the initial conservation ofnon-renewable resources – a result that holds true formonopolies, core-fringe market structures, oligopoliesandmonopsonies.9Inthecaseofafullycartelizedmarket,theintuitionisasfollows:whenanaturalresourcescartelincludesallproducers, itwillbehaveasa fullmonopoly.Given world demand for the cartelized commodity, themonopolistwillateachmomentintimesetpricesatthepointonthedemandcurvecorrespondingtothequantitywhere marginal cost equals marginal revenue. In otherwords, the monopolist at each moment in time will setpricesatalevelabovemarginalcost.10

Therefore, as with the static theory of cartels, non-renewable natural resource cartels will restrict outputrelative to the output of a perfectly competitive (oroligopolistic) industry, in order to raise prices andprofits.Overtime,theoptimalpriceandextractionpathfora resourcescartelwill bedescribedbyamodifiedHotelling arbitrage condition, whereby the marginalrevenue, rather than theprice,willgrowat the rateofinterest. This is because when extraction costs arenegligible,11thevalueforthemonopolistofextractingaunitofthecommoditysometimeinthefuturemustbethesameasthemoneythemonopolistwouldgetiftheyextracteditnowandkeptthemoneyinabank.

What thismeans is thatprices–andthusdepletion–will increase faster or slower than under perfectcompetition depending on the changes over time indemandresponsivenesstopricechanges(elasticityofdemand).Inparticular,economictheorysuggeststhatamonopoly will slow resource depletion when theelasticityofdemandincreaseswithpriceorovertime,and will accelerate resource depletion when theelasticityofdemanddecreases.Inshort,itwilldepleteresources at exactly the same rate as a perfectlycompetitive industry when the elasticity of demand isconstant (Dasgupta and Heal, 1979; Stiglitz, 1976;Lewis,1976).

Figure13representsthepriceandoutputpathwhentheresponsiveness of demand to price changes (i.e.the elasticity) increases over time. This is generallythought to be the more realistic case because as thepriceincreasesovertime,asubstitutefortheresourcemaybecomeavailable–andconsumerswillmorereadilyshiftawayfromtheconsumptionoftheinitialcommodity(DevarajanandFisher,1981;Teeceetal.,1993).Inthiscase, a monopoly cartel will deplete resources moreslowlythanaperfectlycompetitiveindustry(seeBox6foradiscussiononwhynaturalresourcesarepronetocartelization).Theintuitionisthat,knowingthatdemandelasticity will grow over time, a monopolist will takeadvantage of the chance of extracting higher rentstodaywhentheelasticityislowbylimitingextractionandcharginghighprices,thuspreservingresourceslonger.

Figure13:output and price paths in perfect competition and monopoly

Monopoly price

Time Time

OutputPrice

Monopoly output

Competitive output

Competitive price


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It is important toemphasize the limitationsofeconomictheory indescribingsomethingasstrategicallycomplexasdecisionsaboutexhaustibleresourceextractionunderimperfect competition. In an inter-temporal framework,decisions are made on the basis of expectations,especiallyabouttheactionsofotheragents.Assumptionsaboutthewayexpectationsareformulatedarethereforecrucial to determining the outcome. One commonassumptionisthatfuturepriceswillbe“announced”attheinitial date and that agents do not deviate from theannounced path. That is, producers set their extractionpaths and consumers their demand path given eachother’s strategic choice at the beginning of the period.This is equivalent to assuming the existence of well-functioningfuturemarkets.Intheirabsence,commitmentstoacertainpricepathwill,ingeneral,notbecredible,as

atsomelaterstagethebestchoiceofoneoftheparties,assumingthatallotherscontinuetobehaveaspredicted,may differ from the one envisaged at the initial date(Newbery,1981;Ulph,1982).12

(ii) Imperfect competition and trade in natural resources

The effects of trade opening on exhaustible naturalresources under imperfect competition remain largelyunexplored intheeconomic literature.This isbecausethe exhaustibility of natural resources and imperfectcompetition introduce dynamic and strategicconsiderations that significantly complicate welfarecomparisons.Theexistingliteraturedoes,however,helptorevealsomebroadpatterns.

Box6:Why are natural resources prone to cartelization?

The general case

Aproducercartelisaboutmonopolisticcoordinationaimedatjointlycuttingsupplyorraisingprice,thusleadingto increased revenue for the group. The conditions for cartel formation and cartel duration are not wellunderstood,buteconomictheorycanprovidesomeusefulinsights.Thereisaclearincentivetoformacartelwhenthegainsofsettingamonopolypriceexceedthecostsofimplementingandenforcingthecartelagreement.Thisismorelikelytohappenwhenthecartel’sshareofglobalsupplyishighandwhentheworlddemandaswellastheoutsiders’supplyofthecartelizedcommodityisnottoosensitivetopricechanges(Radetzki,2008).

Therearethreemajorproblemsthatacartelmustovercomeifitistobesuccessful.First,thereistheproblemofdeterminingtheoptimallevelofoutputandtherulesgoverningtheallocationofthatoutputamongcartelmembers.Thisisanissuesuppliersarelikelytodisagreeupon,astheydifferintechnology,discountratesandforecastsoffuturedemand.Similarly,whenacartelisformedamongcountries,thedifferinginterestspursuedbytheirgovernments,aswellasthedifferingsocialandpoliticalcontextsinwhichtheyoperate,mayreducethelikelihoodofstrikingadeal.

Second,onceoutputdecisionshavebeentaken,cartelmembershaveanincentivetorenegeontheagreementand sell additional output, thus reaping additional profits. The temptation to depart from the agreement ispositivelyaffectedbytheelasticityofdemand:ahigherresponsivenessofdemandtowhateverpricediscountisofferedbytheproducerisassociatedwithastrongertemptationtodefect.Inaddition,defectiondependsupon the probability of detection and punishment: the easier it is to detect deviations from commitmentsundertakenunderthecartel,thelesslikelyitisthatmemberswilldefect.

Third,acartelhastobeabletoprevententrybynewfirms.Highprofitswill, infact,provideanincentiveforotherfirmstoenterthemarket,andthiswoulddisruptthecartel’soriginalproductionandpricetargets.

The case of natural resources

Inthecaseofdepletablenaturalresources,differentforecastsabouttheamountofreservesandthestrategicvalueofsuchreservesmakeitparticularlydifficulttoreachanagreementonoutputandpricelevelsaswellasontermsofrevenuesharing.

There are, however, characteristics typical of natural resources that make the markets for these commoditiesparticularly prone to cartelization. First, natural resources tend to be concentrated in few countries, hence fewproducersgenerallyaccountforalargeproportionofworldsupply.Thisreducesnegotiationandenforcementcostsamongcartelmembersasthenumberofmembersrequiredtocoveralargeshareofworldsupplywillbesmall.

Second, natural resources tend to exhibit high fixed costs of extraction. These costs reduce the risk ofdissolution of a cartel due to entry by new firms, as they make it difficult for outside producers to equipthemselveswiththeproductioncapacitynecessarytoenterthemarket.

Third,naturalresourcestendtoberelativelyhomogeneous.Thisincreasestheincentiveforfirmstodefect,asahigher responsiveness topricechanges isassociatedwith lessdifferentiatedgoods.However,deviationsfromacartelagreementareeasiertodetectwhenproductsaresimilarthanwhentheyaredifferentiated(inthelattercaseitiseasiertocircumventtheagreementbyvaryingquality,forexample).


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Totheextentthatnaturalresourcesaregeographicallyconcentratedinonecountryorcontrolledbyacartel,itisclearthatthatcountryorcartelhasacomparative(aswell as an absolute) advantage in producing theresourceandwillexportit.Furthermore,intheabsenceofbarriers to trade, theextractionpathchosenby themonopolistwilldependonlyonhowthe inter-temporalworld(foreignplusdomestic)demandfortheresourcewill change over time. Therefore, the expectation thatimperfectcompetitionwilldeliveramoreconservativeexploitationpaththanperfectcompetitioncontinuestoholdtrue(Bergstrom,1982).

Asfaraspatternsoftradeunderimperfectcompetitionare concerned, economic theory suggests that thepredictionofthestandardHeckscher-Ohlintheorem–i.e. that countries will export goods using the factorwith which they are relatively better endowed – alsoholds true (Lahiri andOno,1995;Shimomura,1998).Thisexplainswhymineral-richcountriestendtoexportmineral products and import manufacturing-intensiveproductsfromcapital-richcountries.Itisworthnoting,however,thatinthecaseoffullycartelizedcommodities,the amount each country exports will depend on theproduction quotas agreed by the cartel’s members.Considerationsotherthancomparativeadvantagemayaffect decisions on quota allocation among cartelmembers, and thus trade patterns may depart fromcomparativeadvantageunderthesecircumstances.

Furthermore, imperfect competition may also help toexplain two-way trade (or intra-trade) in the samenaturalresource.13AccordingtoevidencebasedontheGrubel-Loyd index, this is relatively common for someresources(seeSectionB).Thestandardexplanationforsuchtwo-waytradeinagivenmarketisthatcountriesare trading different varieties of the same good(Krugman, 1979).14 This cannot be easily applied totrade in natural resources given the similar nature ofthese products. There are simply not that manyvariations of iron ore or copper, for example. Nor cantrade in natural resources within an industry beexplainedfullyintermsofdifferentiatedproducts–i.e.thetwo-wayexchangeofaresourceatdifferentstagesof the production process to exploit countries’comparativeadvantagesorincreasingreturnsofscale.This is because the cost of transporting bulkcommoditieslimitsthescopeforcreatinggeographicallyfragmented production chains. Indeed, many naturalresourcesarenotevensaleableuntilacertainamountofprocessinghasbeenundertaken.

Instead, an important explanation for intra-industrytrade in natural resource sectors may be theprevalenceofimperfectcompetitioninthesemarketsand the phenomenon of reciprocal dumping. Whenmarkets are sufficiently segmented, firms cansuccessfully price discriminate between foreign anddomestic markets, allowing them to charge a lowprice for exports in order to make additional sales(Brander and Krugman, 1983). The rationale is thefollowing:suppose that thesamenatural resource isproduced by a monopolist in each of two identicalcountries. If the monopolist firm in each country

charges the same price, no international trade willtake place. However, if the foreign and domesticmarketcanbesegmented,domesticresidentscannoteasily buy goods designated for export and eachmonopolist can price-discriminate – i.e. set a lowerpriceabroadthanathome.15

By selling into the foreign market, each firm makesadditionalsalesandprofits(eveniftheforeignpriceislower than the domestic price) and trade within anindustryresults.OnestudybyVasquezCordano(2006)explainsintra-industrytradeinliquefiedpetroleumgas(LPG)inPerubythepresenceofadominantgroupofrefinersthatfaceinternationalcompetitionandafringeofLPGimporters.Ifthedominantgroupofrefinersalsocontrols the supply of LPG in the country, and if it isabletochargehigherpricesathomethanabroad,thenthe competitive fringe will have to import LPG to beable to produce the refined product at a competitiveprice.

(d) Sustainability,technologyandtrade

Can an excessive use of exhaustible resources bycurrent generations affect the potential for futureeconomic growth? Will open trade facilitate or hindersustainable growth? The Brundtland Report on theEnvironmentandDevelopment(UnitedNations,1987)broadly defined sustainable growth as developmentthat “meets the needs of the present withoutcompromisingtheabilityoffuturegenerationstomeettheir ownneeds”. The focushere ismorenarrowlyontheeconomic forces thatmayoffset theexhaustibilityof finite resources and how they interact withinternationaltrade.

Fromtheeconomicperspective,thisdebatecentresonwhether theworldasawholecansustain thecurrentrateofoutputgrowthinthefaceofadecliningstockofnon-renewable resources that are essential to theproductionprocess.Recentpolicyandacademicworkhas emphasized that limits to growth arise, not onlybecause of the finite supply of natural resources, butalsobecauseof“nature’slimitedabilitytoactasasinkforhumanwaste”(TaylorandBrock,2005).Inthelattersense,sustainablegrowthdependsontheimpactthatthe by-products of economic activities (e.g. solidpollutants,toxicchemicals,CO2emissions)haveonthequalityoftheenvironment.Whilethetwointerpretationsof sustainable growth are related – in that theenvironment is itself a scarce natural resource – thefollowingdiscussion focusesmoreon resourcesupplylimitationsthanonenvironmentalconstraints.16

Many economists argue that the more pessimisticprognosesforthesustainabilityofeconomicgrowthfailto take into account adequately the forces that canoffsetnaturalresourcelimitations,namelytechnologicalchange and the substitution of man-made factors ofproduction (capital) for natural resources (Dasguptaand Heal, 1974). In particular, they have attempted toidentifytheconditionsunderwhichcapitalcanprovidean alternative to depleting exhaustible resources, and


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how technology can guarantee sustained productionandconsumptiongrowthovertime.Keytothediscussionis the issueofhow international tradeenters into thisprocess,andtowhatextentflowsofgoodsandservicesmaypromoteasustainablerateofeconomicgrowth.

Solow (1974a) shows that constant consumption canbesustainedbyasuitablepathofcapitalaccumulation,despitedecliningresourceflows.Thisispossibleonlyifthere is a certain degree of substitutability betweencapitalandanaturalresource,andifthelatterisanon-essential input.17 This intuition was translated into apolicyrulebyHartwick(1977),whoarguedthattherentderivedfromresourceextractionshouldbeinvestedinbuilding the capital stock (broadly defined to includeinfrastructure, physical capital, education) needed toguaranteeconstantconsumptionovertime.

There are also various ways in which technologicalchangecanhelp toaddressproblemsassociatedwithresource exhaustion. Resource-saving inventions canreduce natural resource requirements per unit of realoutput(Solow,1974b).Newtechnologycanalsohaveasubstitution effect, increasing the demand foralternative resources. For example, as the internalcombustionenginegraduallyeclipsedthesteamengineintheearly20thcentury,itgeneratedagrowingdemandfor oil which was effectively a resource substitute forcoal.Finally,improvedtechnologycanreduceextractioncosts or facilitate exploration, thus increasing theavailabilityofagivenresource.Considerthecaseofanon-renewable resource with escalating extractioncosts.Ifpricesrisetoohigh,demandwillbeextinguished,producing “economic exhaustion” even if some of theresource remains in the ground. However, the costincreasingeffectofdepletioncanbemorethanoffsetby thecost reducingeffectsofnew technologiesandthediscoveryofnewdeposits.

Two other considerations regarding technology andexhaustibility are relevant. First, technology caninfluence the eventual “exhaustibility” of a resource.Considerasituationinwhich,atcurrentconsumption,anon-renewableresourcewillbefullydepletedattimeT.Then, a new technology is introduced which eitherincreases resource supply (e.g. because of newdiscoveries, improved recycling methods), or reducesresource demand (through substitution or efficiencygains) – effectively postponing the point of depletionfromT to (T+n).Asa result, continuous technologicalchange shifts this depletion point indefinitely and anon-renewable resource begins to resemble arenewableresource.

Second,whiletechnologyisgenerallyseenasreducingthe problem of resource exhaustibility, the oppositeeffectcannotbeexcluded.For instance, technologiesthat increaseproductivity in theextracting sector canalso lead to an acceleration of resource exhaustion(CopelandandTaylor,2009).18

Alastpointthatshouldbehighlightedinanydiscussionoftechnologyandnon-renewableresourcesistheroleofinternationaltradeinfacilitatingthetransferofnew

technologies across national borders and in spurringresearch and development (R&D) activities amongcountries (World Trade Organization (WTO), 2008).Recentstudieshavefoundthattechnologicalspilloversaregreaterwithimportsfromhigh-knowledgecountries(Coe and Helpman, 1995) and that in developingcountriestotalfactorproductivityispositivelycorrelatedtotheR&Dactivityoftheirtradingpartners(Coeetal.,1997). This channel is termed “direct spillovers”.Countriesalsobenefitfrom“indirectspillovers”–i.e.theideathatacountrycanbenefitfromanothercountry’sknowledgeevenwhentheydonottradewitheachotherdirectlyaslongastheybothtradewithathirdcountry(Lumenga-Neso et al., 2005). Empirical evidencesuggests that what matters most is how muchknowledge a country can access – and absorb –through the totality of its global trade relations.Therefore, international trade can help guaranteesustained growth to the extent that it promotes thediffusionof technologies thatoffset theexhaustionofnaturalresources.

3. Tradetheoryandresourceexhaustibility:Theproblemofopenaccess

Theprevioussection lookedat the impactof tradeonfinitenaturalresources,andexaminedhowmarketscanhelptopromoteresourcemanagementandsustainableextraction and consumption. The following sectiondiscusses the specific problems related to “openaccess”–asituationwherecommonownershipof,andaccess to, a natural resource can lead to its over-exploitationandeventualexhaustion. Itexamineshowthis affects the pattern of international trade, factorprices and the gains from trade. Under certainconditions, the existence of poorly defined propertyrights (see Box 7 for a more detailed discussion ofproperty rights ineconomics)canresult in thenaturalresourceexportingcountrylosingfromfreetradesince,comparedwithautarky,freetradeleadstoapermanentreductioninitsstockofnaturalresources.

This apparently overturns the standard welfare resultfrom international trade theory which predicts thatcountriesgainfromfreertrade.Whilethisispossible,itisnottheonlyprobableoutcomeevenifthereisopenaccess to the natural resource. The reason for this isthatalotofotherthingscomeintoplay.Thestructureofdemand, population pressure, the technologicalcapacitytoharvesttheresourceandthestrengthoftheproperty rights regime interact in a complex way todetermine the final outcome. In particular, propertyrights are neither binary nor exogenous. Rather thanbeing completely perfect or completely absent, thestrength of property rights in a country falls along acontinuum.Propertyrightstonaturalresourcesmaybestrengthenedwithmoreopentrade,dependingonhowother elements that determine the definition andenforcementofpropertyrightsareaffected.19


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(a) Openaccessproblem

Open access refers to a situation where commonownershipof–andaccessto–anaturalresourcecanlead to its over-exploitation and eventual exhaustion.Consider the caseof a lake stockedwithfish that noone owns. In the absence of defined property rights,there will be too many fishermen on the lake. Thisdepletes the available stock of fish and reduces theefficiencyoftheefforttocatchfish.Thisisobviouslyaneconomic, as well as an environmental, problem. Thereason for this is that each fisherman on the lakereducestheproductivityofallotherfishermen.However,individual fishermen do not take into account thenegative impactof their activity on theproductivity ofotherfishermen. Ineffect, toomucheffort is spent tocatchtoofewfish.

Theresultoftoomuchentryisthatthetotalcatchfromthelakeisbarelyabletocoverthecostoftheefforttocatchthefish.Thedegreetowhichrent–thedifferencebetween total revenues from the catch and the totalcostincurredincatchingthefish-isdissipatedisthusameasureoftheinefficiencyintroducedbyuncontrolled

access (see Box 8 for estimates of the amount ofeconomic profits that could be generated from moreefficientmanagementofthenaturalresourcesstock).

This focus on economic efficiency is not inconsistentwiththeenvironmentaldesiretokeepthelakestockedwith fish. It could be argued that the economic andenvironmental interests coincide in this casebecauseasshallbeseen, theeconomist’spreferredsolution–strengthening of property rights over the naturalresource–rationsfishermen’saccesstothefishinthelake and reduces overfishing, producing an outcomethatisinlinewiththeenvironmentalist’sgoal.20

Since open access is such a significant feature ofcertain natural resources, this concept shall beexplained in greater detail. The renewable resourcegrowsataratethatdependspositivelyonthesizeofthecurrent stock.21 Given the ability of the resource toreplenishitself,itispossibleforhumanstoharvesttheresourceinawaythatthesizeofthepopulationremainsstationary. This “sustainable” harvest will be possibleonly if each period’s growth is harvested, leaving therest of the stock untouched. “Sustainable” here is

Box7:What are property rights?

Afullsetofpropertyrightsoveranassetentitlestheownerto:a)usetheassetinanymannerthattheownerwishesprovidedthatsuchusedoesnotinterferewithsomeoneelse’spropertyright;b)excludeothersfromtheuseoftheasset;c)deriveincomefromtheasset;d)selltheasset;ande)bequeaththeassettosomeoneoftheowner’schoice(Alstonetal.,2009).

Demsetz(1967)providesoneoftheearliesteconomicanalysesofpropertyrights,explainingwhyitarisesandthe characteristics of different property rights regimes. He argues that it is the presence of externalities,whether positive or negative, which explains why property rights arise. The assignment of property rightsallows economic agents to take these benefits or costs into account. The classic example he gives is thedevelopmentofpropertyrightsamongtheMontagnesIndiansinQuebecandthegrowthofthefurtradeinthelate 17th century. Before the development of the fur trade, there did not exist anything resembling privateownershipinlandamongtheMontagnesIndians.However,followingcommercializationofthefurtrade,therewasincreasingeconomicvalueinbeingabletohuntonlandonwhichfur-bearinganimalslived.Bytheearly18thcentury,theMontagnesIndianshaddevelopedacustomofappropriatingpiecesoflandforeachgrouptohuntexclusively.Thisfurtherdevelopedintoasystemofseasonalallotmentofland.

Theextremesofperfectpropertyrightsandofnopropertyrights(i.e.thetragedyofthecommons)(Hardin,1968)maybetheoreticallyusefulconceptsbutareunlikelytodescribereality.Thestrengthofthepropertyrightsregimeapplyingtoanaturalresourcemaybebetterdescribedaslyingalongacontinuum(i.e.aseriesofintermediatecases).Ostrom(1990),forexample,hasdocumentedthevarietyofinstitutionalarrangementsby which local communities have successfully managed common resources. These arrangements do notinvolvetheextremesofcompleteprivatizationnorfullgovernmentcontrol.CopelandandTaylor(2009)suggestthat one way to think of this continuum is in terms of the difficulty faced by a government or regulator tomonitorandenforcerulesonaccesstothenaturalresource.

Monitoringisimperfectsosomeunauthorizedharvestingoftheresourcewilltakeplace,butitwillbeeffectiveenoughtodetersuchbehaviourinmanyotherinstances.Alstonetal.(2009)takeadifferenttackbyfocusingonthequestionofwhoenforcespropertyrights.Theydistinguishbetweende jurepropertyrightswhichareenforced by the power of the state and de facto property rights which are enforced by the owner of theresourceorinalliancewithagroup,e.g.tribe,community,etc.Itisassumedthatthestatehasthecomparativeadvantageinenforcement,theindividualhastheleastadvantageandthegroup’sabilityliesinbetweenthetwo.Whetherthepropertyrightsregimeisdefactoorde juredependsonhowcrowdedthecommonsbecomefromencroachmentbyothers. If therearefewusersofthecommonresource,rentperuser ishighandtheindividualcandefendhispropertyrightsbyhimself.Butasencroachmentincreases,rentbecomesdissipatedand there are gains from banding together to try to exclude others from the resource or seeking de jureprotectionfromthestate.


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equivalent to what economists refer to as the steadystate equilibrium so the two terms shall be usedinterchangeably.22

The quantity harvested depends on the amount oflabour employed and on the size of the naturalresourcesstock.Themorefishthereareinalake,theeasier it will be to catch fish. Initially, as effort isincreased, so does the amount of the sustainableharvest.However,overtime,increasedeffortresultsin

theamountofsustainableharvesteventuallydeclining.The reason for this decline in productivity is thenegative relationshipbetweeneffortand thestockofthe natural resource arising from the steady statecondition.Thegreater theeffortput in, thesmaller isthe equilibrium stock of natural resources.23 Thesmallertheequilibriumstockoftheresource,themoredifficultitistoharvestorcatchagivenamountoftheresource.Eventually,theimpactofasmallerequilibriumstockoutweighstheimpactofadditionaleffort.

Box8:Rents and open access

Box5hasalreadyexplainedvariousdefinitionsofrent(differential,scarcityandquasi-rent)andhasclarifiedhowrentinthenaturalresourcessectorisbestconceivedasthesumofthedifferentialrent(whenproducingfirmsoperateunderdifferentconditions)andthescarcityrent,whichariseswhentherearerestrictionsonthesupply of a natural resource. In the case of natural resources suffering from open access, since it is notpossibletoexcludeothersfromusingtheresource,rentgoestozerobecauseeffectivelytheresourceisnotscarce.

Asdiscussedabove,thedegreetowhichrentisbeingdissipatedisanimportantindicatorofhowmuchopenaccessisreducingtheefficiencyofharvestinganaturalresource.Privateownershiporgovernmentownershipandregulationoftheresourcerepresentdifferentwaysoftryingtoaddresstheopenaccessproblem.Inbothinstances,accesstotheresourceisbeingrestrictedalthoughpossiblywithdifferentconsiderationsinmind.Inthecaseofprivateownership,andassumingthattheresourceownerhasazerodiscountrate,accesswillberestrictedsoastomaximizetherentthataccruestotheowner(seefullerdiscussionbelow). Inthecaseofgovernmentownership,therestrictionmaywellhavemaximizationofrentasanobjective,butitcouldalsohavesomeotherobjectiveinmind,e.g.biologicalorenvironmentalobjectivesuchasmaximumsustainableyield.

Onepopularmethodforcontrollingoverfishingistheuseofindividualtransferablequotas(ITQs)–permitstoharvestspecificquantitiesoffish.Thetotalallowablecatch(TAC)inafisheryisdeterminedbyaregulator,whomaydetermine this total foragivenyearon thebasisofeconomicorecological considerations.Generally,membersofthefisheryaregrantedpermitstoharvestashareoftheTAC.Sincethesepermitsaretransferable,thecurrentownercansellthepermittoabuyer,whowillthenacquiretherighttoharvestashareoftheTAC.Thesumoftheseshares,convertedintoquantitiesoffish,equalsthetotalallowablecatchsetbytheregulator.Ifthetotalcatchdeterminedbytheregulatorfallssignificantlybelowtheopenaccessoutcome,rentswillbegeneratedandtheITQswillreflectthepresentvalueofthestreamoffuturerents.Ifthetotalallowablecatchis not substantially lower than the open access outcome, the ITQs will not have any value (there is rentdissipation).

ITQshavebeenusedinanumberofOECDcountriesandinformationonthepricesofITQsareavailablefromstudiesthathaveexaminedtheseexperiences.PerhapsthemostdramaticexampleoftherentsgeneratedbymanagingfisheryresourcescomesfromIceland.Arnason(2008)estimatesthatbetween1997and2002,thevalueoffisheryITQsaveragedabout40percentofIceland’sGDPand20percentofthemarketvalueofitsphysicalcapital.OneoftheearlyadoptersoftheITQsystemwasNewZealand.Usingdatacoveringnearly15years, Newell et al. (2002) tested the arbitrage relationship between the rate of return on ITQs and otherfinancialassets.ThereasonfordoingthisisthatifITQswereeffectiveinstrumentsforfisheriesmanagement,theywouldbringarateofreturntoquotaownerscomparablewithotherfinancialassetsintheNewZealandeconomy.Thiswasindeedwhattheyfound:therateofreturnonITQswasclosetotheoverallmarketinterestrateinNewZealand.

Ifitisassumedthatthepriceofthenaturalresourceisunity (one), then the yield curve is also the revenuecurve, i.e. revenue=price timesyield (seeFigure14).The revenue curve shows how total revenue changeswiththeamountoflabourexertedtoharvestthenaturalresource. Suppose that the cost of harvesting thenaturalresourceislinearinefforti.e.C=c*E,wherecistheperunitcostofeffort.Therentorprofitearnedisequal tothedifferencebetweentherevenueandcostcurves,i.e.rentisequaltotheverticaldistancebetweentherevenuecurveandthelinearcost.

Withopenaccess,eachworkerwill try tocapture therentfromharvestingthenaturalresource.Therewillbeentryofworkersuntilthelastunitofeffortjustexhauststhe remaining rent.This takesplaceatE*where totalrevenue equals total cost. In contrast, if ownership ofthefishstockswereassignedtoasinglefisherman,andif he did not discount the future, he would have aninterestinmaximizingthesustainablerentthatcouldbeearned from his ownership of the resource. Thefisherman would limit access to the lake’s fish stocksandwouldallowotherfishermentoexpendeffortonly


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(b) Patternsoftrade

Whatistheimpactofinternationaltradeonopenaccessnatural resources?To illustrate theprinciplesatwork,imagine two countries that have equal amounts of anatural resource, the same technologiesand identicaltastes,butdifferwithrespecttopropertyrights.Accessto the stock of the natural resource is perfectlycontrolledinthefirstcountry,butthereisopenaccesstothenaturalresourceinthesecondcountry.Inautarky,itcanbesupposedthatthesecondcountrywillharvesta larger quantity of the natural resource – and at arelatively lower price – than the first country. Whentradeisopenedup,thesecondcountrywillthenexportthenaturalresourcetothefirstcountry.

In standard trade theory, countries that have identicaltastes,endowmentsandtechnologieshavenoreasontotrade.However, introducingdifferences inthestrengthofeachcountry’sproperty rightscreates thebasis fortrade despite the countries being identical in all otherrespects.Thismeansthatapropertyrightsregimecanserveasade factobasisofcomparativeadvantage–aconclusionthatissupportedbytheeconomicliteratureonthesubject–(Chichilnisky,1994;BranderandTaylor1997;BranderandTaylor,1998;Karpetal.,2000).

Nowsupposethatthecountriesalsodifferinthesizeoftheirnatural resourcestocks,andthat it is thecountrywith strong property rights that has relatively moreabundant stocks. One would have assumed that free

until marginal revenue equalled marginal cost. ThiswouldbeatthelevelE**wheretheslopeoftherevenuecurveequalstheslopeofthecostlineandsustainablerent is at a maximum. At this economically efficientpoint,theequilibriumstockwillbelargerthanthestockcorresponding to open access. An alternative way tointerpret the level of effortE** is that itwouldbe theallocationofeffortinthenaturalresourcessectorthatwouldhavebeenchosenbyaregulatorwhoseobjectiveistomaximizesocialwelfare.

On the other hand, if the owner of the fish stockdiscounts future revenues, he would choose a steadystatestockthatislowerthanthatwhichmaximizesrent.HecanachievethisbyallowinggreaterfishingthanE**,reducing the existing fish stock, but yielding himadditional revenues.Thisadditional revenuewill comeattheexpenseoflowerfuturerentsbecausethesteadystate stock will be lower. But a positive discount ratemeans this reduction in future rent is valued less,providing the incentive for the resource owner toharvestmoreoftheexistingstock.Asthediscountrategoestoinfinity,theownerwillharvesteverythingtodayeven if it means the resource is extinguished. This isbecause an infinite discount rate means the resourceownerattachesnovalueatalltofuturerevenues.24

Althoughthesimplemodelservesasausefulillustrationof the problems related to open access resources, inthe real world the management of such resources istypicallyfarmorecomplex.Forexample,manyfisheriesoperateundervariousgovernment-imposedregulations,such as gear limitations, area closures, or length-of-season restrictions. This had led some economists todevelop an alternative framework, “regulated openaccess”, for analysing resource systems whereauthorities are able to effectively enforce regulationsbutwhereotherwisethereisfreeentrybyfishermensothat rents are fully dissipated (Homans and Wilen,1997). The system lies somewhere between openaccess, at one extreme, and rent-maximization, at theother. It may well be that most fisheries in developedcountriesfallwithinthisintermediatecategory.Sinceitisassumedthattheregulationiseffective,thestockofthe natural resource will be greater in long runequilibriumunderthissystemthan intheopenaccesscase,andconsequently, thequantityoffishharvestedwill be greater since the fishery is more productive.SimulationsbyHomansandWilen(1997)fortheNorthPacific Halibut fishery25 – which they consider anexampleofaregulatedopenaccesssystem–suggestthatthedifferenceinstockandharvestlevelsoverthepureopenaccessmodelcanbedramatic.

Figure14:open access and optimal harvest of natural resources

A

Dollars

Labour effort

E* – open access level of effortE** – level of effort that maximizes rentAB – rent

Revenue

Total cost

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trade would result in the natural resource-abundantcountry exporting that good to the natural resource-scarce country. However, the relative strength of thecountries’propertyrightsregimesexertsanindependentinfluenceoncomparativeadvantageandhenceon thepatternof trade. It ispossible for thecountrywhich islessabundantinthenaturalresourcetoendupexportingthat good to the natural resource abundant country iftheformer’spropertyrightsregimeissufficientlyweak.

Ofcourse,otherthingshavetobetakenintoaccount.Inparticular,predictionsabout thepatternsof tradealsodepend on the structure of demand. Building on thework of Brander and Taylor, Emami and Johnston(2000)showthatifthedemandforthenaturalresourceis relatively high, then the country with the weakproperty rights can end up importing rather thanexportingthenaturalresource(seeBox9).Thiscanbeexplainedas follows: thecombinationofhighdemandfortheresourcegoodandpoorpropertyrightsleadstomassivedepletionof thestock,even inautarky,andasmallharvest.Thus, if trade isopenedup, thecountrywithpoorpropertyrightswillrapidlydepleteitsresourcestockandendupimportingthegood.

(c) Gainsfromtrade

Whenanaturalresourcesectorsuffersfromopenaccessor common pool problems, in principle the basic “gainsfrom trade” result is undermined. While the long-run(steadystate)welfareoftheresource-importingcountryrises with trade, it declines for the resource-exportingcountry.Intuitively,thisisbecausefreetradeexacerbatestheexploitationofthenaturalresourcesothatthesteady

statestockislowerthaninautarky(BranderandTaylor,1998).Sincethesizeofthenaturalresourcestockaffectslabourproductivity, the lower steady state stockmeansthattheeconomywillbeharvestingasmallerquantityofthenaturalresourcegoodunderfreetrade.Analternativewayofunderstandingwhythesizeofthenaturalresourcestockaffectswelfareisthatitrepresentscapital(inthiscase,naturalcapital)fromwhichtheeconomycanearnastream of future returns. The smaller the stock of thenatural resource, thesmaller futureharvestswillbe.Anexampleofhowthecombinationofopentradeandweakpropertyrightscanleadtothenearextinctionofanaturalresourceandawelfare lossfor theexporter is the19thcentury slaughter of the Great Plains buffalo (Taylor,2007).

However, introducing additional features to thissimplifiedmodelcanproduceaverydifferentresult. Ifthedemandforanaturalresourceisrelativelyhigh,thestandardgains from tradewill result (seeBox9), andfreetradewill increasethewelfareofboththenaturalresourceimportingandexportingcountries(EmamiandJohnston,2000).Asexplainedearlier,withhighdemandfor the natural resource, the country with strongproperty rights exports the natural resource to thecountrywithweakpropertyrights.Thisimpliesthatthelong-run stock of the natural resource in the countrywithpoorpropertyrightswillactuallybehigherthaninautarkyandsoleadtoawelfaregain.Thewelfareofthecountrywithstrongpropertyrightsalsorisessince itsnatural resource sector is being optimally managed(priceequalsmarginalcost).Inotherwords,eveninthecaseofopenaccessresources,freetradecanincreasethewelfareofbothcountries.

Box9:the role of demand

To better explain the role of demand, an example of two countries that produce manufactured goods andharvestanaturalresourcewithlabourisconsidered.Theonlydifferencebetweenthesetwocountriesistheirpropertyrightsregimes.Thestructureofdemandisidenticalinbothcountries.Weshallexaminetheresultingpatternof tradewhen theymove fromautarky to free trade.The resultdemonstrates thateven though thepropertyrightsregimeiscriticalindeterminingthepatternoftradeandwhethertherearewelfaregainsfromtrade,theintensityofdemandforthenaturalresourcecandramaticallyaltertheresults.

Onecountryhassuchweakpropertyrightsthatitsuffersfromopenaccess.Underopenaccess,therelativesupplycurve(Sw)fortheresourceisbackwardbending,whichmeansthatasthepriceofthenaturalresourcerises,theamountofharvestdeclines.Thereasonforthisunconventionalshapeofthesupplycurveisthatasthepriceofthenaturalresourcerises,morelabourisdrawntothesector.Thisincreaseineffortreducesthestockofthenaturalresource,leadingtoadeclineintheproductivityofworkers.Ifthepricerisessufficientlyhighenough,thelossinproductivitycanleadtoadecreaseinsteadofanincreaseintotalharvest,despitethegreateramountoflabourbeingusedinthesector.

Forthecountrywithstrongpropertyrights,therelativesupplycurvefortheresourcewillhavetheconventionalshape–itispositivelysloped(Ss).Itcorrespondstothemarginalcostcurveofharvestingtheresource.Thisisbecausetheresourceowner(ortheregulator)allowsharvestingofthenaturalresourceonlyuptothepointwheremarginalrevenueequalsmarginalcost. Ineffect,theexternalityposedbytheindividualharvestertoothers(hisharvestingdecreasestheopportunityofotherstocatchmore)isinternalizedbythesingleresourceownerortheregulator.Inresourcesystemswithopenaccess,thesupplycurveincontrastcorrespondstotheaveragecostcurvesinceeffortinharvestingcontinuesuntiltotalrevenueequalstotalcost.

Whathappenswhenboth thesecountriesopenup to trade?Twoscenarioscanarise. In thefirst scenario,relativedemandfortheresourceislow,sothedemandcurveintersectstheupwardslopingpartofboththesecountries’supplycurves.Intheotherscenario,demandfortheresourceishigh,sotherelativedemandcurveintersectsthebackwardbendingpartofthesupplycurveofthecountrywithweakpropertyrights.Thepatternandthebenefitsfromtradewilldifferdependingonthesituation.


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Relativedemandfortheresourceislow(seeFigureA)

Relativedemand inboth countries isgivenbyDL. In this case, theautarkypriceof the countrywithweakproperty rights isgivenbyPwwithproductionatOE.Theautarkypriceof thecountrywithstrongpropertyrightsisgivenbyPswithproductionatOB.Whentradeisopenedup,thefreetradepriceP*willsettlebetweenthe twoautarkyprices.Thecountrywithweakproperty rightswillexport thenatural resource to theothercountry,depletingthestockofitsresource.Itsexport(CF)isgivenbythehorizontaldistanceattheworldpricebetweenthedemandcurveanditssupplycurve.Correspondingly,theimport(AC)ofthecountrywithstrongpropertyrightsisequaltothedistancebetweenthedemandcurveanditssupplycurve.Asaconsequenceofthispatternoftrade,thecountrywithpoorpropertyrightswillhavealowersteadystatenaturalresourcestockandsufferfromawelfareloss.Thecountrywithstrongpropertyrightswillreapthestandardgainsfromtradesinceitsuffersfromnodomesticdistortion.

FigureA:Free trade when relative demand for a natural resource is low

A BO C E F

SW SS

DL

P* – world price

AC – imports ofnatural resourcegood by countrywith strong property rights

CF – exports ofnatural resourcegood by countrywith weak property rights

Harvest/Manufactures

Relativeprice

PS

PW

P*

Relativedemandfortheresourceishigh(seeFigureB)

Ifinautarkythereisahighrelativedemandforthenaturalresource(DH)inbothcountries,thecountrywithlittle or no property rights will be operating in the backward bending portion of its supply curve, with theaveragecostofharvestingtheresourcebeingveryhigh.Highdemandleadstoalotoflabourbeingdevotedtothe natural resource sector, causing the stock to run very low. Since the size of the stock affects labourproductivity,harvestwillbelowinthecountrywithpoorpropertyrights.TheautarkypriceofthecountrywithweakpropertyrightswillbePwandproductionwillbeatOA.Inthecountrywithstrongpropertyrights,theautarkypriceisatPsandproductionatOE.Whentradeisopenedup,thecountrywithstrongpropertyrightsendsupexportingthenaturalresource(equaltoCF)tothecountrywithpoorpropertyrights.Thecountrywithstrongpropertyrightswillreapthestandardgainsfromtradesinceitsuffersfromnodomesticdistortioninthefirstplace.Thefreetradestockofnaturalresourceswillbehigherinthecountrywithpoorpropertyrightsthanunderautarkyanditwillalsogainfromtrade.

FigureB:Free trade when relative demand for a natural resource is high

SWSS

DH

P* – world price

BC – imports ofnatural resourcegood by countrywith weak propertyrights

CF – exports ofnatural resourcegood by countrywith strong propertyrights

A BO C E F Harvest/Manufactures

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(d) Factorprices

AccordingtotheHeckscher-Ohlintheory,internationaltradeleadstofactorpriceequalization.Inotherwords,trade in goods substitutes for the movement of thefactors of production. In the literature on trade inrenewable natural resources, the only factors ofproductionarelabourandthestockofnaturalresources.Inalmostallcases,therealwageoflabouristhesameacrosscountries.

However, factorprices in thenatural resourcessectorwillnotbeequalized.Takethesimplestexamplewherecountriesdifferonlyinpropertyrights.Inautarky,therewill be rents from optimally using the resource in thecountrywithstrongpropertyrights,whereastherentswill be driven down to zero in the country withoutpropertyrights.Withfreetrade,rentswillcontinuetobezerointhecountrywithopenaccesswhetheritendsupimportingorexportingthenaturalresource.Ifitstradepartnerhasstrongerpropertyrights,rentswillcontinuetobeearnedunderfreetrade.Theresultobtainedhere– factor prices are not equalized by trade – should,perhaps,notcomeasasurprisegiventheexistenceofamarketfailure.

(e) Howtradeaffectspropertyrights

Whataboutthecasewherethepropertyrightsregimeisendogenous– i.e.where theabilityofgovernments toenforcepropertyrightsisaffectedbytradeopeningandrelativeprices(CopelandandTaylor,2009)?Theanswerto this question is a mixed one. The strength of apropertyrightsregimedependsonavarietyoffactors,includingtheabilitytomonitorandpreventcheating;thecapacity to extract or harvest a resource; and theeconomicincentivetodepletearesource.Anincreaseinresourcepricesasaresultoffreetradecanaffecteachofthesefactorsindifferentways.Forexample,ahigherprice could increase incentives to extract more of aresource, but it could also reduce incentives to poachtheresourceifthepenaltyistoloseaccesstothenowmore valuable resource forever. Higher prices couldencourage investments in resource extraction, but itcould also enhance regulatory capacity, thus assistingthetransitiontomoreeffectiveresourcemanagement.

Theendogeneityof theproperty rights regimemeansthat there could be a variety of outcomes from tradeopening. In particular, resource-exporting countriescouldgainfromfreetrade.Forsomeeconomies,wheretheautarkicpriceoftheresourcewaslowtostartwith,theincreaseinrelativepricearisingfromfreetradecanlead to a transition to more effective management.Theseeconomieshaveenoughenforcementcapabilitysothatrentsaregeneratedatasufficientlyhighpriceforthenaturalresource.However,forsomeeconomies,it remainstruethat themovetofreetradewill leadtoresource depletion and real welfare losses. Theseeconomiesarethosewherethenaturalresourceisslowto replenish itself, where economic agents have astrong preference for current consumption, over-harvesting is hard to detect, harvesting technology is

moreproductive,andwherea largenumberofagentshaveaccesstotheresource.

Highlightingthevarietyofpossibleoutcomes,Copelandand Taylor (2009) offer several examples where theopening of trade opportunities sometimes facilitatedbettermanagementofnaturalresourcesandothertimesled to over-exploitation. Oneexample of success is thegeoduck26fisheryinBritishColumbia,whichwasinitiallyopen access but became a well-managed fishery withindividualharvestquotasprimarily inresponsetoexportdemand from Asia. One example of over-exploitation isthe North American buffalo that was discussed earlier.AnotherexampletheyciteistheopeningoftheEstoniancoastal fishery to exporting in the 1990s, whichcontributedtotherapiddepletionoffishstocks.

(f) Changesinpopulationandtechnology

Doespopulationgrowthleadautomaticallytoincreasedpressure to circumvent property rights and exploitnatural resources? A study of forest cover in India byFoster and Rosenzweig (2003) provides empiricalevidence that population and economic growth can,undercertaincircumstances,actuallyencouragebetterresource management. Population growth has twocontradictory effects: on the one hand, it raisesharvesting capacity, which in turn makes it easier todepleteagivenresource.Ontheotherhand,itincreasesthedomesticpriceofresourceproducts,duetogrowthindemand,generatingrentsinthatsectorandreinforcingincentivestobetterregulateandmanagetheresource.

The key question is whether growing demand for theresource increases its price sufficiently to offset theincreased capacity to harvest the resource. If thecountryexperiencingpopulationgrowthissmallrelativeto global markets and cannot influence the worldresourceprice,thenthenegativerelationshipbetweenpopulationsizeandresourcestockwillhold.However,ifthecountryislargerelativetotheworldeconomy–sothatthepopulationincreasetriggersariseinthepriceof the natural resource – it is possible for resourcemanagementtoimprove.

Similarly,technologicalimprovementscanhaveamixedimpactonpropertyrightsenforcementandthedepletionof natural resources. For example, improvements insurveillancetechnologycanassistfishermentobetterdetect the location of fish, thereby putting morepressure on the resource; but they can also helpregulatorstobetterdetectillegalfishing,whichleadstobetterresourcemanagement.

4. Naturalresourcesandtheproblemofenvironmentalexternalities

Sofar,twokindsofnegativeeffectshavebeenanalysedin the context of exhaustible resources. The first isstrictlyrelatedtothefactthatsomenaturalresourcesarefinite.Insuchasituation,ifeitheraproducingfirmor


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asocialplannerdoesnot take this issue intoaccountwhendecidinghowmuchtoextracttoday,consumptionlevelsabovethesocialoptimuminthepresentwillimplyless consumption for future generations. The secondeffect is related to the open access problem ofexhaustibleresources,wherebythecollectiveownershipofaresourcemightresultinitsoveruseanddepletion.

The use of exhaustible resources in production andconsumptionactivitiesleadstoathirdkindofnegativeeffect that manifests itself through changes to theenvironment.Inthecaseoffossilfuels,forinstance,oilor coal extraction causes acidification of the sea andproduces atmospheric CO2. In the case of forestry,excessive timber extraction leads to loss of naturalhabitat for plant and animal species due to decliningsoilfertilityandchangesinclimateandbiogeochemicalcycles.Finally, inthecaseoffisheries,over-harvestingone species might have a negative impact on otherspeciesandhenceonbiodiversity.

Thisthirdtypeofeffect–whicheconomistsdefineasenvironmental externalities– is the focusof this sub-section.Anexternalityofaneconomicactivityreferstoitsimpactonapartythatisnotdirectlyinvolvedinsuchactivity.Inthiscase,pricesdonotreflectthefullcostsorbenefitsinproductionorconsumptionofaproductorservice. An example of environmental externalities isthefactthatoilproducersmaynottakeintoaccountthefull costs that theextractionanduseof this resourceimposes (on future, as well as present, generations)throughpollution.This implies that thepriceofoilwillnotreflectitsenvironmentalimpact.Killingdolphinsasa by-product of catching tuna is another example ofenvironmental externalities. In this case, the marketpriceof tunadoesnot take intoaccount thenegativeeffectofthetunafisheryonbiodiversity.

This sub-section discusses the characteristics andtypes of environmental externalities generated by theextraction and use of exhaustible resources. Theeffects of trade on the environment will also beillustrated taking into account the interaction thatenvironmental effects have with the other types ofexternalitiespreviouslydiscussedinthisreport.27

(a) Fossilfuels,pollutionandtrade

To understand the effects of the use of energyresources on the environment, it is useful to classifyenvironmental externalities into two categories: flowand stock externalities.28 Flow externalities representthe environmental damage caused by the currentextractionoruseof the resource.Anexampleofflowexternalities is air pollution generated by the use ofenergy in oil extraction or mining. Stock externalitiesarise when environmental damage is a function ofcumulative emissions. Examples of stock externalitiesincludetheatmosphericaccumulationofcarbondioxideand its effect on the global climate, contamination ofground water from oil or coal extraction that is onlyslowly reversed by natural processes, and irreversibledamagetonaturallandscapesthroughstripmining.

A general conclusion of existing studies29 onenvironmentalexternalitiesisthatpostponingresourceextractiontoday–andthusreducingpollutingemissions– isoptimal. In thecaseofflowexternalities, the factthat resources are exhaustible partially offsets theproblem. Following the Hotelling rule,30 a pattern ofrisingpricesreflecting the increasingscarcityoffinitefossil fuels implicitly addresses part or all of theenvironmentaldamagegeneratedby theextractionofsuch resources. In addition, the market may react toprice increases by developing alternative energytechnologies which can also help to address theenvironmentaldamagecausedbythecurrentextractionoruseoftheresource.

Inthecaseofstockexternalities,themarket-determinedrateofdepletionistoohigh.StudiessuchasBabuetal.(1997) show that a modified Hotelling rule, whichincorporates costs related to damage flowing fromaccumulating pollution stocks, would slow downextraction today and hence would ensure a socialoptimum. While under the original Hotelling rule, anadditionalunitofresourcewillbeconservedonlyiftheresourcepricerisesataratefasterthanthemarketrateof interest, under this new modified framework, anadditionalunitofresourcewouldbeconservedevenifthe equilibrium resource price rises at a slower pacethantheinterestrate.Thiscomesfromthefactthatanincrease in the consumption of resources today willincrease the pollution stock tomorrow. In eachsubsequentperiod therewillbeanadditionaldisutility(i.e. welfare loss) caused by higher pollution stockcreatedinearlierperiods.Inthesecases,anadditionalunit of resource would be conserved in the currentperiodtopreventhigherdisutilityinfutureperiodsevenif the resource price is rising more slowly than themarketrateofinterest.

What is the relationship between trade in fossil fuelsandenvironmentalexternalities?Thisquestionispartlyansweredbyaseriesofmodelsinwhichthepresenceoftradeacrosscountriesisimplicitlytakenintoaccount.In these studies, it is assumed that resources areconsumedbyallcountries,bothexportersandimporters–arealisticassumptiongiventhatmostnon-renewableenergy resources are unevenly distributedgeographically (see Section B.1) and the globaleconomyishighlydependentonfossilfuels.31Therefore,ifthedemandofnon-producercountriescoincideswiththeir imports, the relationship between trade andenvironmental externalities will depend on a series offactors,discussedbelow,directlyaffectingtheoptimalrateofextractionoruseoftheresources.

Some of these factors may accelerate resourceconsumption compared with the social optimum andexacerbate the negative impact on the environmentrelateddirectlytotheextractionanduseoffossilfuels.First, the presence of asymmetric information onresourceavailabilitycanencouragebothexportersandimporters to behave strategically. For example,importers might have an incentive to announce thedevelopment of a backstop technology32 to increasetheir bargaining power and to drive down resource


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costs,whileexportersmightbetemptedtoexaggerateexisting resource stocks in order to delay thedevelopment of substitutes.33 In both situations, theextraction rateof the resourcewill be faster than thesocial optimal rate, and environmental damage willincrease. In the first case, exporters will react to thethreatofabackstoptechnologybyraisingtheextractionrate and lowering the resource price. In the secondcase,exporterswillfollowafasterextractionpaththatisconsistentwiththeover-estimatedresourcestock,inorder to lend credibility to their exaggerated claimsabouttheextentofresourcereserves.

Second, cost-reducing technologies tend to have anegative impactonresourceprices,bydecreasingthemarginalcostsofresourceextraction.Theoveralleffectontherateofextractionoftheresourcesandhenceonenvironmental damage will depend on the trade-offbetween technological progress and resourceexhaustibility.StudiesbyAndréandSmulders (2004),Farzin (1992) and Krautkraemer (1985) show that, intheshortrun,decreasingcostsduetoatechnologicaladvance tend to off-set increasing costs due to therisinginsituvalueoftheresource.Pricedecreaseswillleadtohigherconsumption,andthusmorepollution.Inthe longrun,however, therisingvalueof theresourcestillinthegroundwilloutweighthedecreasingcostsofextraction, so prices will rise again. The pollutiongeneratedintheshortrunwillpersistovertime,soevenif the rate of resource extraction decreases in thefuture,thenegativeeffectontheenvironmentremains.

Third, the discovery of new resources can have aneffect similar to that of cost-reducing technologies.34Becausenewdiscoveriesgenerallymeanthatresourceextractionbecomeseasierandcheaper,pricesdeclineandconsumptionincreases–withnegativeeffectsontheenvironment. In the long run, however, explorationopportunities will run into diminishing returns andresourcepriceswill riseagain.35 Theoverall effect ontheenvironmentwilldependonhowlongtheadditionalpollutiongeneratedovertheshorttermremains.

Lastly, as already discussed in Section C.4, propertyrights incertainnaturalresourcesectorsarenotwell-defined or protected. Consider a situation in whichconcessionrightstoexploitaresourcearegrantedbyagovernment that iseithercorruptorweak.Facedwithpoliticaluncertainty,resourceownershaveanincentiveto speed up resource extraction above the socialoptimumlevel inorderto lockinprofits–whichwill inturnbedetrimentaltotheenvironment.

Ontheotherhand,newtechnologiescanalsohelp tolimit thenegative impacton theenvironment–as, forexample, when carbon-reducing technology limits theCO2 generated by resource extraction (Welsh andStähler,1990;Tahvonen,1997;Grimaudetal.,2009).Inotherwords,ifanabatementtechnologyexists,andifits cost is sufficiently low, then the optimal rate ofresource extraction speeds up and environmentalconstraints are partially loosened – reducing thesacrifice of the current generation. In addition, if theabatement technology helps to reduce the impact on

theenvironmentcausedbycumulativeemissions,thenin the long run total emissions will also decrease. Anabatement technology can be thought as a “cleaner”waytoextractpollutingresources.36

Therolefortradeinthisprocessisworthhighlighting.When energy resources are highly substitutable andwhentheirpollutioncontentcanbeclearlydifferentiated,trademighthelptomitigatesomeoftheenvironmentalexternalitiesderivingfromfossilfueluse.Forexample,countriesusingoil or coal as their principal sourceofenergy could switch to imports of natural gas – the“cleanest” fossil fuel in terms of carbon dioxideemissions37 – thereby slowing the accumulation ofpollutantsanddoinglessharmtotheenvironment.

(b) Renewables,biodiversityandtrade

Environmentalexternalitiescanalsobetheby-productsofharvestingnaturalresourcessuchasfishandforests.Thefollowingdiscussionfocusesoneffectsoftradeinexhaustibleresourcesonbiodiversity.

(i) Habitat destruction and trade

Becausetimberoragriculturalproductionrequirestheuseofland,habitatdestructioncanbeadirectresultofthe expansion of such economic activities. Habitatdestruction is a major cause of declining numbers ofspecies–orreducedbiodiversity–becauseitintensifiesthe competition among species for basic resourcessuchasfoodandwaterandmakestheirsurvivalmoredifficult.38Differentstudies39haveanalysedtheeffectsof trade on production patterns across countries, onhabitat destruction and on biodiversity. The generalconclusionisthattheclassicalgainsfromtradeopeningmaynolongerhold,oncethenegativeimpactrelatedtodecliningbiodiversityistakenintoaccount.40

Tounderstandtheeffectsoftradeinnaturalresourcesonbiodiversity,considertwoidenticalcountries,ahomecountry and a foreign country, which have the samefixedamountoftwotypesofnaturalhabitat,forestandgrassland (Polasky et al., 2004). The number ofdifferent incumbentspecies represents theecologicalproductivity of each type of habitat. In addition, anincreaseinthesizeofthehabitatwillraisethenumberof species. However, marginal ecological productivitydecreaseswithrespecttohabitatsize.41Inotherwords,thebiggertheexistenthabitatthesmallerthenumberof extra species that will be produced by a marginalincreaseinitssize.

Intheabsenceoftrade,bothcountriesproducetimberandgrain.Fortheproductionoftimber,forestlandhasto be converted, whereas the production of grainrequires the conversion of grassland. Once land isconverted to productive use, it can no longer supportnative biological species. If the home country has acomparative advantage in producing timber and theforeign country in producing grain, then opening totrade will lead to an equilibrium in which the homecountry specializes in the production of timber and


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importsgrain.Theoppositewillhappen inthecaseofthe foreign country. In addition, full specialization ofproduction will lead to full specialization in naturalhabitatconservation.Inthehomecountry,forinstance,specializationintimberproductionwillmakethecountryspecialize in the conservation of grassland at theexpense of forests. What then is the impact of tradeopeningonthecountries’biodiversity?

Theeffectof tradeonbiodiversitywilldependon therelationship between the ecological productivities ofeachhabitat.Tobetterunderstandthisresult,considerFigure15wheretheproductivityinproducingspeciesof grassland relative to ecological productivity offorestland(d)inthehomecountryisrepresentedinthehorizontalaxis.LinesAandBillustraterespectivelythelocal biodiversity of the domestic country in autarkyandinfreetrade.Thesetwolinescrosseachotherat

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˜ d > 1 because the marginal ecological production ofeachhabitatispositivebutdecreasinginlandsize.

If both forest and grassland habitat have the sameecological productivity (

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d = 1) and the home countrystarts specializing in the production of timber, thenegativeimpactderivingfromareductioninforestlandwill be greater than the benefit of an increase ingrassland.Tradeintimberproductionwillhaveapositiveimpact on the home country’s biodiversity only if theecological productivity of grassland relative toforestland issufficientlylarge(

€

d > ˜ d )tooffsethabitatdamagecausedbyadecreaseinforestland.

Theimpactoftradeopeningonglobalbiodiversitywilldependonthedegreetowhichspeciesarespecifictoa certain country.42 More precisely, if each species isspecific to each country, the effects of trade onaggregate biodiversity will coincide with those ofcountry-specific biodiversity. If, however, prior toopening up to trade the same species live in allcountries,tradecanbebeneficialevenifbothcountrieshavethesameecologicalproductivity.Inthislastcase,tradeopeningwill leadtoa localdeclineofspecies inthespecializingsectorbutalsotoanincreaseofspecies

intheimportingsector.Sinceeachcountryspecializesin a different product, the overlap of species will bereduced(speciesthatexistedinmultiplecountriesexistnowinonlyonecountry),butworldwidebiodiversitywillincrease.43

(ii) Open access, biological interaction across species and trade

Studieslookingattherelationshipbetweentrade,openaccess problems and biodiversity typically focus onfisheries.44 They suggest that outcomes depend to asignificant extent on the nature of the biologicalrelationshipbetweenthetradedspecies(seeTable6).Theserelationshipscanbeclassifiedintothefollowingthreetypes:apositiveorsymbioticrelationship(wherethestocksofthetwospeciesaremutuallybeneficial);anegative relationship (where the stockof one species[e.g.,fishparasites]reducestheproductivityorsurvivalpossibilities of another species); and an asymmetricrelationship(wherethefirstspeciesservesaspreyforthesecondspecies).

Considerasituationinwhichthereisnotradebetweentwo countries and there is a trans-boundary commonpoolproblem,asbothcountriesfishinthesamewater(Fischer and Mirman, 1996). In addition, assume thatbothcountriescatchandconsumetwotypesofspecies–andhenceareconcernedaboutthebiologicalcross-effectsbetweenthem.Underthisscenario,theproblemof over-harvesting will be mitigated if the biologicalrelationship across species is positive and the rate ofreproduction of one species is higher than the cross-effectbetween the twospecies.Sinceharvesting thefirstspecieswillreducethestockandhence,thetotalconsumptionofthesecondone,thenanoptimalsolutionwillbetoreducethetotalharvestingofthefirstspecies.When the biological relationship between species isnegative,theproblemofover-harvestingismoreacute.Moreprecisely,thefactthatareductioninonespeciesimplies an increase in the stock of the other speciesitselfleadstoover-harvesting.Finally,intheasymmetriccase, there will be even greater harvesting of the

Figure15:Biodiversity, ecological productivity and trade

A(Autarky)

Biodiversity decreases with trade

Biodiversity increases with trade

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predator fish while over-harvesting of its prey will bereduced.

Considernowasituationinwhichthetwocountriescantradeandeachof themspecializes incatchingoneofthespeciesand imports theother (DattaandMirman,1999).Ifcountriestakeinternationalpricesasgiven,45thefactthatacountryisdepletingitsownresourcewillnot be reflected in the other resource’s price. Moreprecisely, agents will not care about the biologicalcross-effect they will produce when harvesting andtherefore, in the presence of a positive biologicalrelationship between species, countries will harvestmorethanwhatwouldbegloballyoptimal.Incontrast,ifthebiologicalrelationshipbetweenspeciesisnegative,there will be under-harvesting. In this case, bothcountries could harvest more because a reduction inonespeciesisbeneficialfortheotherandviceversa.

As the number of countries exploiting each speciesrises and trade increases, there is no clear cutconclusion as to whether the common pool problemworsens or lessens in the presence of biologicalinteractions across species. Whether there is over- orunder-harvesting will depend on a variety of factorssuch as the number of countries, the price effect,consumer preferences and the type of biologicalrelationshipacrossspecies.

5. Thenaturalresourcecurse

A distinctive feature of many natural resourceendowmentsisthattheyarenotwidelydispersedamongcountries,butratheraregeographicallyconcentratedinafewfixedlocations.Thishelpstoexplainwhynaturalresources often represent a disproportionate share ofeconomicproductionandexportsincertaincountries.46Oil-andmineral-richeconomies,forinstance,frequentlyexhibit very high ratios of natural resources tomerchandiseexportsandtoGDP.Itisoftenclaimedthatsuch resource abundance does not always lead tosustained economic growth and development for thecountries concerned, and that in fact it can have theoppositeeffect–aphenomenontermedthe“resourcecurse hypothesis” or the “paradox of plenty”. Thefollowingsectionsurveys the theoreticalandempiricalliteratureonthemechanismsthroughwhichthenaturalresource curse might operate, and tries to draw somebroadconclusionsaboutitsrelevance.

(a) The“Dutchdisease”

Anincreaseinrevenuesfromnaturalresourcescande-industrialize a nation’s economy by raising the real

exchange rate and thus rendering the manufacturingsector less competitive. This tendency towards de-industrializationhasbeencalledthe“Dutchdisease”.47

De-industrializationfollowinganaturalresourcesboomcan be of two types: direct and indirect.48 Direct de-industrialization, or “factor movement effect”, refers tothe shift in production towards the natural resourcessector. In an economy with three sectors, naturalresources,manufacturingandasectorproducingnon-tradedgoods,theboomingnaturalresourcessectorwilltakefactorinputs(includinglabour)awayfromtherestoftheeconomy.Thiscreatesanexcessdemandfornon-tradable goods, thus the relative price of non-tradedgoodsincreases.Iftheeconomyissmall,withthepriceof traded goods determined on world markets, this isequivalenttoanappreciationoftherealexchangerate,whichmakesthemanufacturingsectorlesscompetitive.

Indirect de-industrialization, or the “spending effect”,referstothefactthatadditionalspendingcausedbytheincrease in natural resource revenues results in afurtherappreciationoftherealexchangerate.Namely,the extra revenues originating from the resourceexportsboomraisedomesticincomeaswellasinternaldemandforallgoods.Sincethepriceoftradablesisseton world markets, the additional spending boosts therelative price of non-tradables – resulting in a furtherappreciationoftherealexchangerate.49

Inaneconomymarkedbyperfectcompetitioningoodsandfactormarketsandconstantreturnstoscale(theso-called “neoclassical economy”), the decline in thetradedsectorimpliedbytheDutchdiseaseshouldnotbeviewedasaproblem,letalonea“curse”,becauseitis optimal for countries to specialize in those sectorswheretheyhaveacomparativeadvantage.TheDutchdisease becomes a problem if the shrinkingmanufacturing sector is characterized by positivespilloversontherestoftheeconomy(vanWijnbergen,1984; Sachs and Warner, 1995). Krugman (1987)considers the case in which in the manufacturingsectorproductivityincreaseswithproduction(learning-by-doing). In the short run, a natural resource boomraisesthewageintheboominghomeeconomy,relativeto the foreign economy. Because the home country’sincreaseinrelativewageworsensthecompetitivenessof the manufacturing sector, the production of somegoods inthissectormovesabroad,andthebenefitoflearning-by-doing is foregone. The home country’srelativeproductivityworsensinthosegoodsovertime,so when the resource boom ends, market share andrelativewagewillhavebeenpermanentlyreduced(seeBox10foramoreanalyticaldiscussionoftheKrugmanmodel).

Table6:The effects of trade on the common access problem (small country case)

SPECIESRELATIONSHIP AUTARKY TRADE

Positiverelationshipbetweenspecies Under-harvesting Over-harvesting

Negativerelationshipbetweenspecies Over-harvesting Under-harvesting

Prey-PredatorrelationshipPredator:Over-harvestingPrey: Under-harvesting

Predator:Under-harvestingPrey:Over-harvesting


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If the manufacturing traded sector is the “engine” ofeconomicgrowth(Lewis,1954)foracountry,becauseofproductionexternalities, increasing returns toscaleorlearningbydoing,acontractioninitsoutputinducedbytheDutchdiseaseislikelytoreduceitsgrowthrate,withpermanentnegativeeffectsonincomelevels.ThispointisillustratedinFigure16.50Supposetherearetwoidenticaleconomies,bothinitiallygrowingatthesamerate, so that GDP proceeds along the straight linebetween point O and point A. Now suppose that oneeconomyhasaresourcesboomattimeT0sothatGDPimmediately rises to point B. In the short run, thiseconomy will have a higher GDP. However, if theresourcesboomcausesadeclineingrowthbecauseitdrags resources from the growth-producing sector,GDPintheboomingeconomywilleventuallyfallbelowGDP in the other economy. Even if the boomingeconomyeventuallyrevertstoitspre-boomgrowthrate,itmaystillhaveapermanentlylowerlevelofGDPthantheothereconomy.51

TheDutchdisease,anditspotentialnegativeeffectsonincomelevels,canoccuronlyiftherealexchangerateappreciates following a natural resources boom.

However,theremightbeanumberofreasonswhytherealexchangeratedepreciates,ratherthanappreciates,under such circumstances. For instance, the realexchangeratemightdepreciateifthenon-tradedsectoris more capital intensive than the traded sector, andlabourisneededtosecurethewindfallnaturalresourcerevenues(CordenandNeary,1982).52Realdepreciationcanalsooccurinthepresenceoflearning-by-doingandinter-sectoral learning spillovers. In a modelincorporatingthesetwofeatures,Torvik(2001)showsthataforeignexchangegiftresultsinarealexchangeratedepreciation in the long run,due toashift in thesteady-state relative productivity between the tradedand the non-traded sector. In contrast to standardmodelsoftheDutchdisease,productionandproductivityinbothsectorsmaygoupordown.

Allowingforrealexchangeratedepreciationrevertsthetheoretical underpinning of the Dutch disease. Sincewelackempiricalstudiesonwhethernaturalresourcebooms are associated with real exchange rateappreciation or depreciation, the link between suchboomsandde-industrializationbecomesmoretenuous.Themacroeconomicsituationisalsolikelytoaffectthe

Box10:Krugman’s model of Dutch disease with learning-by-doing

Krugman(1987)extendstheRicardianmodelwithacontinuumofgoodsofDornbuschetal.(1977),byassumingthatunitlabourrequirementsevolveovertime.Respectively,theunitlabourrequirementinsectorzattimetisequaltoa(z,t)athomeandtoa*(z,t)abroad.Asshowninthefigurebelow,thescheduleofrelativeproductivitiesA(z,t)=a(z,t)/a*(z,t) isastepfunction,becausespecializationpatternsbecomeentrenchedwith learning-by-doing.Theequilibrium in themodel isobtainedat the intersectionbetweentherelativeproductivity functionA(z,t)and thebalanceofpaymentsequilibriumcondition,BP.Anatural resourcesboom,modelledasapuretransferTfromtheforeigncountrytothehomecountry,shiftstheBPcurveinward(equilibriummovesfromAtoB).Therefore,intheshortrun,thetransfer(resourcesboom)raisestherelativewageintherecipienthomecountry(boomingeconomy)fromω0toω1.Thehomecountryhasacomparativeadvantageintradables,z,aslongasitsrelativewageislowerthanitsrelativeproductivity.Withalargetransfer,theincreaseinωisenoughtooffsetthehomecountry’sproductivityadvantage,thussomesectorsmoveabroadandzfallsfromz0toz1.

Becauseof foregone learning-by-doing, the shift inproduction from thehome to the foreigncountry impliesdecliningrelativehomeproductivityinthesectorsbetweenz0andz1overtime.Graphically,theA(z,t)functiondevelopsamiddlestep,whichdeepensovertime(downward-pointingarrowsinthefigure).Inthelongrun,ifthetransferisofsufficientlylongduration,thosesectorsremainabroadevenwhenthetransferends.Inotherwords,manufacturingexportsectors–hitbythelossofcompetitivenessinducedbyanaturalresourcesboom–areunabletorecoverwhennaturalresourcesrunout.Long-runwelfareinthehomecountryispermanentlydepressed.

B

Z1 Z0

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BP'

Home's relative wage

Number of non-tradedsectors at Home

Step productivityfunction due towell-establishedspecialization patterns


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likelihood of de-industrialization following a naturalresourcesboom. Iftheeconomyisatfullemployment,theaggregate response toaspendingboomnormallyruns into diminishing returns, reducing the value ofspending. This is because spending translates intohigher prices and crowds out alternative activities,rather than drawing more resources into use. Higherdomesticpricesshowupasa realappreciationof thecurrency,thebasisforDutchdiseaseeffects.However,if there are under-employed resources (“Keynesianeconomy”), this crowding-out effect need notmaterialize. In this case, extrademandcanbemetbydrawing under-employed resources into use. Due tomultipliereffects,thefinalincreaseinincomeislargerthan the increase in demand. Income will continue toriseuntiltheincreaseinincomeequalstheextraforeignexchange supplied by the windfall divided by themarginalpropensitytoimport(Collieretal.,2009).53

The theoreticalpredictionsof theDutchdiseasehavebeen tested both in simulations and econometricanalyses, which indicate that the phenomenon isempiricallyrelevant.Severalstudieshavemeasuredthenet effect of expansion in the energy sector on theoutputofothertradablesectors.Inasimulationmodelof a multi-sector open economy, Bruno and Sachs(1982) show that this effect is negative, with its sizedependingongovernmentbudgetpolicies concerningthe redistribution of oil-tax revenues to the privatesector.Otherstudiesuseaneconometricapproachtoexamine the impact of energy booms on themanufacturing sector. In a cross-country studycomprising Norway, the Netherlands, and the UnitedKingdom, Hutchison (1994) finds little empiricalevidencesupportingtheDutchdiseasehypothesisthataboomingenergysectorwilldrawresourcesoutofthemanufacturing sectors (Norway being the onlyexception, and the adverse effects were short-term).However, Brunstad and Dyrstad (1992) explain thatHutchison’s analysis is most likely to capture effectscomingthroughthespendingchannel.InastudyusingNorwegiandata,theyfindthatmanufacturingindustrieshave been affected by the energy boom through theresources movement effect rather than through thespendingeffect.54

Other studies have looked at the effects of resourceabundanceonthegrowthofthemanufacturingsector,using data from many countries. In a cross-section of52countries,SachsandWarner(1995)showevidencethat resource-intensive economies did indeed haveslowergrowth inmanufacturingexports, after holdingconstant the initial share of manufacturing exports intotal exports.55 Themost direct test ofDutchdiseaseeffectsisprovidedbythegravitymodelofStijns(2003),whoestimatestheimpactofanaturalresourcesboomon real manufacturing exports. The author finds theDutch disease hypothesis to be empirically relevant.Theprice-ledenergyboomtendstosystematicallyhurtenergy exporters’ real manufacturing trade. A 1 percent increase inacountry’snetenergyexportsanda1 per cent increase in the world energy price areassociated with a reduction in the energy exportingcountry’s real manufacturing trade of 0.47 per centand0.08percent,respectively.

(b) Weakeningofinstitutions

Itwouldseemthattheresourcecurseoperatesinsomepoliticalcontexts,butnotinothers.Andthatitisstronglyassociated with certain natural resource sectors, butleavesothers largely immune. Inattempting toexplainthesedifferences,theoriesstressingpoliticaleconomyconsiderations, such as rent-seeking, have gainedprominence(DeaconandMueller,2004).

Institutions,suchaslegalsystems,havebeenshowntobe crucial determinants of growth and development(Acemoglu et al. (2001) and Rodrik et al. (2004)).Resource dominance will therefore have an indirecteffect on economic growth through institutions –beyondanydirecteffectthroughde-industrialization.Itcan either hamper growth in the presence of weakinstitutions, or it can itself contribute to institutionalweakening.

First,resourceabundancehamperseconomicgrowthinthe presence of weak institutions, such as poorlydefined property rights, poorly functioning legalsystems,weakruleoflawandautocracy.Forinstance,BulteandDamania(2008)claimthatunderautocratic

Figure16:A permanent reduction in GDP following a resource boom

GDP

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leadership,policiesareguidedbythedesiretoextractbribesfromfirmsratherthanbywelfareconsiderations.56Whenaresourcesboomoccurs,thevalueofgovernmentsupport for the resources sector increases, therebyraisingthe incentivestobribethe incumbent.Sectoralsupport policies become more biased towards theresourcesindustryattheexpenseofmanufacturing.Ifthe latter sector benefits from network effects andotherspillovers,thefactthatit isreceivinglessthanasocialoptimumlevelofsupportworkstothedetrimentofeconomicgrowth.

Second, when natural resource booms occur, theremightbeatendencyforinstitutionstoweakenbecauseof rent-seeking. On the demand side, agents have anincentive to engage in rent-seeking to appropriatesomeoftheresourceincomeavailableintheeconomy(so-called “voracity effect”, described by Tornell andLane, 1999). On the supply side, a natural resourceboomcanstimulatecorruptionamongbureaucratsandpoliticians who often allocate the rents deriving fromthe exploitation and exportation of natural resources.When agents switch from profit-making economicactivities to rent-seeking activities, it generatesnegativeself-reinforcingeffects thatmore thanoffsettheextraincomefromresourcerevenues,thusloweringsocialwelfare.

In their pioneeringempirical study,SachsandWarner(1995) argue that resource-rich economies generallygrow at a slower pace. Countries with high ratios ofnaturalresourceexportstoGDPin1970werefoundtohave low average annual rates of growth in real GDPover the two subsequent decades.57 This negativecorrelationremainssignificantaftertakingintoaccountothertraditionaldeterminantsofgrowth,suchasinitialincome level, trade openness, investment rates, andinstitutional quality (see also Torvik, 2009). However,thisbroadconclusionhasbeencontestedbyanumberof follow-up studies. For instance, Papyrakis andGerlagh (2004) find that while resource wealth(measuredbytheshareofmineralproductioninGDP)seems to impedeeconomicgrowth, thecoefficientonthis measure of resource abundance becomesinsignificant – and even turns positive – after takingintoaccountcorruption,investment,openness,termsoftradeandschooling.

Sala-i-MartinandSubramanian(2003)useatwo-stageempiricalstrategytodemonstratethatnaturalresourceshave strong, robust and negative effects on long-rungrowth,butonly indirectly via theirdetrimental impacton political and social institutions.58 Once institutionsare taken into account in their growth regressions,natural resources either have little remaining harmfuleffects or even beneficial effects. However, thisconclusion isdisputedbyAlexeevandConrad(2009),who claim that the statistically significant negativecoefficients of the resources (oil) wealth in theinstitutional quality regressions presented in Sala-i-Martin and Subramanian (2003) are largely aconsequenceofthepositivelinkbetweenGDPandoil,ratherthansomesubstantivenegativeinfluenceoftheoilendowmentoninstitutions.

Finally,somestudiestestthehypothesisthatresourceabundancenegatively affectseconomicgrowth in thepresence of growth-adverse institutions, by includinginteraction effects between resource abundance andinstitutionalquality.Mehlumetal.(2006)findapositiveand significant interaction, which implies that incountrieswith institutionsofsufficientquality there isnoresourcecurse.Thisresult,too,hasbeencontestedbyAlexeevandConrad(2009).Theyclaimthatthereisno negative indirect effect of resource abundance onthequalityof institutionswhenpercapitaGDP, ratherthanaveragegrowthratesoveragivenperiodoftime,isused as a dependent variable.59 They conclude thatcountrieswithgood institutions thatwouldhavebeenrichanywaytendtobenefitlessfromthepositiveeffectof natural resources, while countries with weakinstitutionsthatwouldhavebeenpoorintheabsenceofsubstantial natural endowment reap relatively largebenefitsfromtheirnaturalresourceswealth.

(c) Conflict

Themostseveremanifestationoftheresourcecurseisthe onset, or continuation, of civil conflict. Two widelycitedexplanationsofhownaturalresourcesmaycauseconflicts are the so-called “looting” (or “greed”)mechanismandthe“grievance”mechanism(CollierandHoeffler, 2004; Ross, 2004). According to the firstexplanation, primary commodities represent profitableopportunitiesforemergingrebelgroups,whocanraisemoneyeitherbyextractingandsellingthecommoditiesdirectly,orbyextortingmoneyfromotherswhodo.Byenablingnascentrebelorganizationstofundtheirstart-upcosts,natural resources increase theprobabilityofcivilwars. In thegrievancemodel, resourceextractioncreates grievances among the local people who feelthey are being insufficiently compensated for landexpropriation, environmental degradation, inadequatejobopportunities,andthesocialdisruptionscausedbylabourmigration.Thesegrievancesinturn leadtocivilwars.

The link between resource abundance and conflict isparticularlystrongforeasilyappropriable“point-source”naturalresources-thatis,resourcesthatoccurnaturallyindenseconcentrations,suchasoilandminerals,ratherthan forestry which is more diffused throughout theeconomy. These resources induce intensified rent-seeking because revenues and rents are easilyappropriable.60 Moreover, as claimed by Deacon andMueller(2004),countrieswithabundantpointresourceswill tend to evolve governance structures based oncentralized agglomeration of power directed atcontrolling those resources, and their historieswill berepletewithstrugglestoretainthatcontrol.61

Theempiricalliteratureonconflicthasinvestigatedtherole of ethnic divisions in the build up of civil wars(MontalvoandReynal-Querol,2005).Naturalresourcesareoftenunevenlydistributedwithincountries:thinkforinstance of the oil-abundant Niger Delta region inNigeria, or minerals in the Congo’s south-easternKatanga region.Morelli andRohner (2009)developa


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theoretical model where civil conflict arises from theinterconnectionbetweenunevendistributionofnaturalresourceswithinacountryandconflictsofinterestthatassume an ethnic character. Consider that there aretwoethnicgroups,groupjthatcontrolsthegovernmentand group i that is dominated. Groups i and j have toagreeonanyoffourpotentialoutcomes,twopeacefulones(peaceoracceptedsecession)andtwoconflictualones (secessionist or centrist conflict).62 Preferencesover these possible outcomes are essentiallydeterminedbythesurplus-sharingagreement–thatis,theshareoftotalsurplusofnaturalresourcesproductionaccruingtothedisadvantagedgroupi.

Iftherewereonlyoneformofconflict(centristconflict),bargainingandtransfercouldalwaysassurepeace,asthedestructionofwarcreatessomepeacedividendtobe distributed. In the presence of multiple forms ofconflict, however, it is not always possible to find anagreementthatassurespeace,becausetheremightbea war dividend that makes bargaining fail despite theavailability of credible transfers. Bargaining failure ismost likely under two conditions. The first of these iswhentheamountofnaturalresourcesextractedintheregion more densely populated with the dominatedgroup i (denoted r1) is large. The second condition iswhenthewinningprobabilityofgroupiinsecessionistconflict,relativetothewinningprobabilityofgroupiincentristconflict(pS/pC),islarge.Intuitively,forlowr1orpS/pC, secessionist conflict becomes less attractive,andthesituationwouldbesimilartowhenthereisonlyoneformofsalientthreat(i.e.centristconflict).

Theempiricalevidenceregardingnaturalresourcesandcivilconflictismixed,andsometimescontradictory.Onthe one hand, Collier and Hoeffler (2004) find thatcountries relying heavily on exports of primarycommoditiesfacehigherriskofcivilwarthanresource-poor countries, and that this is true for primarycommoditiesofall types– includingoil,minerals, andagricultural goods. On the other hand, subsequentstudieshavechallengedtheclaimthatnaturalresourcesinvite civil conflict. Brunnschweiler and Bulte (2008)findthatcivilwarcreatesdependenceonprimarysectorexports,but the reverse isnot true,and that resourceabundance isassociatedwithareducedprobabilityofwar onset. Others have noticed that the relationbetween natural resource abundance and war onsetdependsonthetypeofnaturalresourcesinvolved.

DeSoysa(2002)andFearonandLaitin(2003)suggestthat resource abundance being associated with agreaterlikelihoodofwaronlyappliestooil.Incontrast,Humphreys(2005)pointsoutthatitisdependenceonagricultural production thatmatters.Usingnewspaperreports of violent skirmishes in 950 Colombianmunicipalities between 1988 and 2005, Dube andVargas (2006) find that violence was negativelycorrelatedwithcoffeepricesinlocationswherealargefraction of land area was under coffee cultivation. Inother words, more violence occurred when coffeeprices were low. The opposite was true for oil: it washigher prices that intensified conflict in areas withproductiveoilwellsorpipelines.63

Thestudiesfocusingonconflictdurationdonotreachconsensus either. Doyle and Sambanis (2000)demonstratethatcivilwarsarehardertoendwhentheyoccur in countries thatdependonprimary commodityexports.However,Collieretal.(2004)showthatprimarycommodities have no influence on the duration ofconflicts. The most solid pattern identified by thisliterature isthat“lootable”commoditiesthatarepronetocontraband,suchasgemstonesanddrugs,arelinkedtothedurationofconflict.Forinstance,Fearon(2004)finds that gems and drugs tend to make wars lastlonger.64

(d) Isthenaturalresourcecurseempiricallyrelevant?

As already noted, the claim that resource-richeconomies generally grow at a slower pace has beenchallenged and qualified in empirical work followingSachsandWarner(1995).Anumberofrecentstudieshavefurtherquestionedthevalidityofpreviousempiricaltestsoftheresourcecursehypothesis,basedondoubtsaboutthemeasuresofresourceabundance,thefailuretotakeintoaccountadditionalvariablesthatarelinkedwithresourceabundanceincross-countryregressionsand the failure to assess the impact of resourcedepletionoverthesampleperiod.

Thefirstcritiqueconcernshowsensitive the resourcecurse is to the measurement of resource abundance.LedermanandMaloney(2007)usenetnaturalresourceexports per worker to measure resource abundance,finding that it has a positive effect on growth. Anynegative impact on growth relates to the high exportconcentration that is typical of resource exporters.Rambaldi et al. (2006) and Brunnschweiler and Bulte(2008),ontheotherhand,argueinfavourofalternativemeasures of resource abundance to replace thecommonly used output- and export-related variableswhicharepronetoendogeneityproblemsandcanleadto biased estimates. Endogeneity is an econometricproblemthatmayemerge, forexample,becausethereisatwo-wayrelationshipbetweenacountry’seconomicgrowthanditsnaturalresourceexports.Theysuggest,respectively,using(non-renewable)resourcerentspercapita and total natural capital, or mineral resourceassets, in US dollars per capita. With such measures,thenegativerelationshipbetweenresourceabundanceandeconomicgrowthno longerholds.Rambaldietal.(2006)donotfindeitherdirectorindirectevidenceofaresourcecurse.BrunnschweilerandBulte(2008)showthat resource abundance is significantly associatedwithbotheconomicgrowthandinstitutionalqualitybut,contrary to the predictions of the resource cursehypothesis,greaterresourceabundanceleadstobetterinstitutionsandfastergrowth.65

The second critique concerns the issue of omittedvariables. Manzano and Rigobon (2007) find that thenegativeinfluenceofresourceproductiononeconomicgrowthisconfirmedinthecross-sectionalframeworkofSachsandWarner(1995),butthattheresultdisappearsin fixed effects panel regressions. This indicates the


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omission of one or more variables correlated withresource abundance, which biases the regressioncoefficients in thecross-sectionalwork.ManzanoandRigobon(2007)arguethattheomittedvariableisdebt-to-GNP ratio, which is positively correlated withresource abundance. When debt-to-GNP ratio isincludedinthecross-sectionalestimates,theresourcecurse disappears. The message, as emphasized byDavis (2008), is that a large pre-existing public debtand inappropriate risk management, rather thanresourceabundance,aretheproblem.

Finally,Davis (2006)andAlexeevandConrad (2009)notice that, even if the existing empirical literature iscorrect,itispossiblethatalargeresourceendowmentresults in high growth rates in the early stages ofextraction and slower growth rates as depletion setsin.66 Davis (2006) shows that after taking changes inthelevelofresourceproductionoverthesampleperiodintoaccount,theresourcecursedisappears:economieswith shrinking minerals-sector output saw slowergrowth,whilethosewithincreasingmineraloutputgrewfaster. This observation may also help to explain whysomestudiesfindevidenceofa resourcecurse,whileothers do not. Measuring the rate of minerals outputonly at the start of the growth period would tend toidentifymineralproducingcountriesthataresubjecttodepletion, not those that are subject to slow growth.

Likewise,measuringtherateofmineralsoutputattheend of the period would tend to identify as mineralproducing countries those whose mineral output hasgrownoverthesampleperiod.This iswhypapersthatmeasuremineralproduction(orreserves)neartheend of the sample period find no evidence to support theresourcecurse(BrunnschweilerandBulte(2008)isanexample), while Sachs and Warner (1995) and otherswho measure mineral production at the start of thesampleperiodfindtheopposite.

In order to take into account the effect of resourcedepletion, Alexeev and Conrad (2009) measure long-term growth via GDP per capita levels rather than bycalculating growth rates over a given period of time.Their conclusion is that countries endowed with oilresources tend to have relatively high levels of GDP,suggesting that natural resources enhance long-termgrowth.

Inconclusion,theempiricalliteraturedoesnotreachaconsensus on whether natural resource abundanceleadstoslowerorfastergrowth.Whatdoesseemclearisthattheliteraturehasprogressivelymovedawayfromthe initial consensus on the existence of a “resourcecurse”andtowardsamorebenignviewoftheimpactofnatural resourceabundanceoneconomicgrowth(seeexampleinBox11).

Box11:How Botswana escaped the resource curse

The mineral sector in Botswana – largely dominated by the diamond industry and, to a smaller extent, bycopperandnickelmining–hasbeenamajorgeneratorofeconomicproduction,government revenuesandexportearnings.ThemineralsharesoftotalGDP,governmentrevenuesandexportearningsincreasedfromalmostzeroin1966(yearofthefirstdiamondminediscovery)toaround50percent,60percentand90percent, respectively, in 1989 (Sarraf and Jiwanji, 2001). Mineral development has led to an extraordinaryeconomicrecord.GDPgrewatanannualaverageof13.9percentintheperiod1965-80,11.3percentintheperiod1980-89,and4.75percentintheperiod1990-98(SarrafandJiwanji,2001).

Thereasonunderlyingthecountry’ssuccessisthewayinwhichthemineralboomofthe1970swashandled.Botswanabeatthenaturalresourcescursethankstosoundmacroeconomicpoliciesandprudentmanagementof windfall gains (Modise, 1999). The government essentially decided not to increase public spendingwhenever mineral revenue increased, but to base expenditure levels during boom periods on longer-termexpectations of export earnings. This is relatively unusual behaviour in a booming economy, where thetendencyistoover-spendwhentimesaregood(seeSectionD.5).Instead,anyexcessrevenuewasusedtoaccumulateforeignexchangereserves,andbuildupgovernmentsavingsandbudgetsurpluses.Theseweredrawn on in leaner years, thus avoiding drastic expenditure cuts and/or surges in public borrowing andexternaldebtwhenexportreceiptsstartedtodecline.Suchpolicyconductwasastrongstabilizingforce;ithelped reduce inflationarypressures,keephealthypublicfinances,andset theeconomyonasustainablegrowthpath.

Botswana also escaped the “Dutch disease” thanks to the accumulation of international reserves, whichsterilized the monetary impact of the mineral export surge and prevented the national currency fromstrengthening.Thiscontroloverthenominalexchangerateallowedothertradablegoods(namelymanufacturers)tomaintaincompetitivenessonworldmarkets, andhenceencouragedeconomicdiversification.Preservingjobs(orpromotingthecreationofnewones)innon-mineralsectors,includingservices,provedhighlybeneficial,giventhatthelabourrequirementsofthemineralsectorarelimitedbythecapital-intensivenatureofminingoperations(SarrafandJiwanji,2001).Therefore,thankstoacombinationofmineralwealthandhigh-qualitypoliticalinstitutionsandmacroeconomicmanagement,Botswanaachievedoutputandemploymentgrowth.


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6. Naturalresourcesandpricevolatility

SectionB.1(e)notedthatanimportantcharacteristicofnatural resources is their price volatility over certainperiods of time. In the past, these price swings wereprincipally supply-driven, often linked to geopoliticalevents–anexamplebeing theoilpriceshocksof theearly and late 1970s. More recently, demand-drivenfactors,suchastherapidincomegrowthofkeyemergingmarkets, have also influenced resource prices (Kilian,2009b). This is particularly true for the most recentcommodity boom – one of the largest and most long-lastinginhistory,coveringabroadrangeofcommodities–wherenosingleandstraightforwardcauseexistsfor

thepriceaccelerationandsubsequentdecline.Thisisanimportantdevelopment,sincetheeconomicimplicationsof volatility may differ depending on the underlyingfactorsdrivingthesuddenswingsincommodityprices.Box12discussestheaboveargumentforthecaseofoil.

From2003toearly2008,thepricesofawiderangeofcommoditiesrosesharplyandoverasustainedperiodoftime.Bymid-2008,energypriceswere320percenthigherindollartermsthaninJanuary2003,andminingproductswere296percenthigher.ByNovember2008,however, all commodity prices were falling, with thedollarpriceofcrudeoilhavingfallenmorethan60percent(WorldBank,2009).Thisconsiderablevolatilityincommodity prices can be seen in Figure 17 whichdepicts price trends for major commodity groups.

Figure17: Real prices of selected commodities, Jan. 2000-Aug. 09 (IndexAverageofYear2000=100)

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Note: PricesaredeflatedbyworldCPI,averageofyear2000=100.Inthisdatabase,thecategoryof“metals”includesmineralssuchasironore.Source: IMF,InternationalFinancialStatistics.

Box12:economic implications of the changing nature of oil price shocks

ThelargeincreasesinthepriceofoiltriggeredbytheArab-Israeliwarin1973,andtheIranianrevolutionof1979,respectively,havebeenconventionallyassociatedwithlowgrowth,highunemploymentandhighinflationinmost industrializedeconomies.Since the late1990s,however, theglobaleconomyhasexperienced twoperiodsofoilpricevolatilityofamagnitudecomparablewiththoseofthe1970sbut,incontrastwiththelatterepisodes,GDPgrowthandinflationhaveremainedrelativelystableinmuchoftheindustrializedworld.

Ithasbeenargued that improvements inmonetarypolicy, the lackofconcurrentadverseshocks,asmallershareofoilinproductionandmoreflexiblelabourmarketsallplayedanimportantroleindeterminingthemildeffectsoninflationandeconomicactivityoftherecentincreaseinthepriceofoil(BlanchardandGali,2007).However,theliteraturehasnotfoundaconsensusonthispoint.

EdelsteinandKilian(2009)andKilianandLewis(2009)arguethatthereisnocompellingevidencethattheevolutionoftheshareofenergyinconsumerexpendituresorinvalueadded,adeclineinthevolatilityormagnitudeofenergypriceshocks,reducedreal-wagerigidities,orimprovedmonetarypolicyresponsescanexplainthedecliningimportanceofoilpricevolatility.Apossibleexplanationofthisphenomenonthathasbeenadvancedrelatestochangesinthenatureoftheoilpricefluctuations.Forinstance,therecentsurgeinthepriceofoildidnotcauseamajorrecessionevenafteryearsofrisingoilpricespartlybecause,unlikeinthepast,muchofthat increasewasdrivenbyunexpectedstrongglobaldemandforindustrialcommodities(Hamilton,2009a).67Suchglobaldemandshockshavebothastimulatingandanadverseeffectoneconomicgrowth,withthelatterworkingthroughhigheroilandcommodityprices.EmpiricalestimatesfortheUSeconomysuggestthat,intheshortrun,thepositiveeffectsarestrongenoughtosustaingrowth,asglobalcommoditypricesareslowtorespondandtheworldeconomyisbooming.USrealGDPgraduallydeclinessubsequently,asenergyprice increasesgainmomentumandtheeconomicstimulusfromhigherglobaldemandweakens(Kilian,2009c).Amorecompletediscussiononthecausesofrecentcommoditypricevolatilityisprovidedbelow.


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Figure 18 depicts a similar boom and bust cyclefor different energy commodities, the categorycharacterizedby thehighestprice volatility. Figure19does the same for a metal commodity and contraststhiswiththemarketsforplywood(forestryproduct)andfish. The dramatic acceleration of prices from 2006onwards for a range of commodities created thesuspicion that, in addition to fundamental economicfactors,priceswerebeingpushedupbya“speculativebubble”(TalleyandMeyer,2008).

Thissub-sectionreviewspossibleexplanationsfor theobserved commodity price volatility in recent times,starting with the controversial debate on the role of“speculators” (i.e. non-traditional investors betting onpricemovementswithnointerestinphysicallyacquiringtheunderlyingcommodity)indrivingprices.Thereafter,theroleoffundamentaleconomicfactorsinexplainingthe recent period of commodity price volatility will be

discussed. The sub-section concludes with a briefreview of some of the consequences of commoditypricevolatilityinbothimportingandexportingcountries.

(a) Speculationincommoditymarkets

(i) Speculation: definition

“Speculation”isoftenreferredtoastheassumptionoftheriskoflossinreturnfortheuncertainpossibilityofareward (Robles et al., 2009). It usually entails thepurchaseofanassetforresaleratherthanforuse,orthe temporary sale of a borrowed asset with theintention of repurchase at a later date in the hope ofmakingaprofitfromapricechangeinthe interveningperiod. Inotherwords,speculatorscanbeonthelongorshortsideofatransaction,wheretheformerreferstothepurchaseofanassetwiththeexpectationthatitwillriseinvalueandthelatterimpliesthesaleofaborrowed

Figure19:Real prices of nickel, plywood and fish, Jan. 2000-July 09 (Index,AverageofYear2000=100)

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Figure18: Real prices of energy commodities: oil, natural gas and coal, Jan. 2000-Aug. 09 (Index,AverageofYear2000=100)

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asset with the expectation that it will fall in value.Speculation may be driven by expectations of futuredemand and supply, which represent marketfundamentals, or by self-fulfilling expectations thatresultinaspeculativebubble.

(ii) Speculation: theory

Inaseminalarticle,Fama(1970)presentedthecaseforthe“EfficientMarketHypothesis”(EMH),whicharguesthat prices are always consistent with marketfundamentals. The underlying logic is that, assumingrational expectations and perfect information (e.g. inthe stock market), prices fully reflect all knowninformation, thereby implying that tomorrow’s pricechange will reflect only tomorrow’s news and will beindependentofthepricechangestoday.However,newsis,bydefinition,unpredictableand,thus,resultingpricechangesmustalsobeunpredictable.68 In thiscontext,prices may change in response to any news aboutfuture demand or supply because it alters theexpectationsofmarketparticipants.Such“speculative”shockshavetheirroots,however,inmarketfundamentalsand are consistent with the EMH. This is becauseforward-looking expectations of traders areincorporated into their actions today and hence arereflectedincurrentprices.

Over time, the intellectual dominance of the EMH hasdiminished,largelyduetotheemergenceof“behaviouraleconomics”, which argues that psychological elementsmake prices at least partly predictable (DeLong et al.,1990;ShleiferandVishny,1997;AbreuandBrunnermeier,2003; Miller, 1997; Harrison and Kreps, 1978;Scheinkman and Xiong, 2003). It emphasizes a“feedback”, “bandwagon” or “herding” effect that isindicativeofthe“irrationalexuberance”(Shiller,2000)ofmarket participants, which leads to self-fulfillingspeculative bubbles.69 This divergence of prices fromtheir fundamental values may be explained as follows.When prices go up, it generates word-of-mouthenthusiasmandheightensexpectationsforfurtherpriceincreases. In turn, this increases investor demand, andthusgeneratesanother roundofprice increases. If thisfeedbackisnotinterruptedoveraperiodoftime,itcreates

a speculative bubble, in which high expectations forfurtherpriceincreasessupporthighcurrentprices.

Thehighprices,however,areultimatelynotsustainable,since they are high only because of expectations offurtherpriceincreases.Hence,theboomisfollowedbyabust(Stiglitz,1990;Brunnermeier,2008).Anecdotalevidence of such self-fulfilling speculative bubblesincludestheriseandcrashofthestockmarketduringthe1980s, thedot-combubble in the late1990sandexchange rate overshooting in the Republic of KoreaandThailandin1997(FloodandHodrick,1990).

(iii) Speculation in commodity markets: the role of non-traditional investors

Thespeculationdebateincommoditymarketscentreson the role of non-traditional investors, such as indexfunds,70hedgefundsandotherswhohavenointerestinbuying or selling the actual underlying commodity(Masters,2008;Roblesetal.,2009).Sincetheydonottakeormakephysicaldeliveryofthecommodity,thesenon-traditionalinvestorsparticipateinfuturesmarkets,but not in spot markets, where physical delivery of aproduct is immediately arranged. They engage infutures trade to make a profit from the successfulanticipation of price movements (United NationsConference on Trade and Development (UNCTAD),2001). For example, a speculator might purchase afuturescontracttodaybelievingthatonce itexpires insix months, it will sell for a higher price. A speculatorthereby enables hedging by taking on risk that othermarketparticipantswanttoshed(seeBox13).

The increasing importance of these non-traditionalinvestorsincommoditymarketsduringthelastfewyearsis attributable to the following. First, natural resourcecommodities have emerged as a new “asset class”,enablinginvestorstobetterdiversifytheiroverallportfolio.This is because commodities are negatively correlatedwithotherassetclasses,suchasstocksandbonds,butpositively correlated with inflation (Gorton andRouwenhorst,2004).71Second,lownominalinterestratescoupled with inflation can lead to the availability of“cheaper-than-free money”,72 thus enabling investors to

Box 13: Investment in commodity futures: providing insurance

Takingtheexampleofthelivecattlemarket,Greer(2005)describesthecrucialrolethatfuturesinvestorscanplayinprovidingpriceprotection.Assumingthataproducerhascattlecomingtothemarketsixmonthsfromnow,he/shewillmarketthecattleregardlessofprice.Obviously,theproducerwillneedtocoveritsunitcostsofproductionifitwishestostayinbusiness.Ifthereisacommonbelief(assumingmarketsareefficient)thatpricewillbe10percenthigherthancostatthatfuturepointintime,itwouldbeadvantageousfortheproducertolockinthispricewiththeclientatthepresentday.However,theprocessor(buyer)maynotbeamenabletosuchadeal.Ifthebuyersellsacertainamountofprocessedmeattoasteakhouseatmarketprice,thesamepriceprotectionasthecattleproducerisnotneeded.

In fact, if theprocessorwere to lock in the input costwithouthavingaguaranteedsalespriceof thefinalproduct,theprocessorwouldbeincreasingitsbusinessrisk.Bycontrast,afuturesinvestormaybewillingtotakeontheproducerpricerisk,albeitatadiscount(“insurancepremium”).Bythesametoken,theproducerisnowsuretosellitscattlewithabenefit,althoughataslightlylowerpricethancurrentlyexpected.Bothparties“win”(unlikeinfinancialfuturesmarkets,whichareoftenconsideredtobe“zero-sum”),sincetheobjectivesofproducersinthecommodityfuturesmarketaredifferentfrominvestorobjectives.


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Besides the riskpremium, another componentof total return is rather specific to investment in commodityfuturesandhas todowithcommodityconsumption relative to inventories.Stayingwith theexampleabove,assumethatasthedeliverydateapproaches,cattlesupplyturnsouttobelowerthanexpected(e.g.owingtodisease).Theprocessormaywishtoensurethatitscontractualcommitmenttosupplyacertainamountofmeattothesteakhouseishonouredandthatallprocessingcapacitiesarefullyemployed.Itmaythereforedecidetobuytheimminentfuturescontract,whichallowsittotakedeliveryatseveraldesignatedlocationsandtogaincertainty tohavesufficientanimals toprocess.At thesame time, if theanticipatedcattle shortage furtherdrivesupprices,theprocessorcanusetheproceedsfromitslongfuturespositiontohelpfinancethepurchaseofthemoreexpensivecattle.

Hence,thepriceofthenearbyfuturecontractmaygoupifprocessorsarereadytopayforthe“convenience”ofknowingthattheywillhaveenoughcattletoprocess.Dependingonthe“precariousness”andvolatilityofthemarket,this“convenience”yieldcanbeaquiteimportantsourceofreturnstoinvestors(Lewis,2005).Thishasbeenthecase,forinstance,intheoilmarket,whereshuttingdownandrestartingrefinerycapacityiscostlyanddemand is inelastic (i.e. demand is not linked to price fluctuations). In other markets, such as gold, whereinventoriesarelargecomparedwithconsumption,theconvenienceyieldhasbeenlow.However,morerecently,especiallyduetodemandfromemergingeconomies,certainindustrialnon-ferrousmetalshaveseenpositiveconvenienceyieldsduetostrongdeclinesininventories.

increasetheirdemandforcommoditiesthroughasimpleincomeeffect(Larson,2008).Third,thedevelopmentofcommodity-basedinstruments,suchasindexcertificates,hasmadeinvestmentincommoditiesmoreaccessibletoalargernumberofpeople(Greer,2005).

Insum,theincreasingimportanceofcommodity-relatedfinancialmarketscreatesnewopportunitiesaswellaschallenges. On the one hand, financial markets canenhance the liquidity of commodity trades, help pricediscovery(i.e.todeterminemarketprices)andcontributetotheefficientallocationofrisk.Ontheotherhand,thesimultaneousincreaseinpricesandspeculatorinterestin commodity futures markets can potentially magnifythe impact of supply-demand imbalances on prices.Somehavearguedthatthehighactivityofnon-traditionalinvestors has increased price volatility and pushedprices above levels justified by market fundamentals.These arguments, counterarguments and the relatedempiricalevidencearereviewedbelow.

(iv) Role of speculation in the recent commodity price boom and bust

Themainthrustoftheargumentthatcommoditymarketshave been characterized by speculation is that largeamountsofmoneyfromnon-traditionalfinancialinvestors,who take long positions in the futures market (in bothorganized exchanges and over-the-counter (OTC)markets), have resulted inasignificantupwardpressureon prices.73 This may be indicative of the “feedback” or“herding”effectmentionedabove,wherebyfuturespricesmayhavebeenhighonlybecausetheseinvestorsbelievedthat prices would be higher at a later date, when“fundamental” factors did not seem to justify suchexpectations,i.e.speculativebubbles.However,itmayalsoreflecttheexpectationsofparticipantsthatarebasedoneconomic fundamentals. For instance, suppose marketsexpect theoccurrenceofanaturaldisasteroracertaingeopoliticaleventwhichwouldadverselyaffectproductioncapacity, creating concernsabout future shortagesof aresource. This could lead to a genuine desire to holdincreasedinventories,therebypushingupprices(Costello,

2008). In this context, Kilian (2009c) argues that Iraq’sinvasionofKuwaitin1990isacaseinpoint.

Kilianarguesthatcrudeoilpricessawasignificantrisein the mid-1990s not merely because of decline inproduction in Iraq and Kuwait, but also because ofconcerns that Iraq might also invade Saudi Arabia,causingamuchlargeroilsupplydisruption.Empirically,itisdifficulttodistinguishbetweenthetwosourcesofspeculation. But given that non-traditional investorsviewcommoditiesasafinancialinvestmentandarenotnecessarily well-acquainted with the workings of thecommoditybusiness, theirbehaviour in thesemarketsmaybeassociatedwitha“herding”effect.

Asevidence,proponentsofthespeculationhypothesishighlight the increased involvement of non-traditionalinvestors in commodity markets. For example,Büyüksahin et al. (2008) report that from 2004 to2008, the market share of financial traders in the oilfuturesmarketincreasedfrom33to50percent,whiletheshareof traditional traders, suchasoil producers,refinersandwholesalers,fellfrom31to15percent.74Inaddition,asshowninFigure20forasampleofadvancedcountries,thenumberofcommoditycontractstradedinOTCmarketsincreasedinthefirsthalfof2008.Inviewofthefactthatthesearelargelyunregulatedmarkets,the argument has been made that this rise in activitymaybeindicativeoftheroleofspeculationintherecentcommoditypricehike(Masters,2008).

The empirical literature examining more specifically therelationship between speculative money flows andcommoditypricesisratherthin.WhileRoblesetal.(2009)showthatsomeindicatorsofspeculativeactivitycanhelpforecast spot price movements, other studies merelypresent anecdotal evidence or simple correlationsbetween futures investment and commodity prices(Masters,2008).Somestudiesseemtoworkundertheassumptionthatspeculatorshaveanundesirableimpactonmarketprices.Forinstance,forarangeofcommoditymarkets, Chevillon and Rifflart (2009), Cifarelli andPaladino (2009) and Sornette et al. (2009) claim thatbecause changes in supply and demand fundamentals


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cannotfullyexplaintherecentdrasticincreaseinprices,largeflowsofmoney,typicallyinlongpositions,musthavepushedcommoditiestoextremelyhighlevels.Thisleadstoanothersectionoftheliteraturewhicharguesthatthebodyof evidencedescribedabove ignores the inherentcomplexityofpricedeterminationincommoditymarketsandisoftennotbasedonrigorousstatisticalmethods.

(v) Not speculation after all?

A range of authors disagree with the proposition that“speculators” played a major role in the recentcommodity boom and bust. First and foremost, it isargued that money flows into futures markets shouldnotbeequatedwithdemandforphysicalcommoditiesbecause futures contracts are settled for cash(Hieronymus, 1977). These are zero-sum markets

where buying by non-traditional investors is “newdemand”justasthecorrespondingsellingbyhedgersis“new supply”. Second, the rigid classification oftraditionalinvestorsasrisk-avoidersandnon-traditionalinvestors as risk-seekers or speculators may notnecessarily be true. This is because many traditionaltraders speculate (Stultz, 1996) and many non-traditionalinvestorssellshortinanticipationofafuturedeclineinequilibriumprices(Frankel,2008).

Third, the participation of financial traders is limited tofutures markets, which consist of purely financialtransactions.Eveniftheirpurchaseofafuturescontractleadstoafuturepriceincrease,itseventualsalenegatestheir existing long position and their account is closed.These financial traders do not take or make physicaldeliveriesandhencedonotparticipateinthespotmarket

Figure20:notional amounts outstanding of otc commodity derivatives, June 1998-June 2009 (Billiondollars)

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Figure21:natural gas – long-short positions by class of investor, June 2006-July 09 (Ratioanddollars)

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Figure22:copper – long-short positions by class of investor, June 2006-Aug. 09 (Ratioanddollars)

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Figure23:united states monthly oil stocks and oil price, Jan. 1986-Aug. 2009 (Tenmillionbarrelsanddollarsperbarrel)

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where long-term equilibrium prices are determined(Smith, 2009; Garbade and Silber, 1983). Speculativetradingmayraisespotpricesonlyifitinducesparticipantsinthephysicalmarkettoholdcommoditiesoffthemarketandbuildupinventories(“hoarding”).

Anecdotalevidencesuggeststhatthecurrentsituationincommoditymarketsisinconsistentwiththeargumentsofa speculative bubble. First, the increase in “long”speculationhasnotbeenexcessivewhencomparedwiththe increase in “short” hedging (Irwin et al., 2009).Second,speculatorshaveoftenbeennet “short”sellersratherthan“long”buyers.Hence,theymayhavedelayedormoderatedthepriceincreases,ratherthaninitiatingoraddingtothem(WorldBank,2009).BoththesefactsarereflectedinFigure21,whichcorrelatestheratiooflong-to-shortpositions,bycategoryofparticipant,topricesfornatural gas at the New York Mercantile Exchange(NYMEX). Itshowsthat, intheearlyhalfof2008,while

prices increased, this ratio was fairly flat for moneymanagers (investment funds). This lack of correlation,however,isnotasevidentincertaincommoditymarkets.Figure22showsthecaseforcopper.

Third,IrwinandGood(2009a)showthatfrom2006to2008,highpriceshavebeenobservedforcommoditieswithnofuturesmarkets.Furthermore,spectacularpriceincreases were concentrated in commodity marketswith little index fundparticipation,whereasmodestorno price increases were seen in markets with thehighestconcentrationof indexfundpositions(Irwinetal.,2009).Fourth,datasuggestthatinventoriesof,forinstance,crudeoilhavestayedrelativelyflatandhavefallen sharply for a range of other commodities from2005 to2008 (Smith,2009;Krugman,2008).Figure23,whichdepictsthecaseofUnitedStatesoilstocks,shows that there is no clear evidence of “hoarding”,especiallywhenpricesincreasedsteeplyin2008.


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Anumberofrecentstudiesuseavarietyofsophisticatedeconometricmethodstomakeamoreformalassessmentoftheroleofspeculationintherecentcommoditypriceboom (Sanders et al., 2004; Sanders et al., 2008;Sandersetal.,2009;SandersandIrwin,2009;Bryantetal.,2006).Forinstance,usingpubliclyavailabledataonpositionsofdifferenttradergroupsintheUnitedStates,Sanders et al. (2008) find that measures of positionchange have a statistically significant effect oncommodityfuturespricesinonlyfiveoutof30cases.Incontrast,reversingthecausalitytestindicatesstatisticalsignificanceinallbutthreecases.

In sum, empirical evidence points towards a range offundamental market factors as the major explanationforthedramaticincreaseincommoditypricesinrecentyears,withlessemphasisonspeculativeforces.Thisisanalysedinthesectiontofollow.

(b) Roleofeconomicfundamentalsinexplainingcommoditypricevolatility

Commoditypricesduringtherecentboommayhavebeenaffectedbyavarietyoffundamentalmarketforcesonthedemand and supply side (Irwin and Good, 2009b;Hamilton,2008;HeadeyandFan,2008).Theseincludebuoyant global economic growth, limits to increasingproduction capacity in the short-run, relative prices ofsubstitutesandgovernmentpolicies.Again,muchoftheliteratureisontheoilmarket,whichwillbeusedonseveraloccasions for illustrative purposes, but is applicable toothernaturalresourcesaswell(Davis,2009).

(i) Demand

Annual increases in the global consumption of majorcommodities from2002to2007were larger than theyhadbeenduring the1980sand1990s (Helblingetal.,2008). Strong income growth in some major emergingeconomies has been a major contributing factor in thisregard (Cheung and Morin, 2007). For example, during

thisperiod,demandfromChina,IndiaandtheMiddleEastaccounted for more than half of the growth in oilconsumptionandChinaaloneaccountedforabout90percentoftheincreaseintheworldconsumptionofcopper(Helblingetal.,2008).The lattermaybeattributabletorapidindustrializationandurbanizationcharacterizedbyahigh metal-intensity of growth in the early stages ofdevelopment(WorldBank,2009).Ontheotherhand,thesharpdecline incommoditypricessincemid-2008maybeexplained, inpart,byacontractionofworlddemandowingtoslowerGDPgrowthduringtherecession.Figure24 reveals an increasing world demand for oil, whichKilian(2009c)arguesisaresultofunexpectedgrowthinemergingAsianeconomiestogetherwithsolidgrowthintheOECD.

Figure 24 shows that while world consumption of oilincreasedfrom1980to2008,worldprovedreservesofthe commodity also increased. A falling consumption-to-proved reserves ratio until the late 1980s impliesthat reserves increased faster than consumption untilthat point in time. Thereafter, the ratio remains aboutconstantastheincreaseinprovedreservesismoreorless in tandem with rising consumption. The lesspronounced increase in proved reserves may beattributabletothetechnologicalchallengesinvolvedinexploiting non-conventional sites such as deep seafieldsoroilsands.

(ii) Limits to increasing supply capacity in the short-run

Despite the steady increase in proved reserves ofenergy commodities such as oil and natural gas,extraction, production and refinery capacity have notfollowedsuit, leadingtoasubduedsupplyresponseintheshort-run,aswitnessedduringtherecentcommodityboom.Oneofthereasonsforthelackofinvestmentinnewcapacitywasthebuild-upofidlecapacityinseveralresourcesectorsduringthe1980sand1990s,whichinturnwasattributabletothefollowing.First,foroil,global


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demand fell sharply following the 1980s oil shock.Second, for oil, metals and minerals, demand amongformerSovietbloccountriesfellbyalmost50percentduringthe1990s,asthesecountriesbegantoallocateresourcesinamoremarket-orientedway(WorldBank,2009;BorenszteinandReinhart,1994).

Giventheabove,excessdemandwasaccommodatedbyarun-downofinventories,andpricesincreasedwhenallidlecapacitywasfinallyabsorbedinthefirsthalfoftheearly 2000s (Helbling et al., 2008). Figure 25 showsthat in the case of oil, for example, refinery capacitydeclined or remained relatively constant from 1980 tothe early 1990s, after which it saw an upward trend.Despite this, we can see that the consumption-to-refineryratioremainedrelativelyconstantfromtheearly1990s to 2006, implying that consumption grew atapproximatelythesamerate.Thisreinforcesasectionofthe literaturewhichargues thathighandsustainedoilprices after 2003 are primarily driven by demand,especiallybecausetheabilitytoincreaseproductionorrefininginthenearfutureislimited(Kilian,2009c).

Higheroilpricesdonotstimulateglobalproduction inthenearfuturebecausetheshort-runpriceelasticityofoil supply is near zero (i.e. oil supply is not veryresponsive to price changes in the short-run) (Kilian,2009b).Atthesametime,inthecaseofoil,thereisnoevidence to suggest that, on the supply side, theOrganization of the Petroleum-Exporting Countries(OPEC) attempted to act as a cartel and hold backproduction from 2004 to 2008 (Smith, 2009; Kilian,2009c).Ontheflipside,highcommoditypricesduringthe boom are likely to have stimulated investment inproduction capacity, thereby alleviating supply-sideconstraints to an extent. Together with contractingworlddemand,thismayhavebeenacontributingfactorforthebustfollowingtheboom.

(iii) Linkages across commodities

Linkages across different commodity markets haveplayed a role in recent price increases. For instance,

higheroilpriceshavehadanimportanteffectonothercommoditiesnotonlythroughthetraditionalcost-pushmechanism, but also through substitution effects, e.g.naturalrubberpriceshaverisenbecauseitssubstituteis petroleum-based synthetic rubber and coal priceshave risen because of utilities switching from moreexpensiveoiltocoalforpowergeneration(Helblingetal.,2008).

Furthermore,highoilpriceshave ledtoasurge intheuseofbio-fuelsasasupplementtotransportationfuels,thereby diverting a significant share of feedstock,especiallycorn,rapeseedandsugarfromfoodsuppliesin major producing countries (Helbling et al., 2008).Thishasnaturallypushedupthepricesofsomemajorfoodcrops.Hence,thisinter-linkagemayexplainpartofthe correlation between energy price and food pricedevelopments,aspresentedinFigure17.Ontheotherhand, the bust which followed the recent boom in oilmarketsmayhavecontributedtotheoveralldeclineincommoditypricesbyreducingthedemandforbio-fuels.In the long-run, the linkagebetweenenergyand foodmarkets may weaken with the development ofalternative sources of energy, e.g. solar power (WorldBank,2009).

(iv) Effective dollar depreciation

SeveralresourcecommoditiesarepricedinUSdollarsandhencemovementsinthedollarexchangeratemayaffect demand and supply. The effective dollardepreciation seen over the past few years has madecommoditieslessexpensiveforconsumersoutsidethedollar area, thereby increasing the demand for thosecommodities(Helblingetal.,2008).Onthesupplyside,the declining profits in local currency for producersoutsidethedollarareahaveputpricepressuresonthesamecommodities(Helblingetal.,2008).

Consider a foreign firm that produces a commoditywhichispricedindollars.Adepreciatingdollarimpliesthat producers will increase prices as they demandmoredollarsfromeachsaleascompensation.Investors

Figure25:World oil refinery capacities, consumption and consumption-to-refinery capacities ratio, 1980-2008 (Capacityandconsumptioninthousandbarrelsperday)

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anticipate this and start putting money into thesecommodities, thereby driving prices higher. Hence, itmay be argued that investors have been pouringresources into the commodities market to protectthemselves against the depreciating dollar. On theflipside,withtheonsetofthefinancialcrisis,thissourceof the commodities boom reversed and possiblycontributed to the sharp price decline in mid-2008. Itwasattributabletoincreasedinvestmentin“less-risky”UStreasurybills,therebyresultinginanappreciationoftheUSdollarvis-à-visthecurrenciesofmostdevelopingcountries.

In a speech in March 2009 on the reform of theinternational monetary system, the Governor of thePeople’s Bank of China proposed a more prominentroleof the IMF’sSpecialDrawingRights(SDR)asaninternational reserve currency (Zhou, 2009). One oftheobjectivesofthisproposalistoaddressthevolatilityof commodity prices denominated in a nationalcurrency (generally US dollars). Specifically, Zhou(2009) argued that promoting the roleof theSDR ininternational trade and commodity pricing couldeffectivelyreducepricefluctuationrelativetoasystemwhere commodities are denominated in a singlenationalcurrency.75

(c) Consequencesofpricevolatilityinimportingandexportingcountries

In view of the dominance of natural resources in theeconomy of many exporters and their strategicimportance in the production of importing countries,commoditypricevolatilityhasoftenbeenofwidespreadpoliticalconcern.Below,theeffectsofvolatilityinbothexportingandimportingcountriesarediscussedinturn.

(i) Effects of volatility on natural resource exporters

Hausmann and Rigobon (2003) show that in aneconomy where an extractive resource (say, oil)represents about 20 per cent of GDP, a shock to theprice of oil has a significant effect on GDP.76 Thisempirical finding is indicative of the fact that pricevolatility has long been considered a problem forexporters thatmainly relyonnatural resourceexportsasasourceofrevenues.Theliteratureattributesthistothe following reasons: risk-averse consumers, fiscalimplications, and volatility as a channel of the naturalresourcescurse.

Risk-averse consumers

If consumers are risk-averse, volatility may have anadverse effect in exporting countries, becauseconsumersarewillingtospendsomeoftheirincomeonhedging against the risk of large swings in resourceprices. Hausmann and Rigobon (2003) hold that thisnegative impact on economic growth is likely to besmall in the absence of further disruptions to theeconomy.77

Fiscal implications

Focusing on oil exporters, Kilian (2009c) notes thatfalling prices can put serious strains on their fiscalbalancesandabilitytoborrowfromabroad.Incontrast,risingpricescantypicallybeaccommodatedeasily,byfinancing imports from the rest of the world andrecycling some of the additional oil revenues into theglobalfinancialsystem.78However,asuddenincreaseinnatural resourceswealthmay inducepolicy-makers toincreasepublicspendinginawaythatisimpossibletofinanceoncethenaturalresourcerevenuesdryup.

For instance,during theepisodesofhighoil prices inthe1970s,banksidentifiedoilproducersascreditworthyborrowers, extending them large loans. These loans,however,financedhigher importsandhigherdomesticconsumption levels,andproved tobeamiscalculationbecauseoilpricesdidnotremainhighforever.Thisledthese oil-rich countries into default, threatening thestability of the international financial system (Kilian,2009c).Similarly,after thediscoveryofnaturalgas intheNetherlandsandtheglobaloilpriceshocksduringthe1970sand1980s,successiveDutchgovernmentsrespondedwithlargepublicspendingincreases.ItthentooktwodecadestoputtheDutchwelfarestateonafinancially sustainable footing again (Van der Ploeg,2006).

Volatility and the natural resources curse

In a framework proposed by Hausmann and Rigobon(2003), volatility arises from an interaction betweenspecialization and financial market imperfections, andcanbeasourceoftheresourcescurse.79Theyconsideraneconomy that is specialized in the resources (non-tradable)sector,whichfullyemploysafixedquantityoflabour. The sector’s supply can be expanded only byincreasing the level of capital per worker. Given fixedlabour, this implies that the productivity of eachadditional unit of capital would be falling. Capital is,however,requiredtogettheinternationalrateofreturn,hence the price of non-tradables must increase. Thiswouldleadtoanappreciationoftherealexchangerate.At the same time, an increase in the price of non-tradables will cause expenditure-switching away fromthe now more expensive non-tradables into tradables,raising the price of tradables. This would lead to adepreciationoftherealexchangerate.

Unlikeadiversifiedeconomywhichwillhaveaconstantreal exchange rate because it can absorb demandshocks with intersectoral reallocation of labour, aspecialized economy will experience a volatile realexchangerate.Inaddition,ifthisspecializedeconomyismarkedbyfinancialmarketimperfections,interestratesare likely to be sensitive to the volatility in the realexchange rate. According to Hausmann and Rigobon(2003),underreasonableassumptionstheinterestrateisboundtogoupasthevolatilityoftherealexchangerate increases, making it even more difficult for theeconomy to attract investment into the “dynamic”tradable sector. The authors note that this volatility-


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induced channel of the resources curse is morecompatible with GDP and price developmentsexperienced in certain resource-rich economies thancompetingexplanations,suchastheDutchdiseaseorrent-seekingapproachesdiscussedearlier.

There is a vast literature on the negative effects ofvolatility (in commodity prices, terms of trade,unanticipatedoutputgrowthorgovernment spending)on growth performance.80 A recent study (Van derPloegandPoelhekke,2009)testsforthedirecteffectsof natural resource abundance on economic growthanditsindirecteffectsthroughvolatilityofunanticipatedoutput growth.81 The authors find that the resourcecurseexistsonlyforcountriesaffectedbyhighvolatility.Althoughthe levelof resourceabundancemayhaveapositive direct effect on growth, this effect can beswampedbytheindirectnegativeeffectresultingfromvolatility. Therefore, natural resourcesabundancemaybeacurseforcountriesaffectedbyhighvolatility(e.g.ZambiaandsomeotherAfricancountries),butaboonforthoselessaffected(e.g.NorwayandtheAsianTigereconomies). In light of these results, a reduction ofvolatility may be desirable from the point of view ofresourceexporters.

(ii) Effects of volatility on natural resource importers

Price volatility is as important a concern for naturalresource importers as it is for exporters. This can, inprinciple, be the case for any commodity imported inlargequantities,andhasespeciallybeen thecase foroil,duetoitseminentroleasaninputinproductioninvirtuallyeverysector.Sincethe1970s,andatleastuntilrecently,macroeconomistshaveviewedchangesinthereal price of oil as an important source of economicfluctuations (so-called “business cycle”), as well asa paradigm of a global shock, likely to negativelyaffectmanyimportingeconomiessimultaneously.82Thefollowing is an analysis of the various transmissionmechanisms of real oil price shocks on oil-importingeconomies, and how their relative magnitude hasevolvedovertime.

Supply-side channel

Anincreaseintherealpriceofoilfromthepointofviewofanoil-importingeconomy isa terms-of-tradeshock(i.e. an increase in the price of imports relative toexports).Suchterms-of-tradeshockstraditionallyhavebeen thought tomatter for theoil-importingeconomythrough their effectsonproductiondecisions,withoilbeing treated as an intermediate input in domesticproduction. A widely addressed but still unresolvedissueiswhether,andtowhatextent,oilpricechangescan explain real GDP fluctuations, based on thisintermediateinputcostorsupplychannel.Somearguethatoilpricefluctuationsarenotamajordeterminantofthe business cycle (e.g. Backus and Crucini, 2000)while others argue that oil price shocks exert majoreffects on real GDP (e.g. Rotemberg and Woodford,1996;AtkesonandKehoe,1999;Finn,2000).However,

thelatterstudiesdonotappeartohavemuchempiricalsupport.

Demand-side channel

According to another branch of the literature, a keymechanism whereby oil price fluctuations affect theeconomy is through a reduction in consumers’ andfirms’ spending. This view is consistent with evidencefrom recent surveys (Hamilton, 2009b) and industrysources(LeeandNi,2002).Energypricechangeshavedirecteffectsonprivateexpenditure.83Theeffectsonconsumption and investment expenditures all imply areduction in aggregate demand in response tounanticipatedenergypriceincreases.Recentempiricalevidence confirms the predominance of such demandeffectsoverthesupply-sidechannel.84

Monetary-policy channel

Monetarypolicyisanotherchannelthatmayamplifytheeffectsofoilpricefluctuationsontherealeconomy.Acentral bank, when faced with potential or actualinflationarypressurestriggeredbyoilpriceshocks,mayrespondbyraisinginterestrates,therebyexacerbatingthe drop in real output associated with rising energyprices.Theextenttowhichmonetarypolicycontributestothedropinrealoutputfollowingariseinthepriceofoil has been estimated using a range of econometricmodels (Bernankeetal.,1997;HamiltonandHerrera,2004; Leduc and Sill, 2004; Carlstrom and Fuerst,2006). However, the various estimates obtained fromthesestudiesaresensitivetomodelspecification,andthusthereliabilityofresultsremainsquestionable.Inarecentstudy,KilianandLewis(2009)findnoevidencethatmonetarypolicyresponsestooilpriceshockswereto blame for the recessions of the 1970s and early1980s.

(d) Summaryandpolicylinkages

This sub-section has presented the causes andconsequences of price volatility in natural resources,focussing particularly on the most recent commodityboomandbust.

Commoditypricechangesareinfluencedbyamultitudeof factors that work simultaneously. Economicfundamentals, such as a levelling out of productioncapacities, linkages across commodities, effectivedollardepreciationandstrongdemandfromemergingeconomies, are important factors in explaining therecent commodities boom. Similarly, marketfundamentalssuchasslowerincomegrowthduetotherecent financial crisis and the build-up of supplycapacityfollowingthelongboomperiodareimportantfactors in explaining the sharp decline in commoditypricesinmid-2008.Intheshort-run,thissharpdeclinemay also have been attributable to forward-lookingexpectationsofslowergrowthasunderlyingsupplyanddemand conditions are unlikely to have changedinstantaneously. In the long-run, the extent to whichdemand slows down and supply catches up with


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demand will depend on population growth, globaleconomicgrowth,tradepolicies,technologicalchange,andotherfactorssuchasclimatechange(WorldBank,2009).

Fromtherecentcommodityboomandbustcycle,ithasalso become clear that excessive price volatility inenergy and other essential natural resources cangenerate important transfers of income within andbetween countries. Impacts have been particularlylarge among poor urban populations and in countrieswith fewer domestic alternatives to those energy andfood items whose prices increased the most (WorldBank,2009).Withcertaincommoditiesbeingvital forthewell-beingofmanypoorpeoplearoundtheworld,apossiblerole(evenifnotthemaincause)oftradersnotconnectedtothecommoditybusinessinbringingaboutpricevolatilityhasbeenamatterofconcern.Thesocialunrest provoked by these developments led certaincountries to adopt extreme measures, such as exportprohibitions.Despite their immediateprice-dampeningeffect at home, such measures are likely to haveexacerbatedandprolongedhighmarketprices,notablybyreducingincentivestoincreaseproduction.

These events have fed into at least two importantdebatesontheneedforinternationalpolicycoordination.First, there is thequestionof the relationshipbetweenexport measures and global commodity price volatility(seeSectionD).Second,theneedtoaddressproblemsof price volatility at their source has been highlighted,notably by appropriately regulating financial markets.This includes, for instance, a discussion of betterreporting and registration requirements of OTCcommodity derivatives trading in order to improvetransparency and thus pricing efficiency in thesemarkets(Paceetal.,2008).QuestionsontheneedforfurtherinternationalpolicycoordinationandcooperationinthefieldoftradewillbefurtherdiscussedinSectionE.

7. Conclusions

Understanding the effects of trade opening on theexploitation of natural resources requires a dynamicapproachthattakesintoaccountthetrade-offbetweenextraction today and extraction tomorrow. Thissignificantly complicates the economic analysis innatural resource markets. As a result, economicliteratureonnaturalresourcesisfragmentedanddoesnotprovideacomprehensiveaccountoftheeffectsoftrade on the allocation of the resources and on theirlong-runsustainability.

Existing trade theory of natural resources shows thatthetraditionalpredictionthattradereflectscomparativeadvantage also holds when the specific feature thatnaturalresourcesareexhaustibleisexplicitlytakenintoaccount. However, traditional assumptions about theoverall gains from trade hold true only under certainassumptions,suchastheabsenceofexternalitiesandimperfect competition. Such market failures areempiricallyrelevant innaturalresourcesectors,whosemarketshavebeenoftencharacterizedbyvariousforms

ofmarketpower(e.g.cartels),weakpropertyrightsandenvironmental externalities. The dominance of naturalresources in certain countries’ economies and theprevalenceofhighpricevolatilityalsoplacelimitationson traditional expectations regarding the gains fromtrade.

First, when the imperfectly competitive structure ofsome natural resource markets is taken into account,economictheorypredictsthat,ingeneral,resourceswillbedepletedmoreslowlythanunderperfectcompetition.However, the existing literature does not provide anaccountoftheextenttowhichtheseresultsholdtrueinamoregeneralmodeloftrade,withcountriesendowedwith different types of natural resources. Nor does itexplaintheimpactofthismorecomplexglobalmarketonthegainsfromtrade.

Second,whentheopenaccessproblemassociatedwithweakpropertyrightsistakenintoaccount,someofthestandard predictions from the theory of internationaltrade about the patterns of trade and the gains fromtrademaybereversed.Whenpropertyrightsarepoorlydefined,trademayexacerbatetheproblemofresourceover-exploitation and make the resource-exportingcountryworseoff.However,thisisnottheonlypossibleoutcome. The final result will depend on the specificstructure of demand, population pressures andharvestingtechnologies.Moreimportantly,trademaybebeneficialintermsofhelpingtostrengthenacountry’spropertyrightsregime.Oneimportantsituationthattheexisting literature does not address is when naturalresources are shared by two or more countries – asituationwhereopenaccessproblemsaremostacute.

Third,trademaynotnecessarilygenerateoverallgainswhen the negative effects of extraction of naturalresourceson theenvironmentare taken intoaccount.For example, opening up to trade can exacerbate ormitigate the common pool problem depending on therelationshipbetweenspecies(thatis,whetherthestockof twospeciesaremutuallybeneficialorone reducesthesurvivalproductivityoftheother)andonthenumberof countries involved. Although economic models thatstudy the environmental effects of the extraction anduseofnon-renewableresourcesdonotgenerally lookattheimpactoftrade,tradecanhaveapositiveimpactontheenvironmentifitisassociatedtothetransferofemission-reducing technologies or access it allows toalternative(lessenvironmentallydamaging)resources.

Fourth,whenexamining thedominanceof thenaturalresourcessectorincertaineconomies,existingstudiesaredividedonwhetherresourceabundancetranslatesintofasterorslowereconomicgrowth.Somestresstherisks of over-specialization in the resources sector,including de-industrialization (the so-called Dutchdisease), problems associated with excessive pricevolatility,economic instabilityandcivilconflict.Others,however, point to examples of economies that havesuccessfully harnessed resource specialization foreconomic growth, and conclude that other factors,besides resource endowments, are key predictors ofeconomicsuccessorfailure.


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Finally,studiesexaminingthecausesandtheeffectsofhigh price volatility in natural resource markets haveemphasizedthetwo-wayrelationshipbetweenvolatilityand trade. On the one hand, trade allows for a moreefficientdiversificationof inputsources,thusreducingthesensitivityofnaturalresourcepricestocommodity-specificshocks.On theotherhand, volatilitymayalsoadversely influence countries’ openness to trade(triggeringexport-restrictingpolicy responses)orhowthey trade (e.g. organized exchanges versus bilateral

long-term contracts). The literature also stressesthe important role that commodity-based financialinstrumentsmayhaveinprovidingahedgemechanismagainsttheriskofvolatilityorincontributingtosuddenpriceswingsviaherdingeffects.Oneweaknessoftheliteratureisthatitfocusesmainlyonoilpricemovements.Whilesomeofthe insightsmaybeapplicabletoothercommodities,theabsenceofstudiesonthecausesandconsequencesofvolatility inother resourcesectors isregrettable.

Endnotes1 SeeWTO(2008)foradiscussionoftheseextensions.

2 Theopportunitycostofdepletionisalsoknownasuser-cost,insitu-valueorresource-rent.

3 ThelistofextensionsoftheHotellingmodelisnotanexhaustiveone.Forrecentsurveysofthetheoreticalandempiricalliteratureonnon-renewableresourceeconomics,seeLivernois(2009)andKrautkramer(1998).

4 Someunderlyingassumptionsarebuiltintothemodels.First,eachcountryissmallrelativetoworldmarketsandisabletosellandbuyatagivenandconstanttermsoftrade.Second,markets are perfectly competitive. Third, no economic orpolitical distortion exists: a social planner chooses theallocationofresourcestomaximizepresentandfuturesocialwelfare(i.e.thepresentdiscountedvalueoftheflowoffutureutilities).

5 TheonlydeparturefromtheHeckscher-Ohlintheory(underthe“Hybrid”scenario)isthataneconomywouldobviouslyswitchitsspecializationfromonecommoditytoanotherwhentherateofresourceextractiondeclinestozeroanditsinitialcomparativeadvantagedisappears.

6 TheseissueswillbeaddressedinSectionsC.3andC.4.

7 Fixedcostsarethosethatfirmshavetopayforcertaingoodsorservicesindependentlyofhowmuchtheyultimatelyproduce.Astheoveralllevelofoutputrises,thefixedcostsgetdistributedoveralargernumberofunits,and,hence,thefirm’saveragecostsofproductiondecline.

8 Inparticular,theoreticalliteraturehasfollowedtwoapproachestomodelapartiallycartelizedindustrywithacompetitivefringe.SomehavemodelledmarketcompetitionasaCournot-Nashequilibrium,inwhicheachproducerisassumedtochooseoutputtomaximizeitsownprofits,takingasgiventheproductionschedulesoftheothers(Salant,1976;Pindyck,1978;UlphandFolie,1980;LewisandSchmalensee,1980).Othershavetreatedthecartelasadominantfirminaso-calledStackelberggame,inwhichthecartelactsasaleader.Thecompetitivefringewillhavetoacceptthepricefixedbythecartel,butthecartelwillhavetofixthepricetakingintoaccounttheoutputproducedbythecompetitiveproducers(Gilbert,1978;Newbery,1981;Ulph,1982;Grootetal.,1992;Grootetal.,2003).

9 ForadiscussiononthepossibleroleofforwardtradingontheallocationofresourcesunderimperfectcompetitionseeLiskiandMontero(2008).

10 Ateachmomentintimepriceswillexceedmarginalcostsbyamarkup.Thismarkupwilldependon(isthereciprocalof)thepriceelasticityofdemand.Inparticular,themorerigidworlddemand,thehigherthecartelmarkup.

11 InthesimplermodelconsideredbyHotelling,marginalcostsarenegligible.Whentheyarenot,theHotellingruleisintermsofprices(foraperfectlycompetitiveeconomy)andmarginalrevenue(foramonopoly) netofmarginalcosts.

12 Economictheoryhasshownthatintheabsenceofmethodstoenforcelong-termcommitments,timeconsistentequilibriaexistunderasetofverylimitedconditions(Newbery,1981;UlphandFolie,1980;MaskinandNewbery,1990).

13 RecallthattheHecksher-Ohlintheoremonlyexplainsinter-industrytrade,thatistheexchangeofdifferentgoodsbetweentwodifferentcountries.InanHeckscher-Ohlinframeworktradetakesplacebecausecountriesaredifferent,thereforethereisnoreasonforcountriestoexchangeidenticalgoods.

14 Two-waytradeinhorizontallydifferentiatedgoodsisexplainedineconomictheorybytheso-called“new”tradetheory.Inthissetup,increasingreturnstoscalefavoureachcountry’sspecializationinalimitednumberofvarietiesandconsumers’loveofvarietyensuresthatforeignanddomesticvarietiesofacertainproductareconsumed.Themodelassumesthatfirmsoperateundermonopolisticcompetition.But,thisassumptionisthenecessaryconsequenceofincreasingreturnstoscale,ratherthanthedeterminantoftrade.

15 Thisdecisiondependsonwhetherthefirmperceivesitssalesintheforeignmarkettobemoreresponsivetopricereductionsthaninthedomesticmarket.

16 RefertoBlockandTaylor(2005)foranextensivereviewoftheeconomicliteratureonthelinkbetweengrowthandtheenvironment.

17 Moretechnically,iftheelasticityofsubstitutionbetweenthenon-renewableresourceandotherinputsisgreaterthanorequaltoone,andiftheelasticityofoutputwithrespecttothenaturalresourceislowerthantheelasticityofoutputwithrespecttophysicalcapital,thenitispossibletoguaranteeaconstantconsumptionpathwithagrowingpopulation(Stiglitz,1974;Solow,1974b;Solow,1974a).

18 Insomeways,theseresultsparallelthefindingsoftheliteratureonenvironmentalquality:technologicalprogresscanhaveoppositeeffectsontheenvironmentdependingonwhatsectorsareinvolved.Indeed,technologicalchangeingoodsproductionhasa“scaleeffect”thatraisesemissions,whiletechnologicalprogressintheabatementsectordrivesemissionsdownwards,throughapure“techniqueeffect”(TaylorandBrock,2005).

19 It is important to point out one limitation in the literaturereviewedinthissub-section.Thepapersallconsiderasituationwherethenaturalresourcesstockissubjecttoexploitationonlybycitizensofthecountryanddonotconsiderthecircumstancewheretheresourceissharedbytwoormorecountries.However,someof themostsevere formsofopenaccessproblemsaretransboundaryinnature,e.g.fishintheopenoceanthatarenotunder the jurisdiction of any single nation or migratory/straddlingstocks thatpassbetween jurisdictions.Acompletediscussionof transboundaryproblemsassociatedwithnaturalresourcesarefoundinSectionDonregionalagreementsandinSectionEofthisreport.


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20 Unfortunately,thiswillnotalwaysbethecase.First,theenvironmentalistmayhavethesizeofthestockcorrespondingtomaximumsustainableyieldasanobjective.Butthesizeofthenaturalresourcesstockcorrespondingtomaximumrentwillusuallybesmaller.Second,ifthediscountrateishigherthanthemaximumrateofgrowthoftheresource,theeconomicallyefficientdecisionwillbetoextinguishthestock.

21 Thegrowthfunctionis

€

dS(t)dt

= rS(t)(1−S(t)K

) ,where

€

dS(t)dt istherate

ofchangeofthestock;risthemaximumpossiblebiologicalgrowthrateoftheresource;S(t)isthesizeofthecurrentstockwhichdependsontime,andKistheenvironmentalcarryingcapacityoftheresource.Thesolutiontothisfirst-orderdifferentialequationisalogisticfunction.TherelationshipisoftencalledtheSchaefercurveafterfisheriesbiologistSchaefer(1957)whouseditextensivelyinhiswork.

22 Thesteadystateconditionisgivenby:

€

dS(t)dt

= h(E,S) where

€

h(E,S) = E * S isharvest.Harvestdependspositivelyoneffort(E)andthestockofnaturalresource(S).Usingtheserelationshipsandthegrowthrate,itispossibletosolveforthestockasafunctionofeffortandsubstitutetheresultintotheharvestequation,whichfinallygivesharvest(orrevenues)asafunctionofeffortinFigure14.

23 Usingthegrowthfunctionandthesteady-statecondition,itispossibletoshowthatthereisanegativerelationshipbetweenstockandeffortinthesteadystate.

24 Forafullerdiscussionoftheroleofthediscountrate,seechapters2and3ofClark(1990).

25 ThisfisheryislocatedintheNorthwesternPacificwatersofCanadaandtheUnitedStates.

26 GeoduckisaspeciesofverylargesaltwaterclamthatisnativetothenorthwestcoastofCanadaandtheUnitedStates.

27 Thisreportfocusesontradeinnaturalresourcesandhenceitwillnotdealwiththeliteratureanalysingtheeffectoftradeontheenvironmentwhenenvironmentalexternalitiesaremainlygeneratedintheproductionsectors(e.g.industrialpollution).ForadescriptionandanalysisofthisliteratureseeWTO-UNEP(2009).

28 Thisclassificationisalsovalidforrenewableresources.Anexampleofflowexternalitiesisforestharvesting.Thestockexternalityofthisactivityinvolvesdeforestation,soilerosion,speciesextinction,andanincreasedconcentrationofcarbonintheatmosphere.

29 WhilemodelssuchasSinclair(1994),UlphandUlph(1994),Withagen(1994),HoelandKverndokk(1996),KolstadandKrautkraemer(1993),Babuetal.(1997)andWelshandStähler(1990)considertheexternalitiesinapartialequilibriumframework,Stollery(1998),Schou(2000)and(2002),GrimaudandRougé(2005)and(2008),GrothandSchou(2007)andAcemogluetal.(2009)usegeneralequilibriummodels.

30 ForadiscussionoftheHotellingruleseeSectionC.1.

31 Datashowthat87percentoftotalconsumptionofenergyin2000wasrepresentedbyfossilfuelssuchasoil(40percent),coal(25.7percent)andnaturalgas(22percent).SeeKronenberg(2008).

32 TheconceptofbackstoptechnologywasfirstintroducedbyNordhaus(1974)andreferstoanalternativewayofproducingacertainoutputwhichdoesnotrelyonexhaustibleresources.Examplesinthecontextofelectricitygenerationaresolarorwindenergy.

33 OPECcountriesalsohaveanincentivetoboosttheirreserveestimates,becausetheirexportquotasdependonthetotalamountofreservestheyhave.SeeCampbellandLaherrère(1998).

34 SeeforinstanceKrautkramer(1998).

35 Itisassumedthattheprobabilityofanewdiscoveryisdecreasingovertime.

36 Thistechnologicaloptionhascurrentlybecomepromisingforthefossilenergyextractionindustry.Infact,thepossibilityandviabilityofcapturingandsequesteringsomefractionofthecarbondioxidearisingfromfossilfuelcombustionhasbeenrecentlydemonstrated.Thisprocess,oftenlabelledasCO2captureandstorage(CCS),consistsofseparatingthecarbondioxidefromotherfluxgasesduringtheprocessofenergyproduction;oncecaptured,thegasesarethendisposedintovariousreservoirs.

37 Whilethecombustionofnaturalgasreleases117,000poundsperbillionbtuofenergyinput(p/btu)ofcarbondioxide,92p/btuofnitrogenoxidesand1p/btuofsulfurdioxides,burningoilandcoalproducesrespectively164,000and208,000p/btuofcarbondioxide,448and457p/btuofnitrogenoxidesand1,122and2,591p/btuofsulfurdioxides,seeIEA(1998).

38 AccordingtoBarbierandRauscher(1994)andSwallow(1990)habitatdestructionisoneoftheobstaclestothelong-runviabilityofmorethan50percentofthosespeciescurrentlythreatenedbyextinction.

39 BarbierandSchulz(1997),Smuldersetal.(2004)andPolaskyetal.(2004)illustratetheeffectoftradeinnaturalresourcesonbiodiversitythroughtheeffectonnaturalhabitat.Brocketal.(2007)analysetheeffectoftrade-inducedbiologicalinvasiononbiodiversity.

40 Herethediscussionwillberestrictedtoidenticalcountries.Ingeneralhowever,theliteraturetakesintoaccountthefactthatcountriesdifferinsize,productivityandtastesandshowsthatinthesecases,theeffectoftradeopeningonbiodiversityisnotclearandwilldependonmultiplefactorssuchasthesectorsinwhichthecountrieswillspecialize,therelativesizeofthespecieshabitatacrosscountriesordifferencesintheeco-systemsacrosscountries.

41 Thisdescriptionof“species-habitatarea”curvecomesfromMacArthurandWilson(1967)andiswidelyusedinecologicaltheory.

42 SeePolaskyetal.(2004).

43 Thewelfareeffectsoftradedependonhowbiodiversityaffectstheutilityofconsumers.Consider,forexample,thatacertainspeciesprovidesservicestothepopulation.Theimpactoftradeonwelfarewilldependonwhetherthespecieshastobelocatedinthesamecountryoftheconsumer(e.g.speciesofsedges,whichareprimarilyusedtofilterwaterinwetlandecosystems)toprovideapositiveeffectonitsutility,orwhetherthelocationofthespeciesisnotrelevant(e.g.speciessuchaschimpanzeesforwhichpeoplecarethattheworldwidepopulationdoesnotbecomeextinct).

44 However,resultscanbeextendedtoothernaturalresourcessuchasforestryandhuntingofwildanimals.

45 Whencountrieshavemarketpowerandtastesareidenticalthepriceeffectwilloffsetthebiologicalexternalityandanefficientlevelofharvestingwillbereached.

46 Resourceconcentrationisasufficient,butnotnecessaryconditionforconcentratedtradepatterns.The“newtradetheory”allowsforextremeconcentrationevenwhereendowmentsaresimilaracrosscountries.Moreover,evenifitwasthegeographicaldistributionoffactorendowmentsthatledtothesetradepatterns,extremetradeconcentrationcouldbetheresultofgeographicallyconcentratedcapital,orskilledlabour.Forthesakeoftheargumentsputforthinthissection,itsufficestonotethattradeinresourcesisapredominantshareofproductionandexportactivitiesinafewabundantcountries,regardlessoftheunderlyingreason.

47 Thetermwascoinedin1977byThe EconomisttodescribethedeclineofthemanufacturingsectorintheNetherlandsafterthediscoveryofalargenaturalgasfieldin1959.


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48 SeeCordenandNeary(1982)andCorden(1984).

49 Itmightbethecasethatthenaturalresourcesectordoesnotemployafactorthatismobileacrosssectors,andiseffectivelyanenclaveintheeconomy.Inthissituationthereisonlyaspendingeffect,becausethereisnointersectoralreallocationofproductiveresources.

50 Figure16isfromSachsandWarner(1995).

51 Afewcaveatsareinorder.First,theexistenceofexternaleconomiesinthemanufacturingsectorhasnotyetbeendetermined.SachsandWarner(1995)themselvesstatethat“thelinksoftheseDutchDiseaseeffectstothelossofproductionexternalities,however,remainsspeculativeandasyetunproven”.Second,thepresenceofexternaleconomiesjustifiesgovernmentsubsidizationofthegrowth-drivingsector.ThelowergrowthpathBCDofFigure16maythenbeduetogovernmentfailureratherthantotheresourceboomper se.Third,thesamegrowthpathBCDcouldbeduetoresourcedepletion,which–asshownamongothersbyNordhaus(1992)andBoyceandEmery(2006)–isadragoneconomicgrowthwhenitisnotoffsetbytechnologicalprogress.Fourth,AlexeevandConrad(2009),whostudytheeffectofoilabundanceonGDPlevels,havenotdeterminedanyresourceextractingeconomytobeonpartCDofFigure16.TheyareallonpartBC,anditisnotknownwhetherCDwillhappen.

52 BytheRybczynskitheorem,thenon-traded,capitalintensivesectorexpandsandthetradedsectorcontracts;theresultingincreaseintherelativesupplyofnon-tradedgoodscausesadepreciationoftherealexchangerate.OthercasesarediscussedinVanderPloeg(2006).

53 Collieretal.(2009)noticethatthisisatheoreticalpossibility.Inpractice,however,eveninthepresenceofunder-employedresources,supplyresponsesaredampened,producinghigherwagesandahigherpriceofdomesticoutputasawholerelativetothepriceofforeigngoods,thereforearealappreciationofthecurrency.

54 BrunstadandDyrstad(1992)findthatoccupationalgroupsinareasclosetotheboomingsectorwhichdidnotexperiencepositivedemandeffectsexperiencedadecreaseintheirrealwagesasaresultofthepetroleumboom.

55 SachsandWarner(1995)alsoshowthatresource-intensiveeconomieshadahigherratioofoutputofservicestooutputofmanufactures.ThisisconsistentwiththepredictionoftheDutchdiseasemodelsthattheratioofnon-tradedto(non-resource)tradedoutputwillbehigherinresourceintensiveeconomies,totheextentthatservicesproxythenon-tradedsectorandmanufacturesproxythenon-resourcetradedsector.

56 Whenthereismorepoliticalcompetition,ontheotherhand,thegovernmentwouldtrytoretainitspowerandtherebyitmightbeforcedtospendmoreonprovisionofpublicgoodstopromotegrowth.BhattacharyyaandHodler(2009)makeasimilarpointbyarguingthattherelationshipbetweennaturalresourceabundanceandcorruptiondependsonthequalityofthedemocraticinstitutions:resourceabundanceispositivelyassociatedwithcorruptiononlyincountrieswithlownetdemocracyscore.

57 Thereisapotentialendogeneityconcern,namelyreversecausalityfromeconomicgrowthtoresourceendowment.SachsandWarner(1995)arguethattherelationshipisrobusttotheintroductionofanalternativemeasureofnaturalresourceabundance–arablelandareatopopulation–whichisrelativelylessendogenousthantheratioofnaturalresourceexportstoGDP.

58 Fortheperiod1970-98,theyestimateagrowthregressionincludinginstitutionalqualityandnaturalresourceabundanceinthesetofexplanatoryvariables.Institutionsareinstrumentedwithvariablesthatdonotaffectgrowthbetween1970and1998–namelymortalityratesofcolonialsettlers,asinAcemogluetal.(2001)andfractionofthepopulationspeakingEnglishandEuropeanlanguages,asin

HallandJones(1999).Thefirst-stageregressionresultsallowonetotesttheindirecteffectofnaturalresourcesongrowthviatheirimpactoninstitutionalquality.

59 Theinclusionoflevels,ratherthangrowthrates,ofpercapitaGDPisjustifiedbyobservingthatifacountryhasahigherpercapitaGDPthananother,itmusthaveexperiencedfastergrowthoverthelongtermthantheother.

60 Forsimilarreasons,conflictismorelikelyforcapital-intensiveresourcesthanforlabour-intensiveones(DubeandVargas,2006).

61 Sincetheyinducerent-seeking,point-sourceresourceswillalsotendtodeteriorateinstitutions(andthereforegrowth),beyondtheireffectonthelikelihoodofconflict.Thisisconfirmedbytheempiricalliterature.Forinstance,Ishametal.(2003)showthatexportconcentrationinpoint-sourcenaturalresourcesandplantationcropsisstronglylinkedtoweakpublicinstitutionsandgovernanceindicatorswhich,inturn,generatelowercapacitytorespondtoshocksand,ultimately,lowereconomicgrowth–ascomparedwithmorediffusenaturalresourcessuchasagriculturalproducts.Therefore,itseemsthatthetypeofnaturalresourceexportsisacrucialdeterminantofwhethernaturalresourcesbecomeacurseorablessing(forastudybasedonpaneldataeconometricmodeling,seeMurshed,2004).

62 Secessionistconflictreferstowarstartedwiththeaimofsplittinguparegionofthecountryandfoundinganautonomousstate,whilecentristconflictisaboutgainingthecontrolofthewholecountry.

63 FismanandMiguel(2008)proposeshiftingsomeamountofinternationaldevelopmentassistanceawayfromlong-terminvestmentandtowardshort-termemergencyaidforcountrieshard-hitbyacollapseinpricesoflabour-intensivecommoditiessuchascoffee.Thisaidwouldkickinassoonaspricesfall,potentiallyavoidingtheoccurrenceofviolentconflict.

64 SeealsoRoss(2004).

65 AnearliercomparativeanalysisbyDavis(1995)alsofoundnoevidenceofaresourcecurse;theobservedmineraleconomieshaddonewellinanumberofdevelopmentindicatorsagainstnon-mineraleconomiesoverthesameperiod,evenoutperformedtheminsomecases.

66 Arelatedidea,exploredinRodriguezandSachs(1999),isthatwithconstantordecliningresourceproductionandexogenousgrowth,GDPpercapitaasymptoticallyapproachesthatofanon-mineraleconomyfromabove,thusexhibitingnegativegrowthrateduringthetransitiontosteadystate.

67 AccordingtoKilian(2009a),thisinterpretationishowevernotentirelyconsistentwithawiderangeofevidencethatindicatesacentralroleforoildemandshocksinallpreviousoilpriceshockepisodessince1972,excepttheoilpriceshocktriggeredbytheoutbreakoftheIran-IraqWarinlate1980.

68 Thisisassociatedwiththeideaofa“randomwalk”,whichisatermlooselyusedinthefinanceliteraturetocharacterizeapriceserieswhereallsubsequentpricechangesrepresentrandomdeparturesfrompreviousprices.Itimpliesthatexpertsinthefieldcannotsystematicallyoutperformuninformedinvestors,exceptthroughluck.

69 Theideaof“herding”infinancialmarketsmaybetracedbacktoKeynes’sBeautyContestwherehedescribedthebehaviourofmarketparticipantsusingananalogybasedonafictionalnewspapercontest.Hearguedthatinvestorsinequitymarketsanticipatewhataverageopinionexpectsaverageopiniontobe,ratherthanfocusingonthingsfundamentaltothemarket(Keynes,1936).

70 Theseareinvestorswhodistributetheirwealthacrosskeycommodityfuturesaccordingtopopularindices,suchasStandard&Poor’sorGoldmanSachsCommodityIndex.


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71 Commoditiesprovidediversificationtoaninvestmentportfolioforatleasttworeasons.First,commoditiesaresubjecttofactors,suchasweatherconditionsorminers’strikes,thathavelittleornothingtodowithexpectationsaboutstockorbondmarkets.Second,iftherewere,forinstance,widelyheldbeliefsaboutrisinginflation,bondpriceswouldfallasinterestratesriseandstockmarketsmightbenegativelyaffectedaswell.However,sincecommodityinvestmentsreflectexpectationsaboutfurtherpriceincreasesover“real”products,theirpricesshouldbeexpectedtorisealongwithexpectationsabouthigherinflation(Greer,2005).

72 Inotherwords,therealinterestratecouldbenegative.

73 Ithasbeenarguedthatasspeculatorsdrivecommodityfuturespriceshigher,theeffectsarefeltinspotmarketsandtherealeconomy,sincespotmarketparticipantstypicallybasetheirsupplyanddemanddecisions,atleastinpart,onexpectedpricechangesinthefuture(Masters,2008;Hamilton,2008).

74 ‘Swapdealers”whoprovidetrades,whichcatertotheneedsofcommercialentities,accountforthebalance.

75 Thespeechcanbeaccessedat:http://www.pbc.gov.cn/english/detail.asp?col=6500&id=178

76 Moreprecisely,HausmannandRigobon(2003)showthata1standarddeviationshocktothepriceofoilrepresentsanincomeshockequivalentto6percentofGDP.

77 HausmannandRigobon(2003)makethefollowingexample:Assuminganeconomywhereoilaccountsfor30percentofnationalincomeandhasastandarddeviationofabout30percentperyearandgivenaconstantrelativeriskaversion(CRRA)utilityfunctionwitharelativelyhighriskaversioncoefficientof3,atypicalconsumerwouldbewillingtosacrifice4.05percentofnationalincomeinordertomakeoilrevenuesperfectlycertain.

78 Sincetheoilproducers’abilitytoabsorbinfusionsofcapitalislikelytobelimited,theyinevitablyinvesttherevenuethatcannotbeinvesteddomesticallyinoil-importingeconomies.Agoodexampleisthesovereignwealthfundsmaintainedbymanyoil-producingcountries(Kilian,2009c).Becauseofthistransferoffinancialwealthfromoilexporterstooilimporters,positiveoildemandshocksornegativeoilsupplyshocksshouldbeassociatedwithatemporarycapitalgaininoilimportingcountries.Thisistheso-called“valuationchannel”oftransmissionofoilpriceshocksacrosscountries.Another,realchanneloftransmissionofoilpriceshocksacrosscountriesisthe“tradechannel”,whichworksthroughchangesinthequantitiesandpricesofgoods

exportedandimported,andisreflectedintheresponseofthetradebalance.Kilian(2009c)explainsthatsupplydisruptions,byincreasingthepriceofoil,causeasurplusintheoiltradebalanceandadeficitinthenon-oiltradebalance(netexportsofnon-oilproducts)oftheexporter.Byconstruction,theresponseintheimportingeconomywillbethemirrorimageofthatoftheexportingeconomy.Demandshocks–associatedforinstancewithproductivityimprovementsintheoil-importingcountrythatraisedemandnotonlyforcrudeoil,butforallotherindustrialcommoditiesaswell–havetwoopposingeffects.Ontheonehand,theyraisethepriceofoil,causingasurplusoftheoiltradebalanceandadeficitinthenon-oiltradebalanceoftheexporter.Ontheotherhand,theyrepresentashort-runstimulusfortheoil-importingeconomy,whichwilltendtocauseanon-oiltradesurplusfortheexporter.EmpiricalresearchbyKilian(2009b)andKilianandPark(2009)ontheUSeconomy(netoilimporter)suggeststhatthelattereffectdominatesintheshortrun,whiletheformereffectdominatesafteroneyear.

79 SeeSectionC.4foradiscussionofotherchannelsofthenaturalresourcecurse.

80 See,amongothers,Aghionetal.(2009)andRameyandRamey(1995).

81 Theauthorsdevelopatheoreticalmodelshowingthatvolatilityinnaturalresourcerevenues,inducedbyvolatilityinprimarycommodityprices,curbsgrowthineconomieswithpoorlyfunctioningfinancialsystems.ThispredictionissimilartoHausmannandRigobon(2003).

82 BlanchardandGali(2007).Sincethelate1980s,however,theeffectsofrealoilpriceshocksonoilimportingcountrieshavebeensignificantlysmaller.ThisisdiscussedinBox12.

83 Thisoccursthroughfourmechanisms:(i)thediscretionaryincomeeffect,thatreferstothereductioninincomeavailablefornon-essentialspendingbroughtaboutbyhigherenergyprices,asconsumershavelessmoneytospendafterpayingtheirenergybills;(ii)theuncertaintyeffect,thatreferstothepostponementofirreversiblepurchasesofconsumerdurables,aschangingenergypricesmaycreateuncertaintyaboutthefuturepathofthepriceofenergy;(iii)theprecautionarysavingeffect,thatreferstotheincreaseintheuncertainty-relatedcomponentofsavings,andtheconsequentfallinconsumption,inresponsetoenergypriceshocks;(iv)theoperatingcostseffect,thatreferstothedelayedorforegonepurchasingofenergy-intensivedurables,whoseconsumptionwilltendtodeclineevenmorethanconsumptiononothergoods.

84 SeeHamilton(2008)andKilianandPark(2009).


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This section looks at the ways government policy responds to the unique features of natural resources. It examines how the unequal distribution of natural resources give importing and exporting countries incentives to use restrictive trade and domestic measures to “capture” monopoly rents. It analyzes how governments can use trade restrictions and domestic measures to strengthen property rights or reduce the exploitation of the natural resource. Where the consumption or extraction of a natural resource affects the environment, it considers the steps governments could take to make producers and consumers take account of the social costs of their activities. However, the use of trade and domestic policies will have consequences for trade partners through changes to their terms of trade. In some instances, the availability of large resource rents may make government policies hostage to vested interests involved in the extraction and trade of natural resources. Finally, this section will consider how regional trade cooperation can assist in mitigating or resolving these potential frictions in natural resources.

d. Trade policy and natural resources


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Contents 1. Tradeandotherpolicyinstrumentsinthenaturalresourcesectors 114

2. Tradepolicy,resourcedistributionandexhaustibility 123

3. Tradepolicyandexhaustibility:Theproblemofopenaccess 130

4. Naturalresourcesexternalitiesandenvironmentalpolicy 136

5. Thepoliticaleconomyoftradepolicyinnaturalresourcesectors 138

6. Nationalresourceabundanceandregionalintegration 141

7. Conclusions 147


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This section is divided into two parts. The first partreportsdataontradepolicyandotherrelevantdomesticmeasures employed in natural resource sectors. Thesecondpart focuseson theeffectsofsuch tradeanddomestic policies. These measures can shift rentsinternationally or change the terms of trade (i.e. thepriceofexportsrelativetoimports).However,tradeanddomestic policies may also affect the conservation ofnatural resources and the environmental externalitiesassociated with their extraction and use. Addressingthese different effects separately can be useful foranalyticalreasons.Clearly,governmentsmayusethesepoliciesfordiversereasons.

1. Tradeandotherpolicyinstrumentsinthenaturalresourcesectors

Thereisawidearrayofpolicymeasuresthatimpactonnaturalresourcestrade,includingexporttaxes,quotasand prohibitions, applied and bound most-favourednation (MFN) tariffs, non-tariff measures as well asnationalconsumptiontaxesandsubsidies.Whatmakesthe picture more complex is that the distinctionbetweentradeanddomesticpoliciescanbeespeciallyblurredinthecaseofnaturalresourcemarkets.

Some countries have such an abundance of naturalresources–andtheirdomesticmarketsaresosmall–that nearly all production ends up being exported.Other countries have such a scarcity of naturalresourcesthattheyhavetodependonimportsforall,ornearlyall,of theirsupply. In thiscontext,economictheory suggests thatdomesticmeasures that restrictproduction in theexportingcountry–or,alternatively,restrictconsumptionintheimportingcountry–haveadisproportionate impact on exports or imports andbecomede factotradeinstruments.

(a) Importtariffs

The following section examines the prevalence ofrestrictionsplacedonnaturalresourceimports.First,itlooks at the level of tariff protection on naturalresources, and whether it is higher than on other

merchandisetrade.Second,itexaminesthepatternofboundtariff rates inthenatural resourcessector.Andthird it looks at the extent of tariff escalation onprocessed and semi-processed natural resourceproducts.

(i) Level of tariff protection

Tomeasure the levelof tariffprotection in thenaturalresources sector, recent data (year 2007) on appliedMFNtariffsinfisheries,forestry,fuelsandminingwereobtained from the WTO’s Integrated Database (IDB)and the International Trade Centre for 146 countries.Thecalculationsincludead valoremequivalentsofnon-ad valorem duties. Based on this information, (simple)average tariff rates were calculated for all countries,andfortwofurthergroupings,developedanddevelopingcountries.1

Theresults,whicharesummarizedinTable7,showthattariff protection in the natural resources sector isgenerallylowerthanforoverallmerchandisetrade(thedetailed informationbysectorandbycountryappearsin Annex Table 1). This conclusion applies to bothdevelopedanddevelopingcountries.Theonlypossibleexception is fisherieswhere, for developingcountries,the rate of tariff protection is higher than for allmerchandise imports. In terms of specific naturalresource sectors, tariff protection is lowest in miningandfuelsandhighestinfisheries.

Table8summarizesavailableinformationonboundtariffratesinthenaturalresourcesectorsforasmallergroupof119countries (detailed informationonbound ratesandbinding coverage for these natural resource sectors bycountryarealsoincludedinAnnexTable1).Boundrates–theagreedupperlimitforatariff–aretypicallyhigherthan the rates actually applied by countries, with theamount of “water” between the two being greater fordeveloping countries than developed. Fisheries has thehighestaverageboundratewhilethefuelssectorhasthelowest.Bindingcoverage–theproportionof tariff linesbound–ishighestinforestryandlowestinfisheries.Withthepossibleexceptionoffuels,bindingcoverageisalmostuniversalfordevelopedcountries.

Table7:simple average applied tariff rates in natural resource sectors, 2007

Sector Developedcountries Developingandleast-developedcountries Allcountries

Fishery 2.2 15.1 14.2

Forestry 0.6 6.5 6.1

Fuels 0.5 6.2 5.8

Mining 0.8 6.0 5.7

Allmerchandizeimports 5.4 10.7 10.3

Source:WTOIntegratedDatabaseandInternationalTradeCentre.


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(ii) Tariff escalation

One suggested reason why resource-rich countriesapply export taxes is to redress the structure ofprotection they face in export markets, where tariffrates tend to rise with the stage of processing. Thisissue has been examined in previous WTO reports intermsof itsapplicationtomanufacturedgoods(WorldTrade Organization (WTO), 2001) and to non-oilcommodities. In the case of non-oil commodities,although tariff protection was found to rise with thedegreeofprocessing,thedegreeofescalationdiffered,sometimes markedly, across countries (World TradeOrganization (WTO),2003).Tariffescalationwasalsofound in manufactured goods although it differedgreatly across countries. Moreover, certain productcategories, such as textiles and clothing, and leatherand leather products, were characterized by a higherdegreeoftariffescalationthanotherindustrialsectors(WorldTradeOrganization(WTO),2001).

Thepatternof tariffprotection fornatural resourcesin their raw state and in their more finished orprocessedstateisshowninFigure26(moredetailedinformation is available in Annex Table 2).2 Tariffescalation appears to be present in some naturalresources, such as forestry and mining, but not inothers,suchasfuels.Forinstance,intheirrawstate,theaveragetariffonforestryproductsis6.1percent.Butintheirmoreprocessedform,itrisesto10.2percent in the case of cork, wood and paper products,

andto18.3percentinthecaseofwoodenfurniture.However,noescalationisdiscernibleinfuels;infact,theremayevenbede-escalationinthatsectorgiventhattheaveragetariffrateonpetrochemicals is lessthantherateonfuels.

Furtherinsightintotheissuecanperhapsbegleanedifone focuses on the structure of tariff protection indeveloped countries. The results shown in Figure 27show that tariff escalation is now present in all threesectors – which is particularly significant given thatdeveloped countries remain the biggest markets fordevelopingcountryexportersofnaturalresources.

(b) Non-tariffmeasures

The non-tariff measures that are examined includepara-tariff measures, price control measures, financemeasures, automatic licensing measures, quantitycontrolmeasures,monopolisticmeasuresandtechnicalmeasures(seeBox14foradiscussionofthelimitationsof this data). They correspond to UNCTAD’sclassificationoftradecontrolmeasures.3

Ananalysisofthesemeasuresinthefisheries,forestryand fuels sectors leads to two main conclusions (seeTable 9). First, the frequency of such measures isgreateronfisheries imports than ineither the importsofforestryorfuels–afindingwhichisconsistentwiththe relativelyhigh levelof tariffprotection infisheriesnotedabove.Second, the typeofnon-tariffmeasures

Table 8: Bound rates in natural resource sectors, 2007

AverageBoundRate BindingCoverage

Fishery Forestry Mining Fuels Fishery Forestry Mining Fuels

All 31.4 26.5 28.6 25.3 65.0 74.0 72.6 68.9

Developed 2.5 1.2 1.6 1.5 98.3 98.6 99.9 90.1

Developingandleast-developed 34.2 28.9 30.9 27.5 62.4 72.1 70.5 67.2

Source: WTOIntegratedDatabaseandInternationalTradeCentre.

Figure26:structure of tariff protection, by stage of processing

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Forestry Fuels Mining

Tarif

f

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Raw FinishedSemi-finished


Figure27:structure of tariff protection in developed countries, by stage of processing

Tarif

f

Forestry Fuels Mining

Sector

Raw FinishedSemi-finished

0

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4



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employedappeartobesimilaracrossthethreesectors– i.e. (i) technical regulations (product characteristicrequirements,labellingrequirements,testing,inspectionand quarantine requirements, etc.); (ii) non-automaticlicensing(licencecombinedwithorreplacedbyspecialimport authorization, prior authorization for sensitiveproductcategories,etc.);and(iii)importprohibitions.

(c) Exporttaxes

Available evidence suggests that there is a strongincidenceofexporttaxesonnaturalresourcesrelativetoothersectors.AccordingtotheWTO’sTradePolicyReviews (TPRs), export taxes on natural resourcesappeartwiceaslikelyasexporttaxesinothersectors.Infact,naturalresourcesectorsaccountforfullyone-thirdofallexporttaxes–althoughtheyrepresentlessthanaquarteroftotaltradablesectors.Intermsofthepercentage of trade covered, estimations based onHarmonized System (HS) two-digit information (seeBox15foradescriptionofthedatalimitations)suggeststhat11percentofworld trade innatural resources is

Box14:Data limitations – non-tariff measures

Dataonnon-tariffmeasureswereobtainedfromUNCTAD’sTRAINS(TradeAnalysisandInformationSystem)database.Thereareseveralfeaturesofthenon-tariffmeasures(NTMs)dataworthnoting.First,alargepartoftheNTMdataisdated–forexample,only15countrieshavedatafor2008–soithasbeennecessarytoincludedatafromvariousperiodstobuildalargeenoughsample.Ifcountrieswithinformationnoearlierthan2000areincluded,atotalof58countriesareavailableforanalysis.However,thenumberofcountriesreportingNTMsinaspecificnaturalresourcessectorisgenerallylessthan58(45forfisheries,37forforestryand44forfuels).

Second,theNTMdatabasereportsalltarifflinescoveredbyaparticularnon-tariffmeasure.However,thelevelatwhichthetarifflinesarereportedisnotuniform–somearereportedatthetwo-digit,othersatthefour-digit,six-digitandstillothersatthenationaltarifflinelevel.

Third,whilethecountoftarifflinescoveredbyNTMsprovidesvaluableinformationabouttheextentofnon-tariff measures and the types of measures applied, this approach does not allow us to determine therestrictiveness of the various measures. So a natural resources sector could have a large number of lineswherenon-tariffmeasuresareapplied,butthemeasuresmayhaveonlylimitedeffectsontrade.Ontheotherhand,anothersectorcouldhaveonlyasmallnumberoftarifflinesaffectedbynon-tariffmeasures,butthosemeasuresmayimposefarmoresignificantcostsonproducersorexporters.

Table9: number of tariff lines affected by non-tariff measures, by type

NTMCode Description Fishery Forestry Fuels

2400 Decreedcustomsvaluation 5 1 0

3100 Administrativepricing 2 2 26

3300 Variablecharges 0 0 2

3400 Anti-dumpingmeasures 24 11 7

3500 Countervailingmeasures 1 0 0

4100 Advancepaymentrequirements 0 3 0

4300 Restrictiveofficialforeignexchangeallocation 0 0 1

4500 Regulationsconcerningtermsofpaymentforimports 210 62 1

5100 Automaticlicence 0 66 0

5200 Importmonitoring 4 1 2

6100 Non-automaticlicensing 2,361 1,435 472

6200 Quotas 0 16 3

6300 Prohibitions 208 178 113

7100 Singlechannelforimports 2 0 273

8100 Technicalregulations 5,954 1,393 400

8200 Pre-shipmentinspection 1 0 0

8300 Specialcustomsformalities 130 20 77

TOTAL 8,902 3,188 1,377

Source: UNCTADTRAINS.

Figure28:export taxes by natural resource – upper bound estimates(frequencyandpercentageofworldtrade)

0

5

10

15

20

25

Fish Forestries Fuels Mining products

Percentage of world trade Frequency

Note: Authors’ calculations are based on HS two-digit data.Frequenciesarecalculatedastheratioofthenumberofexporttaxes/(numberofHStwo-digitsectors*numberofcountries).Source: TradedataarefromComtrade,year2007; informationonexporttaxesisderivedfromTPRs(1995-2009).


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coveredbyexport taxes,while just5percentof totalworldtradeiscoveredbyexporttaxes.Oneconsequenceof theextensiveuseofexport taxesandotherexportrestrictionsinnaturalresourcesistheuseofFDIasawaytocircumventthemeasures.Adiscussionof“exportrestriction-jumping”FDIisprovidedinBox16.

The extent to which trade in natural resources isaffectedbyexporttaxesvariesbysector.AsshowninFigure28,between15to25percentofworldtradeinfishandforestry,andbetween5to10percentofworldtradeinfuelsandmining,isestimatedtobecoveredbyexport taxes.Thefigurealsoshows that theshareof

Box15:Data limitations - export taxes and quantitative restrictions

Information on export taxes has been collected from the WTO’s Trade Policy Reviews (TPRs) publishedbetween1995and2009.Thisistheonlysourceofinformationthatallows,atleasttoacertainextent,across-countrycomparisonoftheincidenceofexporttaxes.However,twomainlimitationsrelatedtotheuseofTPRsshouldbekeptinmind.Thefirstoneisthatavailableinformationfordifferentcountriesmayrefertodifferenttimeperiods.ThisisbecausethefrequencyatwhichWTOmembersarerevieweddependsontheirsharesinworld trade,4meaning thatsomecountriesandcustoms territoriesare reviewedmoreoften thanothers. Inordertogetthewidestpossiblecoverageofexporttaxesinformation,thelatestTPRsavailableforeachWTOmemberhavebeenused.

Thesecondlimitation isthatattheproduct level,dataarehighlyaggregated.ThedegreeofdetailatwhichinformationonproductlevelexporttaxesisreportedinTPRsvariessignificantlyacrosscountries.InordertoallowforacomparisonacrossproductsandWTOmemberswithoutlosingtoomuchinformation,wecollecteddataat theHS2002two-digitclassification level.Thisenabledustoanalysethe intensityofuseofexporttaxesandtoprovideestimatesofthetradecoverageofexporttaxes.Itisimportant,however,tonotethatthesestatisticsarelikelytorepresentupperboundestimates,5becauseanytimeanexporttaxonacertainproductwasreported,includingwhentheinformationwasavailableatthesix-digitlevel,thewholetwo-digitsectorwasconsideredtobecoveredbyanexporttax.

TPRsalsoprovideinformationonotherformsofexportrestrictions.Usingthisinformation,recentworkbytheOECD(2009c)highlights the tendencyofcountries toadoptquantitative restrictionsmainly forconservingexhaustible resources, protecting the environment and controlling weapon and arms trade. The study alsoreportsthatexportrestrictionsforforestry,fisheries,mineralproducts,metalsandpreciousstonestendtobeusedtomaintainadequatesuppliesofessentialproductsortopromotedownstreamindustry.

AnadditionalsourceofinformationforquantitativerestrictionsisWTOnotifications.AdecisionbytheCouncilforTradeinGoodson1December1995(G/L/59)createsaprocedureforWTOmemberstosubmitbiannualnotificationsof theirexportquantitative restrictions.6However, from1996to2006only tenWTOmembershavenotifiedquantitativerestrictionsontheirexports.

Box16:Investments in natural resources – a case of “export restriction-jumping” FDI?

Theuseofexportrestrictionsonnaturalresourcescanleadimportingcountriestotakealternativemeasurestotryandsecureaccesstoscarcesupplies.

Afirstwayto“jump”exportrestrictionsisthroughacquisitionoformergerswithforeignfirmsinvolvedinthenaturalresourcessector(oilfirms,miningfirms,etc.).Specifically,firmsinimportingcountriesmaychoosetoinvestinthenaturalresourcesectorintheexportingcountry–forinstancebyrelocatingsomepartsofthedown-streamproductionprocess–asawaytoavoid(or“jump”)theexportrestrictionsonthenaturalresource.

Directinvestmentsinnaturalresources,suchasland,inforeigncountriesmay–inpart–havesimilarmotivations.Thisphenomenonhasattractedsignificantattentionrecently.Theseinvestmentsfrequentlytaketheformoflong-termleases,outrightpurchases,orcontractfarming.Inmanycases,theacquiredlandistobedevotedtoraisingcropsforfoodorforbiofuel.Investorstendtobefromcountrieswherearablelandandwaterisparticularlyscarceorfromeconomieswithagrowingdemandforfood,energyandrawmaterials(vonBraunandMeinzen-Dick,2009).TheinvestmentsarefrequentlymadeincountriesinAfrica(suchasEthiopia,Mozambique,Sudan)andinSouthEastAsia(Cambodia,Indonesia,Philippines),butalsoinmoredevelopedresource-richcountriessuchasUkraineandRussia.7

Thereissomeavailableinformationontheamountoftheseinvestments.Thevalueofcross-bordermergersand acquisitions in the natural resources sector (mining, quarrying and petroleum) reached more thanUS$ 83billion in 2008, representing about one-eighth of the total value of cross-border mergers andacquisitionsthatyear(UnitedNationsConferenceonTradeandDevelopment(UNCTAD),2009).8Ifoneusesflows of foreign direct investment (FDI) to agricultural production in developing countries as a proxy forinvestments in land, this amount tripled to about US$ 3 billion annually between 1990 and 2007 (UnitedNationsConferenceonTradeandDevelopment(UNCTAD),2009).

Therearebenefitsandrisksinvolvedinbothtypesofinvestments.


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world trade in natural resources covered by exporttaxestendstobehigherthanthepercentageof linescovered by export taxes, thus suggesting that exporttaxes tend to be used by major exporters of thecommodity.

Acloser lookat theuseofexport taxes in theminingsector shows that the incidenceof these taxesvariessignificantly across product sub-headings, with iron,copper, natural or cultured pearls and stones beingmostfrequentlysubjecttoexporttaxes(seeFigure29).Dataforforestryshowthatexporttaxesaremainlyonwood products, rather than cork or pulp wood.

Becauseofthecapital-intensivenatureofthenaturalresourcessector,mergersandacquisitionsprovideawayoffinancing the large outlays required for operations. Since exploration for natural resources can be very risky,mergersandacquisitionsprovideanopportunityforsharingrisk.Finally,thisformofinvestmentcanbenefitthefirms involved by allowing them to share technologies and reduce their costs through rationalization of theirbusinessoperations(e.g.eliminatingduplicateoperations).However,therearealsoimportantchallengesposedbythesetypesofinvestmentstogovernmentswhichhavejurisdictionoverthefirms.Oneisthepossibilitythattheacquisitionorthemergerresultsinacombinedfirmwithsignificantmarketpower.Asecondchallengeinvolvesthecasewheretheacquiringfirmmaybepartlyorwhollystate-ownedorisasovereignfund.Thiscanraiseconcernsaboutthepossibleblurringofthelinesbetweenthecommercialandpoliticalinterestsoftheacquiringfirm.

Foreigninvestmentsinlandcanincreaselandproductivity,particularlyiftheinvestmentsareaccompaniedbynew technology and expenditures on complementary inputs, such as irrigation, drainage and even roads.Foreign investment canalsohelp toexpand theglobal supplyof natural resourcesbyexpanding landuse,extractionandproduction.Furthermore,foreigninvestmentcancreateotherbenefitsthatcanbe“captured”bythelocaleconomyintheformofincreasedruralemploymentandeconomicactivity.However,suchinvestmentsalsoinvolvecosts.Theinvestmentmaydisplacelocalinhabitantswhoinitiallyhadaccesstotheland.Sincethedestinationoftheseinvestmentsisusuallypoorcountries,propertyrightsmaynotbewelldefined.Theownersmayeithernothaveformalrightstothelandortheymaybeunabletohavetheirrightsrecognized.Inthefaceofa large investor, theycaneasilybedisplaced.Othercosts thathavebeen raised in thecontextof theseinvestmentsincludeadverseeffectsontheecologicalsustainabilityoflandandwaterresources.

Asignificantshareof these investments in thenatural resourcesareahavebeenmadebecausegrowingglobaldemandhaspushedcountriesandfirmstotakewhatevermeasureswereneededtosecurehard-to-getsupplies.However,itislikelythatsomeoftheseinvestmentshavealsobeenpromptedbyexportrestrictionsimposedbymajorproducerswhennaturalresourceandfoodpriceswerehigh(“export-restrictionjumpinginvestments”).Theseexportrestrictionsmayexacerbateconditionsofalreadystretchedsuppliesandlowertheconfidenceinthefunctioningofinternationalmarkets,encouragingcountriesshortinland,waterandothernaturalresourcestofindalternativemeansofsecuringsupplies.Inthissense,theinvestmentscanbeseenas“second-best”responses–effortsbyconsumingcountriestogetaroundtraderestrictions–thatwouldotherwisenothavebeenmadeifmarketsprovidedgreatercertaintyofaccess.Whatismore,theremaybenoassurancethathost-countrygovernmentswillautomaticallyallowtheoutputsfromtheinvestmentstobefreelyexportedifaseriouscrisisweretoerupt.

Figure29:export taxes on mining products by subheading – upper bound estimates (frequencyandpercentageofworldtrade)

Trade covered Frequency

0

5

10

15

20

25

Aluminium Copper Inorganicchemicals

Fertilisers Iron Lead Nickel Other basemetals

TinNatural or cultured

pearls and stones

Ores, slagand ash

Salt Zinc

Note: Authors’calculationsarebasedonHStwo-digitdata.Frequenciesarecalculatedastheratioofthenumberofexporttaxes/(numberofHStwo-digitsectors*numberofcountries).Source: TradedataarefromUNComtrade,year2007;informationonexporttaxesisderivedfromTPRs(1995-2009).


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Unfortunately,giventhehighlevelofaggregationofthedatabase,itisimpossibletodistinguishacrossdifferenttypesoffuel,fishorwood.

Theanalysisofexportdataatthecountrylevelrevealsthat for some countries, export taxes on naturalresourcescoveralargepercentageoftheirtotalexportsinnaturalresources.Figure30showssomeofthemainusersofexport taxes in termsof theshareofnaturalresource exports covered by export taxes.Notwithstanding the limitations regarding the cross-country comparability data (see Box 15),9 the figureshows that for some countries export taxes cover alargeshareoftheirexportsinnaturalresources.

(d) Otherexportrestrictions

There appears to be a strong incidence of quantitativeexport restriction (prohibitions, quotas, automatic andnon-automaticlicensing,etc.)appliedtonaturalresourcesrelativetoothersectors–asoutlinedinTable10,whichsummarizesavailableinformationonsuchrestrictionson

natural resource sectors notified to the WTO.10 Clearly,export restrictions on natural resource productsrepresenteda largeshareofnotifiedexport restrictions– some 2,577 entries out of a total of 7,328. Theserestrictions fall fairlyequallyunderArticleXIandunderArticleXX11ofGATT;thereisalsoanequalpropensitytouse either non automatic-licensing or quota-typerestrictions across sectors. Unfortunately, the entriesidentified in thenotificationsonquantitative restrictionsareatdifferentlevelsofdisaggregation(someatchapterlevel,othersateight-digit level),making it impossible todrawinferencesontherelativedegreeofrestrictivenessofsuchquantitativemeasuresacrosssectors.12

(e) Consumptiontaxes

According to the theory, the uneven geographicaldistributionofnaturalresources–resultinginresource-abundantcountriesexportingmostof theirproductionandresource-scarcecountries importingmostof theirconsumptionneeds–means thatdomesticmeasures,such as consumption taxes, can function as de facto

Figure30:natural resources exports covered by export taxes – upper bound estimates for selected countries (frequencyandpercentageofworldtrade)

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Cam

eroon and Gabon

Gam

bia

Central A

frican Republic

Lesotho

Solom

on Islands

Mali

Dom

inica

Sri Lanka

Maldives

Zam

bia

Colom

bia

Malaysia

Guyana

Mexico

St.K

itts and Nevis

Indonesia

Tunisia

China

Madagascar

Papua N

ew G

uinea

South A

frica

Fiji

Nam

ibia

Jordan

Guinea

Benin

Mauritania

Kenya

Fish Mining products Forestries Fuels P

hilippines

Côte d'Ivoire

Note: Author’scalculationsarebasedonHStwo-digitdata.Frequenciesarecalculatedastherationofthenumberofexporttaxes/(numberofHStwo-digitsectors*numberofcountries).Source: TradedataarefromUNComtradedatabase,year2007;informationonexporttaxesisderivedfromTPRs(1995-2009).

Table 10: export restrictions on natural resources notified to the Wto

NaturalResourceSector

Countries(Number)a

Measures(Numberofentries)

JustificationbytheMemberimposingthemeasure

AutomaticLicensing

NonAutomaticLicensing

Quota ProhibitionGATTArt.XI

GATTArt.XX Other

Fish 2 0 10 0 8 0 18 0

Forestry 6 0 173 122 18 107 165 0

Fuels 2 0 201 236 7 172 172 74

Miningproducts 7 94 1,001 746 60 618 823 353

TOTAL 10 94 1,385 1,104 93 897 1,178 427

aTotalnumberofcountriesmaynotcorrespondtothesumobtainedacrosssub-sectorsbecausethesamemayappearindifferentsub-groupings.Note: OtherjustificationsdenotesnotificationsmadeunderArt.III,Art.XVIIorArt.XXIoftheGATTorProtocolofAccession.Source: Authors’calculationsbasedonWTOSecretariatdata.


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trade instruments in importing countries. Gatheringinformation on domestic measures that restrictconsumptionis,therefore,importantasthesemeasuresare likely tohavean impacton the volumeof importsandonthetermsoftrade.Onemajordrawbacktothisinformation-gatheringexerciseisthatonlyconsumptiontaxesonfuelsareavailable.

Nevertheless, an analysis of these data shows thatconsumption taxes are high when compared with therateof tariffprotectiononfuels. In thecaseofOECDcountries,forexample,importtariffsonfuelsaveragedonlyabout5.8percent(seeTable7),whereasthetaxon gasoline and diesel for motor vehicles ranges

between30and60percent,dwarfingthesizeofimporttariffs. Consumption taxes on fuel used by industryappeartobelowerwhilefuelforelectricitygenerationseemstobetaxedtheleast(roughlyinthesameorderofmagnitudeasimporttariffs).

Information on fuel taxes for non-OECD countries isavailable froma relatively old studybyMahler (1994).ItrevealsapatternconsistentwiththatseeninOECDcountries–namely,domestictaxesonfuelsareseveralorders of magnitude greater than the tariffs on fuels(seeTable12).One importantpoint tonoteabout thedata in theMahlerpaper is thatonly those taxes thatareexplicitly leviedonpetroleumproducts, expressed

Table11:taxes on fuels in oecD countries, 2008(percent)

Countries Percentageoftaxesinlowsulphurfueloilpricesinindustry

Percentageoftaxesinautomotivedieselpricesforcommercialuse

Percentageoftaxesinautomotivedieselpricesfornon-commercialuse

Percentageoftaxesinpremiumunleaded(95ron)gasolineprices

Percentageoftaxesinnaturalgaspricesinhouseholds

Percentageoftaxesinlightfueloilpricesinindustry

Percentageoftaxesinheavyfueloilforelectricitygeneration

Australia .. .. 33.0 34.6 .. .. ..

Austria 14.7 44.9 47.8 56.8 26.6 16.6 3.4

Belgium 3.5 30.7 42.7 58.6 .. 2.9 ..

Canada .. 21.5 .. 27.6 .. 8.5 ..

CzechRepublic 5.4 37.3 47.3 55.0 16.0 4.2 6.3

Denmark 11.5 36.0 48.8 59.8 .. 4.2 ..

Finland 14.5 35.1 46.8 62.1 24.2 12.6 ..

France 4.6 40.3 50.1 61.1 15.0 8.7 ..

Germany 6.2 42.0 51.3 62.6 .. 9.6 6.4

Greece 4.3 28.9 40.3 47.5 8.3 18.2 ..

Hungary 6.4 34.2 45.2 53.0 16.7 .. ..

Ireland .. 35.0 46.3 54.8 11.9 6.8 3.8

Italy 7.1 37.7 48.1 57.5 .. 37.2 ..

Japan 4.8 30.9 27.0 .. .. 7.2 ..

Korea 11.7 .. 38.8 .. 19.5 16.6 ..

Luxembourg .. .. .. .. .. .. ..

Mexico .. - 13.0 13.0 13.0 - ..

Netherlands 8.1 38.2 48.1 61.3 37.8 .. ..

NewZealand .. 0.3 11.4 38.6 .. - ..

Norway .. 39.7 51.8 60.9 x 19.5 ..

Poland 3.9 33.1 45.2 56.4 18.0 10.0 5.1

Portugal 2.8 40.6 45.5 59.0 4.8 .. ..

SlovakRepublic - 41.4 50.8 56.0 16.0 - ..

Spain 3.4 31.0 40.5 49.5 13.8 12.1 ..

Sweden 48.5 38.9 51.1 62.0 .. 10.3 ..

Switzerland 6.0 44.0 45.3 48.6 9.8 3.4 ..

Turkey .. 46.0 46.0 59.7 15.3 .. 31.7

UnitedKingdom .. 50.5 57.9 61.9 4.8 .. 47.9

UnitedStates .. 13.8 13.8 15.0 .. 4.9 4.7

Legend:x–notapplicable;..-notavailable;--nil.Note: Taxesrefertoexcisetax,consumptiontax,goodsandservicetax(GST),andVAT.Source:InternationalEnergyAgency(IEA)(2009).

Table12:Fuel taxes in non-oecD countries, 1991(percent)

Regions Premiumgasoline Regulargasoline Automotivediesel Heavyfueloil

Africa 79 86 53 48

Asia 37 53 21 4

EasternEurope 115 125 82 n.a.

MiddleEast 23 23 6 1

WesternHemisphere 70 62 36 25

Source: Mahler(1994).


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as a percentage of before tax petroleum prices, areused.However,somecountrieswillhavemany implicittax ratesorsubsidieswhichwillaffect theprice level.Thesewillultimatelyincrease(decrease)thetaxrates.

(f) Subsidies

Severalnaturalresourcesectors–mining,coal,forestryand fisheries – figure very prominently in thenotifications made by WTO members under theAgreementonSubsidiesandCountervailingMeasures(SCM). While the SCM notifications serve as animportantmeansofinformingotherWTOmembersthatsubsidies are being provided, they are less useful forquantifyingthesubsidiesinvolved.Membersfrequentlyindicatethatnoinformationonthevalueofthesubsidyis available, or if valuesareprovided, thenotificationsare often unclear about the measurements that havebeenused.Forthesereasons,thefollowingdiscussionfocusesonotherstudies(besidesWTOnotifications)offisheriessubsidieswheremoreinformationisavailable(seeBox17)forashortdiscussionofthedatalimitationsonsubsidies).Note,however, thatthefiguresreportedinthesestudiesmaynotalwayscorrespondtotheterm“subsidies”asusedintheSCMAgreement.

(i) Fisheries subsidies

Probablyoneofthefirstattemptstoestimatefisheriessubsidies was carried out by the UN Food andAgricultureOrganization(FAO)(1992).Employing1989data, the FAO study estimated an annual deficit ofUS$54billion between global fishing revenues andcosts,suggestingthatthedifferencemightbemadeupbysubsidies.Usingthedefinitionofsubsidyunderlyingthe SCM Agreement, a subsequent study by Milazzo

(1998) came up with a somewhat lower estimate ofUS$14to20billionayearinglobalfisheriessubsidies,withthesubsidiesconstitutingbetween30and35percentofthevalueofthecatch.13ThemostrecentworkonthisissueisbySumailaetal.(2009)whichsuggeststhatglobalfisheriessubsidiesfor2003werebetweenUS$ 25 and 29 billion. All told, these various studiessuggestthatglobalfisheriessubsidiesareintheorderof tens of billions of dollars annually and make up asubstantialportionofthevalueofthefishcatch.

Beyondthesestudies,thereisalsodatafromtheOECDongovernmentfinancialtransfers(GFTs)tothefisheriessector, defined as “the monetary value of governmentinterventions associated with fisheries policies” andcovering all transfers from central, regional and localgovernmentsinOECDcountries.14From1996to2006,thesetransfersaveragedaboutUS$6.1billionannually,rangingfromalowofUS$4.2billionin1998toapeakofoverUS$7billion in2006.15Japanand theUnitedStates were the two biggest spenders, contributing28and30percentrespectivelyoftotalOECDtransfersin2006(seeTable13).TheOECDestimatesthatoverthe past decade, the transfers represented around18 per cent of the value of the total catch of OECDcountriesfromcapturefisheries(OrganizationforEconomicCo-operationandDevelopment(OECD),2009b).Capturefisheries refers to the sum (or range) of all activities toharvestagivenfishresource.

Data on developing countries’ fisheries subsidies ismoredifficulttoobtainandtendstobescatteredacrossdifferent studies or reports. However, based on thestudybySumailaetal.(2009)citedabove,32percentof total fisheries subsidies were accounted for bydevelopingcountriesin2003.TheestimatesbycountryareshowninTable14.

Box17:Data limitations – subsidies

The2006World Trade Reportconductedacomprehensiveexaminationofthetype,amountandincidenceofsubsidies provided by WTO members (World Trade Organization (WTO), 2006). One conclusion was thatcomprehensiveinformationonsubsidiesishardtoobtain,eitherbecausegovernmentsdonotsystematicallyprovidetheinformationorbecausemultipledatasourcesusedifferentdefinitionsandclassificationsystems.National subsidy reportsprovidequantitative information thatmaybedetailedbutdonotguaranteecross-country comparability. Data from international sources, including from the WTO, allow for cross-countrycomparisonsbutonlyexistatahighlyaggregatedlevel,orareavailableforalimitednumberofsectors.

Table13:Government financial transfers by oecD countries to fisheries, 2006 (USDmillions)

Country Amount Country Amount

Australia 90.0 Korea,Rep.of 752.2

Belgium 7.8 Mexico 89.1

Canada 591.0 Netherlands 21.3

Denmark 113.2 NewZealand 38.6

Finland 23.4 Norway 159.5

France 113.8 Portugal 29.3

Germany 30.7 Spain 425.4

Greece 79.6 Sweden 41.5

Iceland 52.4 Turkey 133.9

Ireland 29.4 UnitedKingdom 114.7

Italy 119.2 UnitedStates 2,128.8

Japan 1,985.1 oecD 7,169.9

Source: OrganizationforEconomicCo-operationandDevelopment(OECD),2009b.


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Table14:Fisheries subsidies in year 2003: developing countries and customs territories(USDmillions)

Country TotalAmount Country TotalAmount

Albania 1.3 Libya 5.1

Algeria 6.7 Madagascar 12.9

Angola 74.5 Malaysia 317.2

AntiguaandBarbuda 4.1 Maldives 65.2

Argentina 366.8 MarshallIslands 72.1

Bahamas 14.3 Mauritania 26.0

Bahrain 11.9 Mauritius 2.2

Bangladesh 62.8 Micronesia 170.1

Barbados 0.9 Morocco 91.7

Belize 7.9 Mozambique 21.5

Benin 6.6 Myanmar 157.8

Brazil 413.4 Namibia 122.5

BruneiDarussalam 0.8 Nauru 0.2

Cambodia 7.4 Nicaragua 14.8

Cameroon 9.4 Nigeria 31.0

CapeVerde 11.2 Oman 79.5

Chile 93.7 Pakistan 136.7

China 4,139.5 Palau 1.5

Colombia 15.4 Panama 50.1

Comoros 0.7 PapuaNewGuinea 662.0

Congo 1.8 Peru 205.5

CostaRica 17.1 Philippines 918.8

Coted'Ivoire 12.3 Qatar 3.8

Cuba 13.9 RussianFederation 1,481.8

Cyprus 1.4 SaintLucia 4.0

Djibouti 0.6 Samoa(Western) 7.3

DominicanRep. 7.5 SaoTome&Principe 0.7

Dominica 7.3 SaudiArabia 33.3

Ecuador 47.4 Senegal 70.5

Egypt 15.8 Seychelles 28.6

ElSalvador 9.5 SierraLeone 13.7

EquatorialGuinea 0.3 Singapore 0.3

Eritrea 2.0 SolomonIslands 35.0

Fiji 39.8 Somalia 4.3

Gabon 12.6 SouthAfrica 69.6

Gambia 12.1 SriLanka 132.4

Georgia 1.0 St.Kitts&Nevis 1.1

Ghana 32.9 St.Vincent&Grenadines 5.3

Grenada 5.4 Sudan 1.3

Guatemala 8.9 Suriname 15.8

Guinea-Bissau 4.4 Syria 0.8

Guinea 28.9 Taipei,Chinese 360.5

Guyana 54.5 Tanzania 10.0

Haiti 4.4 Thailand 552.6

Honduras 11.9 Togo 1.5

HongKong,China 8.6 Tonga 7.2

India 1,070.2 Trinidad&Tobago 11.5

Indonesia 989.7 Tunisia 26.5

Iran 243.1 Turkey 97.1

Israel 1.2 UAE 10.6

Jamaica 10.7 Ukraine 49.7

Jordan 0.1 Uruguay 11.1

Kenya 4.8 Vanuatu 144.0

Kiribati 23.5 BolivarianRep.ofVenezuela 64.8

Korea,Rep.of 893.9 Vietnam 697.4

Kuwait 1.0 Yemen 117.6

Liberia 0.6

Source:Sumailaetal.(2009).


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Given that not all fisheries subsidies are intended toexpandfishingcapacityandsomeareintendedtoassistconservation efforts, an exclusive focus on the totalamountofsubsidiesmaygiveafalseimpressionoftheextent to which the payments exacerbate theexploitationoffisheriesstocksordistorttrade.

Kahn et al. (2006) have attempted to disentangle theeffectsofdifferentsubsidyprogrammesandtoaccountfortheamountsinvolved.Theyestimatedthattheamountofnon-fuelsubsidies thatcontributedtoan increase infishing capacity globally was about US$16billion.Included under this category are: programmes on boatconstruction, renewal and modernization programmes;support for fishing port construction and renovation;marketingsupport,processingandstorageinfrastructureprogrammesandthelike.Tothiscategorymustbeaddedthe US$ 4.2 to 8.5 billion worth of fuel subsidiesestimatedbySumailaetal.(2006).

In contrast to these subsidies, Kahn et al. (2006)estimatedthatUS$7billionofsubsidiesweredevotedto fisheries management and conservation. In thiscategory, they included expenditures on monitoring,controlandsurveillance;stockassessmentandresourcesurveys;andfisheriesresearchanddevelopment.Finally,theyidentifiedanotherUS$3billionofsubsidiesthat,intheirview,havethepotentialtoleadtoeitherinvestmentor disinvestment in the fisheries resource.16 Notableamong theprogrammes that theyclassifiedunder thisheading are vessel buy-back programmes (see thediscussioninBox22).

Basedondataforthelastdecade,thepatternofsupportinOECDcountriesappearstoshowalargerproportionoftheGovernmentfinancialtransfers(GFTs)weredevotedto fisheries management, research and enforcement(38 per cent of total GFTs in OECD countries). Theremainder went to infrastructure expenditure(39percent), vessel decommissioning schemes (7 percent), income support (5 per cent), access agreements(3 per cent), vessel construction and modernization(3percent)andothercostreducingtransfersanddirectpaymentsgeneralservices(5percent).

2. Tradepolicy,resourcedistributionandexhaustibility

What are the trade and domestic policies thatgovernmentsadopttodealwiththeunevengeographicaldistribution of finite natural resources, and how dothese policies affect other economies? Since naturalresources are often concentrated in a few countries,producers and exporters of these resources benefitfrom market power and can earn large (at timesmonopoly)rents.Thesemayprovideboththeimportingand the exporting countries with an incentive toappropriate part or whole of these rents by imposingtrade restrictions, such as import tariffs, export taxesandexportquotas,orprovidingsubsidies.

The following analysis will focus mainly on the “rent-shifting” effectsof tradepolicymeasures.However, a

critical issue in the analysis of the impact of thesepolicieswhenappliedtofinitenaturalresourcesisthatthey involve dynamic considerations. As discussed inSection C, optimal extraction of exhaustible naturalresources is an inter-temporal decision involvingcalculations of optimal extraction paths over time. Agovernment incentive to adopt certain trade policymeasures may depend not just on market conditionstoday but on strategic considerations regarding theavailabilityof–anddemandfor–theresourcesinthefuture. These dynamics introduce importantcomplexitiesintoeconomicmodels,includingtheissueof whether a government can credibly commit to acertain announced trade policy time path. For thisreason, the existing economic literature has analysedthese issuesonly inrelationtospecificcircumstancesandpolicymeasures.

(a) Rent-shiftingeffectoftariffs(andconsumptiontaxes)

Economists stress the importance of rent-shifting toexplaintheuseofimporttariffsonnaturalresources.Inother words, tariffs are strategically set by resource-importing countries to extract rents from resource-exporting countries. This argument is particularlyrelevant innatural resources relative toother typesofproducts for two reasons: first, because resourcerevenues largely consist of pure rents; and second,because import tariffs on natural resources cannotgenerallybejustifiedasimportsubstitutionstrategies.Since deposits of exhaustible natural resources, suchasoilandminerals,tendtobeconcentratedinrelativelyfewlocationsandcannotberelocatedfromonecountrytoanother,obviously therationale for imposing importtariffscannotbetoincreasedomesticproduction.

Twootherargumentshavebeenadvancedtojustifytheuseofimporttariffs.Oneisaninsuranceargumentthatrelatestothefactthatthesupplyofnaturalresourcesavailable isunknownand thatasaconsequence theirsupplymaybesubjecttorandominterruptions.Severalstudies show that import tariffs can be optimal ifsupplies are subject to such interruptions. This isbecause the higher domestic price will reflect thepremium that consumers pay for the vulnerability anduncertainty of imports (Nordhaus, 1974; Plummer,1982). The other argument is a strategic one – thatimporttariffscanbeoptimaltocounteractthemonopolypower of the resource-rich country. Based on theevidence that the natural resource exporters may bemonopolistsand that importersmayenjoymonopsonypower,variousstudieshaveexaminedtheoptimalityofimport taxation (Bergstrom et al. 1981; Bergstrom,1982;Newbery,1984).17

Regardlessofthemotivations,theimpositionofimporttariffs will affect the geographical distribution of therentsassociatedwithextraction.Consider thecaseofoil, which is available in a finite amount and costsrelativelylittletoextractaftertheinitialinvestmenthasbeen made. These high fixed and low variable costsmeanthatitssupplycurveisinelastic–thatis,itisnot


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sensitive topricevariations. In thesecircumstances, iftheimportingcountryintroducesatariff,theexportingcountry will have to lower the exporting price (by asmuchasthesizeofthetariff)inordertobeabletosellthetotalamountoftheresource.Therefore,theburdenofthetariffwillfallontheexporter.

Figure 31 provides a graphical representation of theimpact of an import tariff on natural resources in asimple static model, where all available resource isexhaustedinagivenperiod.SupposethatQisthetotalamountavailableofacertainnatural resource,sayoil,andS is itssupplycurve.Supposealso that theworldconsistsofanimportingandanexportingcountryandthat all resource extracted is exported. In thesecircumstances, for a given demand curve D, the freetradepricefortheresourceisP1.SupposethenthattheimportingcountryimposesatariffT.ThedemandcurveshiftstoD’andthenewequilibriumwillbeattheexportpriceP1

T.ConsumerswillcontinuetopaythepriceP1–thepriceatwhichtheydemandthequantityQ-whiletheexporterwillreceivethepriceP1

T.Theshadedareainthefigurerepresentsthetariffrevenuecollectedbythe government of the importing country – with thedifferencebetweenP1andP1

TbeingthetariffT,anditalso reflects the reduction in rent suffered by theexportingcountry.

Underthecircumstancesdefinedabove,aconsumptiontaxwouldhaveexactly thesameeffectsasan importtariff.That is, in thesameway thata tariff foragivenexportprice increasesdomesticprices,so toodoesaconsumption tax raise domestic prices. If supply isinelastic – and in the absence of a domestic industryconsuming the resource – the exporting country willhavetopaytheburdenofthetax.Itisbecauseoftheirsimilareffectsthatmuchoftheeconomicliteratureonnaturalresourcesreferstoconsumptiontaxesortariffsasequivalentmeasures.

How much of the exporter’s rent can importersappropriate?Thebroadconclusion in the literatureonrent-extracting tariffs (or the equivalent consumptiontaxes) is that the higher the tariff imposed by the

importingcountry,thehighertheshareoftherentthatitcanappropriate.Infact,theentirerentcaneventuallybe extracted by imposing a high enough tax or tariffrate.Thisargumentalsoholdswhen theexporter isamonopolist(Bergstrom,1982).

Thereare,however,anumberoffactorsthatdeterminethesizeoftherentthatcanbemovedfromtheexportingtotheimportingcountry.Oneisthesizeoftheimportingcountry relative to the exporting country. The optimaltarifftendstobehigherthelargertheimportingcountry– and it approaches a confiscatory level when theimporting country is very large compared with theexportingcountry (BranderandDjajic,1983).Anotherdeterminingfactoristhenumberofimportingcountries.Ingeneral,theshareoftheexporter’srentthatcanbeappropriated decreases with the number of importingcountries(Rubio,2006).

Finally,thesizeoftherentthatcanbeappropriatedbytheimporteralsodependsonwhethertheresource-richcountryfacesadomesticdemandfortheresource,forexample, from a local processing industry. If thesupplying nation can transform the natural resourceinto final goods within its own economy, then it canrespond to the imposition of the tariff by restrictingexports.Withconsumptionnolongertakingplaceintheimporting country alone, the amount of resourcesupplied to the importing country is no longer fixed,thuslimitingtheimportingcountry’sabilitytoreaptheentirerent(BranderandDjajic,1983).

Akeyissuedeterminingtheeffectsofanimporttariffisits time pattern. When this is taken into account, ageneralresultofnaturalresourceeconomicsisthattheeffectofatariffonthepriceandoutputpathchosenbytheindustry(beitacompetitiveindustryoracartel)willdepend on whether the tariff remains constant,decreases or increases over time. In particular,economic theoryshows that ifagovernmentcanpre-commitandchoosesaconstant(intermsofitspresentvalue) tariff over time, the extraction path will beunaffectedbythetariff(Bergstrom,1982).18

Figure31:the effect of a tariff on natural resources(staticmodel)

Q Quantity of resource exports

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Figure 32 elucidates this case in a two-periodframework.19Inthefigure,thecurvesD1andD2representthedemandcurvesinperiod1andperiod2,respectively.QEisthequantityofresourceexportsatwhichthefirst-periodpriceequalsthediscountedsecond-periodprice(that is, the exporting country is indifferent betweenextractingandsellingtheresourcenoworinthefuture),and PE is therefore the equilibrium price. When theimportingcountry imposesa tariff (constant inpresentvalue terms over the two periods), the demand curvesshiftdownwardstoD1’andD2’andtheequilibriumshiftsfromEtoE’.Thequantitiesoftheresourceextractedinthetwoperiodsareunaffectedbythepolicy.Theworld(export)pricefallstoPT,butconsumersintheimportingcountry will continue to pay PE (the export priceaugmentedbythetariff).Inotherwords,thegovernmentoftheimportingcountrywillappropriatepartoftherentof theexporter country (the shadedarea in thegraph)withoutaffectingtheoutputpath.

Overall, the critical issue is whether countries cancredibly commit themselves to a certain announcedtimepathofimporttariffs.Naturalresourceeconomicshas shown that optimal tariff paths may be timeinconsistent–i.e.sometimeinthefuture,asthetariffplan set at the beginning of the period unfolds, theimporterwillwanttodeviatefromtheoriginaltariffpath.This applies, for example, to a dominant oil importerfacing a competitive supply of oil and other small,competitivebuyers.Inthesecircumstancestheoptimaltariffpathwouldsimplyincreaseattherateofinterest,as this would maintain the price path consistent withtheHotellingrule(seeSectionC.1).Atsomedateinthefuture,however,thedomesticpriceinthedominantoilimportercountrywillbecomesohigh thatdemandforoilfallstozero,whiletheoilpriceintherestoftheworld,whereoilisimportedfreeoftariffs,willbelower.Atthispoint, the dominant importer will find it attractive todeviate from the previous tariff plan, by reducing thetariffand importingmoreoil.Theoriginal tariffplan isthusdynamicallyinconsistent(Newbery,1981).20

Therearetwobroadsolutionsputforwardtothistimeinconsistencyproblem.Thefirstoneinvolvesreinforcingthecredibilityofcertaintradepolicyannouncementsby

binding them in international agreements such as theGeneral Agreement on Tariffs and Trade (GATT) andotherWTOagreements.Thesecondinvolvestheuseoffuturesmarketsandthestorageofresources(MaskinandNewbery,1990).

(b) Exporttaxes

As noted above, one interesting feature of naturalresourcestradeistheextensiveuseofexporttaxes.21Thefollowingdiscussionlooksatthevariousmotivationsfor export taxes, and the structure of markets thatinfluencetheiroperationandimpacts.

Tounderstandtheeffectofanexporttaxonexhaustiblenaturalresources,itisimportanttodistinguishbetweensituationswhenthereisalocaldemandfortheresourceand when there is not. Assume that the economy ischaracterizedbythreeagents:thegovernment,theoil-producingcompanyandconsumers.Whenallproductionis exported, an export tax imposed by the exportingcountryonlyhasdistributionaleffects:rentsmovefromthe extracting company to the government of theexporting country in the form of export tax revenue.There is no terms-of-trade effect in these cases. Thereason for this is simple. Suppose that the initialconditionsarethosedescribedinFigure31.Thesupplycurveofacertainresource–forexample,oil–isfixedat a certain level and all production is exported.22 Intheseconditionstheexportpricewillbedeterminedbythelevelofthedemand.

Ifthegovernmentoftheexportingcountryintroducesatax on exports, the oil-producing company will not beable to pass the burden of the tax onto foreignconsumersbyincreasingtheexportprice,becauseatahigher price part of the resources remain unsold.Therefore, the export price will not change, while thenetpricereceivedbytheoil-producingcompanywillbereducedbytheamountofthetax,sayT.Foranexporttax equal to T, the shaded area in Figure 31 willrepresent the rent loss of the oil-producing companyand the export tax revenue of the government of theoil-richcountry.

Figure32:the effect of a tariff on natural resources(two-periodmodel)

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Incontrast,whenpartofthenaturalresourceproductionisconsumeddomestically,anexporttaxisequivalenttoasubsidyondomesticconsumptionintermsofitspriceandquantityeffects.Sincenaturalresourcesarehighlyconcentrated geographically, it is often the case thatthetradepolicyoftheresource-richcountry isabletoaffect the world price of the resource. In economicterms, these conditions define a so-called “large”country. When a large exporting country applies anexporttaxonthenaturalresource, thedomesticpricewill fall and the world price will rise. Part of the rentassociatedwithproductionwillshiftfromtheproducercompany to the government and to the consumers intheexportingcountry.

In addition, there will be a terms-of-trade gain for theexporting country and a terms-of-trade loss for theimporting country (see Box 18). Domestic consumerswill consume too much of the resource, while foreignconsumers will consume too little. In the exportingcountry,consumers’efficiencylossmaybecompensated

bytheterms-of-tradegain.Therefore,asforanyothergood, there is an optimal export tax for naturalresources.23However,theexportingcountrywillgainattheexpenseoftheimportingcountryandglobalwelfarewillbereduced.

In the long run, however, export taxes may not beeffective in maintaining high export prices of naturalresources. One reason is that sustained high worldprices provide an incentive for importing countries toinvestinnewresource-savingtechnologiesthatreducetheirnatural resourcerequirementsperunitofoutput.Sustained high prices may also make availableadditional resources for exploitation – by creatingincentives to exploit resources that would not beeconomicaltoexploitatnormal(freetrade)pricesortoundertake exploration for new reserves. All of thiscreates higher demand uncertainty for the exportednatural resource, because the discovery of a newsubstitutable resource would suddenly shift demandawayfromthetaxedcommodity.Indecidingwhetheror

Box18: Welfare effects of an export tax: the case of a large country

SupposethatQSisthetotalamountofacertainresource–forexample,oil–andthatitsoverallsupplycurveSisinelastic.Inthepresenceofadomesticdemandforoil,theexportsupplywillbeapositivelyslopedline,indicatedinthechartbySx.SupposeaswellthatthecurveDxrepresentstheexportdemand–i.e.thedemandfortheresourceintheforeigncountry.AttheequilibriumpricePE,thequantityQEisexportedwhiletherest,QS-QE,isconsumeddomestically.24Infreetrade,exportpriceanddomesticpricecoincide.

If the government of the resource-rich country introduces an export tax, the export supply curve will shiftupwardstoSx’.Thisisbecauseforacertainpricepaidbytheimportingcountry,onlyafractionisperceivedbytheproducingcompany,becausetheamountTispaidtothedomesticgovernment.Inparticular,theexporttaxwillcreateawedgebetweenthedomesticandtheforeignpriceofthecommodity.Inthenewequilibrium,theforeignimporterswillpayPXandwillconsumethequantityQX,whiledomesticconsumerswillpayPD(equalto PX –T) and will consume QS – QX. The shaded area below the price PE is the producers’ surplus loss,generatedbythelowerprice(netofthetax)perceivedbytheproducer.TheareaPXPDDXrepresentsthetaxrevenueaccruingtothegovernmentoftheexportingcountry.Ofthis,thelightblueareaindicatestheterms-of-tradegainenjoyedbytheexportingcountry(orequivalently,theterms-of-tradelosssufferedbytheimportingcountry)duetothehigherexportpricefortheresource.Thegreenshadedareaistheconsumers’surplusgainoccurringtodomesticconsumers,consequenceofthereductionofthedomesticprice.

Finally,thedark-blueshadedareaisthedead-weightloss.Theexporttaxmaybeoverallwelfareimprovingfortheexportingcountryifthedead-weightlossismorethanoffsetbytheterms-of-tradegain.Clearly,thisoccursattheexpenseoftheimportingcountrythatwillsufferfromaterms-of-tradelossand,becauseofthedead-weight-losses,theworldasawholewillbeworseoff.

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not to apply an export tax, natural resource-richcountrieshavetotrade-offtheshort-runterms-of-tradegainsagainstthepossiblenegativelong-runeffectsofhigherdemanduncertainty.

Furthermore, export taxes on natural resources alsohavedistributional consequenceswithin theexportingcountry.Byreducingthedomesticpriceoftheresource,theyimplicitlysubsidizetheresource-consumingsectorand reduce the income of the resource-producingsector.For this reason, theycanbeused forsocialorre-distributionalobjectives–forexample,anexporttaxmightbeappliedtonaturalgasproductsinresponsetogovernment concerns about escalating heating costsforthepoor.However,exporttaxesareasecond-bestpolicy response to distributional problems comparedwithadirectsubsidyoranincometax.

Overall welfare considerations should also take intoaccount the fact that export taxes may generateproduction inefficiencies in the resource-using sector.For example, they may distort investment incentivesandencourageexport-taxjumpingFDI(seeBox16).Inaddition, because of the implicit subsidies, they mayencouragetheprocessingsectortoproduceagoodfor

whichitdoesnothaveacomparativeadvantage.Inthisrespect,anexporttaxhasaneffectsimilartothatofadual pricing scheme,25 whereby prices in the exportmarket are determined by market mechanisms whilepricesinthedomesticmarketarefixedbyagovernmentatalowerpricethanabroad.

Besidesterms-of-tradeandincomedistributionmotives,governmentsmayalso imposeexporttaxesonnaturalresources for a variety of other economic objectives,includingtosmoothoutthevolatilityofexportearningsandtostabilizeincome,topromoteexportdiversificationandtorespondtotariffescalation(seeBox19).Exporttaxesonnatural resourceshavealsooftenbeenusedfor non-economic reasons, such as conservation andenvironmentalprotection(KorinekandKim,2009)26–subjectsthatwillbediscussedinsub-section4.

(c) Exportquotas

In general, the exhaustibility of natural resourcesimplies a trade-off between extraction today andextraction in the future. For a country that exportseverythingitproduces,establishinganexportquotawillgenerallyresultinhigherfutureratesofextraction.

Box19: export taxes as a tool to address resource volatility, dominance and tariff escalation problems

export taxes as income stabilization policy

Onedistinguishingfeatureofnaturalresourcestradeishighpricevolatility.Anotheristhatnaturalresourcesoften represent a disproportionate share of resource-rich countries’ GDP and exports. These two featurestogethermakesomecountriesparticularlypronetoincomestabilizationproblems.Arecentstudy(Borenszteinet al., 2009) shows that 40 countries characterized by a heavy dependence on the export of one singlecommodityexperiencedexport incomevariabilitytwiceas largeasnon-commodityGDPvariabilitybetween2002and2007.27

Incomestabilization,andinparticularexportrevenuestabilization,iscommonlyviewedasanimportantpolicygoal.Stabilizationschemes,internationalcommodityagreementsandbufferstocksareallexamplesofpoliciesthathavebeenaimedatreducinginstability.Althoughneithereconomictheorynorempiricalevidenceprovideclear conclusions about the relationship between export-earning instability and economic growth (seeSectionC.5),itseemslikelythatreducedincomevolatilityiseconomicallybeneficialforcountriesbecauseitleadstolowerconsumptionvolatilityandhigherwelfarewhenconsumersareriskaverse.

Threemotives justify theuseofanexport tax inthesecircumstances.First, itsoftensthe impactofrapidlyrisingworldpricesinthedomesticmarket(recallthattheimpactofanexporttaxistolowerdomesticprices),thus protecting local consumers. Second, it increases government revenue, thus easing fiscal imbalances.Third,ittaxesthewindfallgainsofexporters,thuspromotingafairerdistributionofincome.28

However,theuseofanexporttaxtostabilizeincomeisnotwithouthazards.First,aflatexporttaxthatdidnotdifferentiatebetweenpricerisesandfallswouldnotbeeffectiveinsmoothingthetransmissionofworldpriceshockstothedomesticeconomy.Whatisneededinsteadisaprogressiveexporttaxsystem–wherebyahightaxrateisimposedwhenworldcommoditypricesrise,butthetaxrateisreducedorremovedwhenpricesfall.Thiswouldcapturepartofthegainsfromincreasingcommoditypricesbutavoidtheadverseimpactoffallingpricesonproducers’incomes.

Second, a progressive export tax system can reduce the transmission of price fluctuations and act as anincomestabilizeronly ifgovernmentsarewilling toadjust theirexpenditurepatternsaccordingly inorder tobalancedemandovertime.Volatilityofworldpricescanresultinfluctuationsintaxrevenue.Inordertostabilizeincome in thedomesticeconomy,governmentsneedtosaveduringperiodsofhigh tax revenueandspendmoreduringperiodsoflowtaxrevenue.Ifgovernmenthasahigherpropensitythanconsumerstospend,thentheincomemultiplier29willriseastheexporttaxrises,withtheresultthatevenaprogressiveexporttaxsystemwouldfailtostabilizetheeconomy.


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Third,politicalandsocialinstitutionsneedtobeflexibleenoughtoadjusttochangingconditions.Theexternalfactorsthatfirstpromptedanexporttaxcanevaporatequickly,butmanygovernmentsmaylackthepoliticalandinstitutionalflexibilityneededtomakerapidpolicyadjustments–leavingexporttaxesinplacelongaftertheunderlyingeconomicconditionshavechanged.

Finally,exporttaxesmaytriggeraself-reinforcingspiralofrisingprices.Whenexporttaxesareintroducedbyseveralexportingcountriesorbyamajorexporter,thefallintheinternationalsupplyofthecommoditysubjecttoexportrestrictionsmayfurtherincreaseexportprices(WorldTradeOrganization(WTO),2009).

Ingeneral,exporttaxesareasecond-bestoption.Indeed,naturalresourceeconomiststendtoarguethatthedevelopmentofefficientstockexchangesandfinancialmarketsisamoreeffective–andlowercost–wayofaddressing income instability problems. In particular, some economists urge governments to accumulateforeignassetsincommoditystabilizationfundsasprecautionsagainstpossibleinstability(ArrauandClaessens,1992;Deaton,1991;Durduetal.,2009).However,thisstrategymaybelessviableincountriescharacterizedby weak governance, as the funds are vulnerable to misuse. Moreover, the accumulation of precautionaryreservescomesat thecostof lowerdomesticconsumptionandwelfare.Alternatively,commodityexportersmay ensure against the risk of export income volatility by hedging the risk with derivative instruments(Borenszteinetal.,2009;CaballeroandPanageas,2008).

export taxes as export diversification policy

Concernsabouttheeffectsofresourcepricevolatilityrunintwodirections–ontheonehand,fearsofpossiblewelfarelossesassociatedwithdeterioratingterms-of-trade,andontheotherhand,fearsofde-industrializationassociatedwithimprovingtermsoftrade(theso-calledDutchdisease).30Forexample,Roemer(1985)notesthat themost common response to risingmineral prices–and the threatofDutchdisease– is to tax theboomingmineralexportsectorandtosubsidizethelaggingdomesticmanufacturingsector.Bytaxingexports,thegovernmenteffectivelyredistributesincomefromtheboomingsectortotheshrinkingsector.31

AsdiscussedinSectionC.4,anaturalresourceboomneednotleadtoDutchdisease.Theshrinkageofthenon-competitivesectoristheefficientresponsetotheexpansion(andincreasedearnings)ofthecompetitivesector, inthiscasenaturalresourcesextraction,becauseitallowsthecountrytoenjoyhigherwealth.OtherfactorsareresponsiblefortheDutchdisease,suchaspre-existingdistortionsorpositivespilloversassociatedwithproductioninthemanufacturingsector(vanWijnbergen,1984;SachsandWarner,1995).Inthesecases,the first-best policy response would be the removal of the distortion or the provision of incentives to takeaccountofthespillovers.Tradepolicycanonlybejustifiedasasecond-bestpolicyoption(i.e.becauseitdoesnotdirectlyaddressthecauseoftheproblem)whenthefirst-bestoptionisnotviable.

Export taxes have not only been used to avoid de-industrialization, but also to promote infant industries.32Sincenaturalresourcesareusedasinputsinmosthigher-valueaddedindustries,exporttaxescanworkasanindirectsubsidytomanufacturingbyreducingthepriceofresourceinputs.Byshiftingsupplyfromtheexportto thedomesticmarket, export taxes lower thedomesticpriceofnatural resources tobelowworldmarketprices,thusgivingthedomesticdownstreamindustryacompetitiveedgeagainstforeigncompetition.

However,traditionaleconomicmodelssupportinfant-industrytypesofpoliciesonlyinspecificcircumstances.Accordingtomanyeconomists,theargumentthatnewdomesticindustriesmaynotbeabletocompetewithwell-established foreign firms because they lack sufficient experience – and that if protected, they mayeventuallyacquiretheexperienceandacomparativeadvantage–isnotper seasufficientargumenttojustifygovernmentinterventionfromaneconomicefficiencypointofview.Thisisbecausewell-functioningfinancialmarkets will recognize the potential comparative advantage of the new industry, and will lend it sufficientresourcesintheinitialphaseofitsdevelopment,ontheassumptionthattheirinvestmentwillberepaidassoonas the industry develops its comparative advantage (Baldwin, 1969). Government intervention can only bejustifiedinthepresenceofsomeformofmarketfailure,suchasimperfectfinancialmarkets.Trade-restrictivemeasuresrepresentasecond-bestpolicyoption(thefirst-bestoptionwouldbetoreformfinancialmarkets).

export taxes as response to tariff escalation

Whiletariffsonnaturalresourcestendtobeverylow,evidencesuggeststhattarifflevelstendtoincreaseascommodities become more processed.33 To the extent that developed countries’ imports are crucial to thegrowthofhighvalue-addedindustriesindevelopingcountries,tariffescalationmayincreasepoorercountries’relianceonunprocessedprimarycommoditiesandhindertheirabilitytodiversifytheireconomiesanddevelopadomesticmanufacturingsector.Inthissituation,theremovaloftariffescalationwouldbethefirst-bestpolicy(i.e.theleastdistortionary)toachievediversification.However,exporttaxeswouldbeasecond-bestpolicy–becauseby reducing thedomesticpriceofa resource, theywould favour the localprocessing industryandoffsetthedistortionaryeffectsoftariffescalation.


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willbeconsumedintwoperiods(seeFigure33).34Ifanexport quota is introduced in period 1 at the leveldenotedbyQA,thenthepriceinperiod1willincreaseand equal PA. In period 2, the supply of the naturalresourcewill behigher (equal to thesegmentQs-QA)andthepricewillbelower,PB,thanintheabsenceofafirst-periodquota.

Whatarethewelfareeffectsofanexportquota?Intheexportingcountry, theeffectofanexportquota is toshiftrentsfromthesecondtothefirstperiod,and,inprinciple, the loss in the second period may even belarger than the gain in the first period. The figurebelowclarifiesthispoint.IfaquotaQAisimposed,thepriceoftheresourcewill increaseandtherewillbeaterms-of-trade gain in period 1 (the green area).However, since a larger amount of resources will beavailableinthesecondperiod,thepriceinperiod2willfallbelowthe level thatwouldhaveprevailedwithoutthequotaandtherewillbeaterms-of-tradeloss(theyellowarea).

At the world level, the price wedge between the twoperiods implies a real income loss, given by the areaABE. Of this, the area ACE is the loss in consumersurpluscausedbyhigherpriceinthefirst-period,whichis not compensated by the terms-of-trade gain. TheBCEisthesecond-periodterms-of-tradelossthatisnotcompensatedbythegaininconsumersurplusresultingfromlowersecond-periodprice.

Two points are worth noting. First, the price of theresourcecanbekepthigheroverthetwoperiods(andthereforeaterms-of-tradeargumentfortheimpositionof a quota exists) only if a government can crediblycommit that it will leave some of the resourcesunexploitedintheground.Second,whenallresourcesare exported, an export quota is equivalent to aproduction quota. The trade-off between extractiontoday and extraction in the future also holds in thiscase.

Several reasons may justify the introduction ofquantitative restrictions on the extraction rate of aresourcerelativetotheoptimalonethatmightotherwisebechosenby thecompetitiveproducer. In thecaseofnaturalresources,uncertaintyaboutthefutureplaysanimportant role in decisions about extraction, and thisuncertainty may take different forms. There isuncertaintyof supply, due to the fact that reservesofsomenaturalresourcesareat leastpartiallyunknown.Inaddition,thereisuncertaintyonthedemandside,assubstitutes for resources may be developed andbecomeavailableatsomeunknownpointinthefuture.Risk-aversionplaysanimportantroleindeterminingtheoptimalextractionpathsinthiscase.Forexample, ifagovernment is more risk-adverse than the privateproducerandwantstoavoidrunningoutofaresource,itmayconsideritoptimaltointroduceaquotatomovetowardsamoreconservativeextractionpath(Devarajanand Fisher, 1981; Weinstein and Zeckhauser, 1975;ArrowandChang,1978;Hoel,1978).

Another important reason for restrictingproduction inone period relative to the future is the existence ofexternality – which will be discussed in more detailbelow.Inaddition,exportquotas,likeexporttaxesmaybe introduced as a second-best policy measure tofurthercertaindevelopmentobjectives,asnotedabove.

Finally, export quotas can also be rationalized by aterms-of-trade argument. When there is domesticdemandfortheresource,anexportquota(likeanexporttax)willcreateawedgebetweendomesticandforeignpricesandworkasabeggar-thy-neighbourpolicy.Theresource-exportingcountrygainsintermsoftrade,butthepolicygeneratesoverallefficiencylosses.

(d) Subsidies

Althoughavailableinformationsuggeststhatsubsidiestonaturalresourcesectorsaresignificant(WorldTradeOrganization (WTO), 2006), no comprehensive cross-countrydataexisttoallowacomprehensivecomparison

Figure33:the effect of a quota in period 1

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of subsidy policies across the main producers andconsumersofnon-renewablenaturalresources.35

Aproductionsubsidyinaresource-exportingcountryisessentiallyasimpletransferfromthegovernmenttotheproducing company. Provided that supply is linked toavailable resource stocks (the situation described inFigure31),aproductionsubsidywillnotaffectconsumerprices, but will simply increase the price per unit ofoutputfortheproductioncompany.Fromaneconomicperspective, production subsidies in an exportingcountryarejustifiedwhenthereisamarketfailureandwhen insufficient resources flow to the extractionactivity. In thecaseofanatural resourcessector thatrepresents,ormaypotentially represent,a largeshareof a country’s economy, one can imagine that thedevelopment of an extraction company could havepositiveexternalities for the restof theeconomy, andthusthecaseforpublicsubsidiescouldexist.

A consumption subsidy acts like an export tax whenprovidedbythenaturalresource-exportingcountry,andsimilar rationales apply. To the extent that the twomeasuresdiffer,anexporttaxrepresentsrent-shiftingfrom the producing company to the government andconsumers,whereasaconsumptionsubsidyrepresentsa transfer from government to consumers and theproducingcompany.36

In contrast, a consumption subsidy provided by theimportingcountryworksintheoppositedirectiontoanimporttariff,inthatitisasimpletransfertotheexportingcountry – suggesting that there may be mainly anincomedistributionrationalebehindit.

Production and exports can also be affected byexploration subsidies. Since available natural resourceendowments are partially unknown, and companiesmust invest in exploration to discover new deposits,governmentsmaychoosetosupportthisactivitythroughexplorationsubsidies–thatis,incentivesforcompaniesto invest in exploration. By increasing the amount ofproven resources, more intensive exploration activitycanincreaseproductionandexportsofnon-renewableresources.InthesituationillustratedinFigure31,thisisequivalenttoshiftingthesupplycurvetotheright.

Theeconomicliteraturehighlightsanumberoffactorsthatmaycausemarketfailures intermsofexplorationactivity and hence justify public intervention.37 One isthe spillover of geological information. Becauseexploration isexpensiveanduncertain–andbecauseproducerscanbenefitfrominformationthatspillsoverfrom exploration attempts in adjacent territories –producers might have an incentive to wait for theirneighbours todrill first, resulting in socially inefficientlevelsofexploration(Stiglitz,1975;Peterson,1975).Agovernment subsidy to encourage exploration couldresult in the discovery of new resources that mightotherwisehavegoneundeveloped.

Exploration by the government itself – or subsidies toencourageprivateexploration–maymakesensefortwootherreasons.First, theremaybepositivespilloversto

therestoftheeconomyfromsuccessfulexplorationthatraisetheoverallbenefitsforthegovernmentrelativetoprivateactors–thusjustifyinggovernmentinterventions.Second,aprinciple-agentproblemexistsinexplorationthat may induce a sub-optimal exploration rate. Theproblem arises because of sunk (i.e. non-recoverable)costsofexploration (Collier andVenables,2009).Thereductionofthisinitialsunkcostthroughtheprovisionofasubsidyisawaytoaddresstheproblem.

The market may also fail to deliver a socially optimallevelofexplorationbecauseoftheso-called“tragedyofthecommons”.38Ifanexplorerthatdiscoversamineraloranoildepositmayexcludeothersfromtheexploitationof the natural resource, he will have an incentive toexplore and capture the benefits of a discovery asquickly as possible before others do. This “race” mayresult in over-exploration, as each discovery reducesthe amount of resources available to all (Hotelling,1931).Aswillbediscussedinmoredetailbelow,therearea rangeofpolicy instrumentsavailable toaddressthe problem of the commons – from rules andregulationstotaxesandsubsidies.Onewaytoreduceover-exploration is to create an incentive to invest inother activities, for example by providing subsidies toencourage research into substitute or renewableresources (e.g. subsidies to encourage research intobiofuels or solar energy as a way of offsetting thedevelopmentofnewoildeposits).

3. Tradepolicyandexhaustibility:Theproblemofopenaccess

As explained in Section C, free trade in naturalresources between two countries may not always bemutuallybeneficialwhenopenaccessproblemsexist.What policies should governments adopt to addressthisproblem?Andaresomeapproachesmoreefficientandeffectivethanothers?

(a) Tradepolicyinstruments

Thefollowinganalysisassumesthattheexportingandimporting countries are “large” economies capable ofaffectingworldprices (the resultwouldessentially bethesamefor“small”economiesexceptfortheterms-of-trade effect). Moreover, the discussion focuses oncomparingthelongruneffectofpoliciesratherthanonthetransition,i.e.steady-stateequilibria.39

Anexporttaxappliedbyaresource-exportingcountrywith open access problems will reduce the level ofextractioninthenaturalresourcessector. Itraisesthewelfare of the resource exporter in two ways: byimprovingitstermsoftradeandbyincreasingitslong-runstockofnaturalresources.However,theuseofanexporttaxhasabeggar-thy-neighboureffectbecausetheincreaseinwelfareoftheexportingcountrycomesattheexpenseofthewelfareofitstradingpartner.Theimporting country will suffer a terms-of-trade declineand its steady state natural resources stock will belower.


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Theresultingincreaseintheexportingcountry’s long-runstockofnaturalresourcesassumesthatthereisnodomesticprocessingsectorthatcouldmakeuseofthenaturalresource.Incaseswhereadomesticprocessingsectorexists,anexport tax isa lesseffective tool forprotectingnatural resource stocks, since it effectivelylowers the resource price that domestic processorshavetopayandincreasesthequantitytheywilldemand(seeBox20).

Whathappenswhen the importing country imposesatariff on the natural resource, leaving aside for themomentthequestionofpreciselywhyitwouldwanttodo that. Given the large country assumption, such a

restriction will improve the terms of trade of theimportingcountrywhilereducingthetermsoftradeoftheresource-exportingcountry.Moreover,thelong-runstockof thenatural resource in the importingcountrywill fall while the steady state stock in the exportingcountrywill rise.BranderandTaylor (1998)show thateventhoughtheresourceexportersuffersaterms-of-trade loss, itgains in thesteadystatebecauseof thegreater stock of natural resources which, in turn,expandsitsconsumptionpossibilities.

BranderandTayloralsoshowthattheimportingcountrymay benefit from the imposition of protection in twoways: through a terms-of-trade improvement and

Box20:export restrictions in the tropical lumber industry

The world’s forests are endangered by decades of over-logging – primarily triggered by land conversion,notably into agriculture (Robalino and Herrera, 2009). Since the 1970s, many developing countries haveresorted to taxesor bansonexportsof logs for thepurposesbothof conserving their useandpromotinggreater domestic value-added processing. Jeffrey (1992) noted the use of (high) export taxes in WesternAfrica (Cameroon, Ivory Cost, Ghana), South East Asia (Indonesia and Malaysia) and Latin America. Onejustificationfortheuseofthesemeasureswastocorrecttheeffectofhightariffescalationimposedbysomedevelopedcountriesagainstprocessedwoods,deemedtodepresspricesfortropicaltimberoninternationalmarkets. Furthermore, export measures served industrial policy and development objectives by providingassistancetodownstreamindustriesincorrectingthebiasintroducedagainsttheirexportsbytariffescalationinimportingcountries,andby“capturing”someoftheeconomicrentassociatedwiththecountries’perceivedmarketpowerinthesesectors.

Exportmeasureshaveoftenbeencombinedwithdomesticpolicymeasures(governmentcontroloflandandofloggingconcessionsandlicences,obligationsbyconcessionairestoundertakefurtherprocessingoftimber)toencouragedomesticprocessingindustries.AnumberofWTOtradepolicyreviewshavedocumentedhowhigh export duties on logs and export promotion measures (including concessionary credit, insurance andguarantees,exemptionsanddutydrawbackonmachinery)haveplayedacentralroleinIndonesiaandMalaysia’sindustrialpolicies.In20years,Indonesia–whosegovernmenthadlinkedthegrantingofloggingconcessionsto the establishment by the applicant company of a wood/plywood processor near the territory of theconcession–fulfilledbythelate1990sitsobjectiveofbecomingtheworld’slargestplywoodmanufacturerandexporter,whileexpandingwoodfurnitureindustries.Malaysiaalsobecamethesecond-largestexporterofwoodproducts.Undoubtedly,exportpolicycontributedtogenerateemployment,raiseexportreceiptsandtoboosttheeconomygenerally.

However,someeconomistshavearguedthatthescaleatwhichthesepolicieswereconductedraisesquestionsaboutefficientresourceallocationandresourcesustainability,eventhoughsustainabilitymayhavebeenoneofthetwogovernments’objectivesattheoutset.Anderson(1997)aswellas Varangisetal.(1993) arguedthatimpediments to trade reduced thevalueofsustainable forestry.Althoughpoor implementationofdomesticpoliciesregulatingtheproductionofdomestic timber(inadequate loggingsupervision, lackof tenurerights,inadequate stumpage fees, non-transparent allocationof logging concessions)weremainly responsible forunsustainablelogging,“tradepoliciesareinefficientinstrumentsforcorrectingdomesticdistortionsand,inthecaseoftropicaltimbertrade,mayaffecttheenvironmentperversely.Exportandimportrestrictionsultimatelydepressthevalueofanalreadyunder-priceresource–theforest.”

PolicycasesconductedbytheWorldBank(1998)identifiedsomeofthedrawbacksassociatedwithprohibitiveexporttaxesinforestry(500to5,000percentinIndonesiain1998)andrequirementsonconcessionairestoestablish wood-processing factors, resulting in domestic logs and timber prices being one-fifth of theinternationalprice,theproliferationofwood-processingmills(3,000inIndonesia),wastageratiosuperiortothe international average, and finally the diversion of wood to relatively less remunerative and efficientdownstreamprocessingindustries(plywood)thanalternativeindustries(higher-valueaddedfurniture).

Intheearlypartofthisdecade,theIndonesianandMalaysiangovernmentscorrectedsomeoftheidentifieddrawbacks, notably by reducing the amount of the export tax, weakening powerful export cartels that hadobtainedtradeandotherprivilegesfrompreviousgovernments,andpartiallyliberalizinglogexports.However,inviewoftherapidlydevelopingdemandforrawandprocessedwoodproductsinAsiaontheonehand,andtheexpansionofuncontrolledloggingandsmugglingofwoodproductsintheforestsofbothcountries,bothgovernmentsdecidedtore-establishexportbansontropicaltimber.


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throughthetariffrevenuesitcollects.Itispossiblethatthesebenefitscouldoutweighthe lossfromthe lowersteadystate levelof thenatural resourcesstock.Thispossibilityofanetgaincouldexplainwhyaresource-importingcountrymightbewillingtoimposeatariffonanaturalresource.

Clearly,theexportingcountrywillpreferanexporttaxtoatariff,whiletheimportingcountrywillhavetheoppositepreferences. Inboth instances, the long-runwelfareoftheexportingcountryrises.Thekeydifferencebetweenthetwoinstrumentsisthatthesteadystateutilityoftheimportingcountryfallswithanexporttax,whereastheeffectisambiguouswithanimporttariff.

(b) Domesticpolicyinstruments

(i) Strengthened property rights

The economic literature argues that a more efficientoutcome can be achieved by strengthening propertyrights rather than by employing trade measures. Thefirst-best policy is to eliminate the distortion at thesource,whichistheabsenceofpropertyrightsoverthestockofnaturalresources(BranderandTaylor,1998).Thisimpliesthatwhenbothtradingpartnersareabletomanagetheresourcesectoreffectively,bothcountriescan reap thebenefitsof tradeopeningwithout riskofresourceover-exploitation.

Howdoesstrengtheningpropertyrightsintheexportingcountry compare with imposing export taxes, asdiscussed above? First, strengthening property rightsimproves resource allocation by reducing the level ofextractionbelowtheopenaccessequilibriumtoapointthat would maximize rent (see Section C.3). Second,giventhereductioninresourceextraction,strengthenedpropertyrightswillalsoproduceaterms-of-tradegainfor the exporting country. But unlike an export tax,strengthened property rights would fully correct theunderlyingdistortionarisingfromopenaccessproblems– i.e. too much effort or labour devoted to harvestingthenaturalresource.

However, seeing this problem in terms of perfectpropertyrightsversusopenaccessisprobablyunhelpful,giventhatpropertyrightsregimestypicallyliebetween

thesetwoextremes.Whilestrengthenedpropertyrightsis the first-best solution, it is important to understandthe limitations that regulators (whether nationalgovernmentsorlocalcommunities)facewhentryingtoenforcerulesgoverningaccesstonaturalresourcesortomonitorcompliance(CopelandandTaylor2009).

Ostrom(1990)hasstudiedmanysuccessfulexamplesof community efforts to manage common poolresources from around the world – ranging fromfreshwater basins in the United States to irrigationsystemsinthePhilippines,andtomountainpasturesinSwitzerland (see Box 21). In each case, these areneithercompletelyopenaccessresourcesnorperfectlymanaged resource systems. Nor are they completelyprivatized or fully state-controlled systems. Theyoperate using an assortment of rules for sharing theresource,formonitoringcompliancewiththenormsandforadjudicatingdisputes.Frequently,agreementamongthemembersofthecommunitycovernotonlyhowtheresourceistobesharedbutalsohowprovisionistobemade for maintaining, repairing or investing in thenatural resource system. What is striking about theseexamplesistheirlongevity,withsomelocalinstitutionsbeingcenturiesold.Whileitisnotpossibletoclaimthattheselocalsolutionsachieveaneconomicoptimum,thedurabilityof the institutionsnevertheless testifies toacertainlevelofsuccessinmanagingnaturalresources.

Ostrom identifies a number of “design” principles thatcharacterize these long-standing arrangements. Theindividuals who have rights to the resource and theboundariesoftheresourceitselfareclearly identified.Therulesgoverningtheharvestingoftheresourceandthe obligations to provide for maintenance repair orinvestments are tailored to local conditions. Theindividualswhoaresubjecttotherulescanparticipateinmodifyingthoserules.Thosewhomonitorcompliancewiththerulesareaccountabletotheharvestersorarethemselvesharvesters.Sanctionsarecalibratedtothedegreeofseriousnessoftheoffence.Low-costvenuesfor resolvingdisputesareavailable.Higherauthoritiesat the regionalornational levelsdonotchallenge therightof localcommunitiestodevisetheirownrulesorinstitutions.

Themorecomplexthecommonpoolresourcesystemis,themorewidely layeredormulti-levelledare the rules.

Box21:Alpine meadows

OneofthesuccessfulexamplesoflocalcommunityeffortstomanagenaturalresourcescanbefoundinTörbelintheSwisscantonofValais.Sinceatleast1224,historicalrecordsdocumentthatvillagershavebeenmanagingseveraltypesofcommunalproperties,includingalpinemeadowswherecowsareallowedtodotheirsummergrazing.Thecommunalmeadowshaveco-existedwithprivateownershipof landsforat least500years.ForOstrom,thisindicatedthatcommunalownershipwasnotsimplyavestigefromthemedievalages,butarationallychosenwaytomanagethemeadows.Accesstothemeadowsisstrictlylimitedandregulationsdatingbackto1517furthersetouttheselimitations:nocitizencouldsendmorecowstotheAlpthanhecouldfeedduringthewinter.This“wintering”rulewasstrictlyimposed,withofficialsinchargeofenforcementgiventherighttocollecthalfofallthefinesleviedonthosecaughtviolatingit.Althoughyieldsarelow,themeadowshaveconservedtheirproductivityforhundredsofyears.Villagershelptopreservethisproductivitybycontributinglabourtoweedandmanurethegrazingareas,andbyconstructingandmaintainingmountainroads.

Source: Ostrom(1990).


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While Ostrom is able to offer exemplary cases ofsuccess, she also documents quite a large number ofunsuccessful efforts at managing common poolresources. In her estimation, they failed because theylacked a sufficient number of the design principles.However,Ostromiscarefultoofferthequalificationthatthese design principles are not necessarily pre-conditions for success. The difficulty of providing aneconomically concise analysis or explanation for whytheseinstitutionsworksuggeststhatthereismorethanatouchoffortuityinvolvedinthemostsuccessfulcases.

Furthermore, thedifficultyofachievingan idealpropertyrights regime may be particularly acute in developingcountries.Institutionalandsocio-politicallimitationsmakeit unlikely that poor developing countries will be able toimplement such policies effectively in the near future(Lopez,1998).Thisopensthedoortotheuseofalternativepolicy instruments such as trade measures, which werediscussedbefore,anddomestictaxesandquotas.

Inconnectionwiththis,itwillbehelpfultoexamineotherdomesticmeasuresthathavebeenused inthenaturalresourcessector.Thetworeviewedhereareaproductionquotaorlimitonharvest,andataxonharvest.Inaddition,becausesubsidiesinsomerenewablenaturalresourcesectors, such as fisheries, have been particularlyimportant,theirimpactisalsoexamined

(ii) Tax on production or harvest

BranderandTaylor(1998)rankaproductiontaxinthesameorderofefficiencyaspropertyrights,i.e.theyarefirst-best instruments,40 if the tax issetata level thatmakes the harvester internalize the reduction inproductivitythatheinflictsonotherharvesters.Thisisshown in Figure 34 which depicts the situation aftertradeopening,meaningthattherevenuecurvereflectsworld market or post-trade liberalization prices. Theapplicationofaproductiontax(atarateequaltoAB/AE**) shifts the revenue curve inward to the dashedcurve (i.e. lowers the revenue from harvesting theresource)so that labourallocationunderopenaccessnowbecomesequaltotheoptimallevelofeffortE**.41

NotethatE**istheallocationoflabourthatwouldresultfrom the actions of an owner whose objective was tomaximizetherentfromtheresource(marginalrevenueequalsmarginalcost).Thedifferenceinthiscaseisthatthe linesegmentABrepresentstaxrevenuecollectedbythegovernmentinsteadofrent.

(iii) Quantitative limit on the harvest of natural resources

Theviewabouttheefficacyofproductiontaxesisnotshared by everyone. Chichilnisky (1994) claims thattaxing the harvest of the natural resource can evenexacerbatetherateof itsextraction.However, it turnsoutthatherresultrequiresadditionalassumptionstobemade about the consumption preferences of thoseworking in thenatural resources sector. Theoutcomeshe describes occurs because she assumes workerswho harvest the natural resource have a demand forconsumption goods produced in the non-resourcessectorthatisnotaffectedbypricechanges.Thus,facedwith a reduction in their revenue as a result of theapplication of the production tax, they must harvestmore of the resource so that they can purchase thesameamountoftheconsumptiongood.Ontopofthis,there will be an additional welfare loss from theincreased harvesting because of the decline in theresource-exportingcountry’stermsoftrade.

Ferreira(2007)arguesthattheuseofaproductiontaxbytheresource-exportingcountrywillnotbesufficientto prevent it from suffering a welfare loss. Herexplanation for this is that unlike a quantitativerestrictiononharvesting,ataxonharvestsdoesnotfixthe amount harvested since the allocation of labourrespondstochanges inrelativeprices.Themovementfrom autarky to free trade increases the price of thenatural resource in the country with poor propertyrights.Workersinvolvedinthenaturalresourcessectorwill increase their effort so that they can harvest andsell more of the resource at the higher price. Aproductiontaxwillreducebutnoteliminatetheincentiveforworkers toallocatemoreof their labour toharvestthenaturalresource.

Figure34:effect of a production tax

A

Dollars

Labour effort

E* – open access level of effortE** – level of effort with production taxAB – tax revenues

Total revenuenet of prod. tax

Total revenue

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Ferreira (2007) argues that a production quota onharvests is preferable. As long as there is somequantitativerestrictioninplacetolimitharvestingofthenatural resource, free trade can be optimal for theexportingcountry.Furthermore,agovernmentdoesnotneedexact informationontheoptimal levelofharvesttosetaquantitativerestrictionthatwillincreasewelfare.So long as the quantitative restriction on the amountharvested is binding, trade opening will not putadditionalstressonthestockofthenaturalresourcessectorandhencewelfarewillincreasefortheresource-exporting country. This is because a country thatliberalizesusuallyexperiencesgainsfromtwosources:increases in consumer surplus (because liberalizationreduces the price paid by consumers for import-competingproducts)andincreasesinproducersurplus(because factors of production are more efficientlyutilized).

In a situation where the natural resources sector ischaracterizedbyopenaccess,tradeopeningresultsinmore effort or labour being allocated to the naturalresourcessector,leadingtolossesinproducersurplus(rentdissipation) thatdominates thegain inconsumersurplus. However, if a quantitative limit is set on theharvestofthenaturalresource,sothatnoreallocationof labour to the natural resources sector takes place,the gains in consumer welfare will be sufficient toproduceanoverallincreaseinthecountry’swelfare.

The argument about the superiority of a productionquotatoaproductiontaxissurprisingsinceatwhateverlevelaproductionquotaisset,thereisalwaysawaytosetaproductiontaxsothatitachievesthesameresultwhen implemented. Using Figure 34 to illustrate thispoint,notethattheoptimallabourallocationE**canbeattained either by a production quota that fixes theharvest at the amount AE** (assuming that the worldpriceisnormalizedtoone)oraproductiontaxequaltoAB/AE**. Weitzman’s (1974) classic article on pricesand quantities shows that, when there is completecertainty about benefits and costs, price instrumentsare equivalent to quantitative controls. It is only whenthe regulator facesuncertaintyabout thestructureofbenefitsandcoststhatthetwoinstrumentswillnotbeequivalentintheirwelfareeffects.42

Nevertheless,theresultfromFerreira(2007)mayhaveimportantpracticalpolicy implications ifuncertainty isallowedandduetothefactthatmanypoorbutresource-rich countries do not have the monitoring andenforcement capability to implement a first-bestpropertyrightsregime.Asimplequotaontheamountofresources that can be harvested, however, may befeasible for poor countries. Furthermore, the quotaneednotevenbesetattheoptimalamountofharvest,andyettradeopeningwillbewelfareimprovingfortheresource-exportingcountry.

(iv) Subsidies

While it iswidelyrecognizedthat importantrenewableresources are over-exploited, and that corrective

measures need to be implemented to restore theirproductivity, this recognition has not stoppedgovernments fromproviding various formsoffinancialsupport to producers. One notable example is fishingsubsidies. The reasons for such support are varied.Sincefishisanimportantfoodsource,subsidiescouldbe rationalized as a measure to ensure food security.Fishing communities may be located in strugglingregionsof a country and so subsidiesoftenhelp jobsremain in those areas. Finally, subsidies may also beprovidedinordertoreducefishingeffortsandconservefish stocks (see Box 22 on the buy-back of fishingvessels).

Economic theory suggests that subsidies that reducethe cost of harvesting (e.g. subsidies for fuel used infishing boats or subsidies for fleet modernization, orsubsidies that are paid on the basis of harvest) willworsen the exploitation of stocks that already sufferfrom open access. The increase in revenue or thereduction incostmadepossibleby thesubsidy raisesrentinthenaturalresourcessectorandtherebyattractsmoreentry.Thisinfusionofentrantscontinuesuntilrentistotallydissipated.

Despitetheincreasedeffort,theeffectofthesubsidiesonharvestoroutput isambiguous. It isonlywhenthenatural resources system is in the upward slopingportionof thesupplycurve that thesubsidy results inmoreoutputorharvest.Ifthenaturalresourcessystemisinthebackward-bendingportionofthesupplycurve,thesubsidywillresult inreducedharvestoroutput.Torecall theexplanation inSectionC.3, thesupplycurveofthenaturalresourceunderopenaccessisbackward-bending because too much effort is involved inharvesting. Hence, when the price rises, drawingadditionallabourtothenaturalresourcessector,thoseadditional workers reduce instead of increase totalharvest.Bythesametoken,thesubsidyaggravatesthecrowding in thenatural resourcessectorandreduces,insteadofincreases,totalharvest.

When the resources are subject to some form ofmanagement,whethersubsidiesworsentheexploitationofthenaturalresourcesstockornotmaydependonthenature of the management system. If management oftheresourcetakestheformoftheindividualtransferablequota (ITQ) system, which has become popular infisheries, where a total catch (the “total allowablecatch”)isdeterminedattheoutsetandindividualquotasareassignedtoharvesters,thesubsidywillnotincreasethe exploitation of the resource if the total allowablecatch is left unchanged and is effectively monitoredandenforced.Instead,thesubsidysimplystayswiththeharvestersorITQownersasincreasedrents.

What is theeffectofsubsidieson international trade?The interesting case is where the initial free tradeequilibriumoccurs inthebackward-bendingportionofthe supply curve of the country with open accessproblems.Somehavearguedthatgiventheseverityoftheopenaccessproblem infisheries, this is the likelysituationforthatsector(AscheandSmith,2009).


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Figure 35 below shows the free-trade equilibriumoccurringinthebackward-bendingportionofthesupplycurve. The structure of demand is the same in bothcountries and is given by DH. The country with weakproperty rights imports the natural resource from thecountrywithstrongproperty rights.Theworldprice isgivenbyP*withimportsgivenbyBCwhichisequalto

exportsCF.Asubsidybythecountrywithweakpropertyrightsincreaseseffort(shownastheshiftinthesupplycurvetoS’w).However,sincethesubsidizingcountryisalready in the backward-bending portion of its supplycurve,thisadditionaleffortactuallyreducesitsharvestandthesteadystatestockofthenaturalresource.Asaconsequence,at the initialworldpriceP*, thecountry

Box22:Are there good subsidies? the case of vessel buy-back schemes

Anexampleofapotentially “good”subsidy isabuy-backprogrammewherefishermenarecompensated toremovetheirfishingvesselandtherebyreducefishingefforts.However,opponentsofthenotionthattherearegoodsubsidiesclaimthatalltransferswilleventuallybetransformedintoincreasedeffort.Hence,theentryofnewvesselsorincreasedcapacityintheremainingfleetwillmakeupforthereductionineffortimpliedbytheremovalofonevessel.

Buy-backprogrammesareacommontooltoreducecapacityinfisheries,particularlyindevelopedcountries.Howeversomedevelopingcountriesalsohavesuchprogrammesinplace.Fishingvesselshavelittlealternativevalueand it is thereforedifficult for thefishermen towithdrawavessel.Buy-backprogrammesprovide themeanstochangethis.

GrovesandSquires(2007)giveeightcategoriesofreasonswhyvesselbuy-backsareusedasamanagementtool: (1) increasing economic efficiency, (2) modernizing fleets and adjusting fleet structure, (3) facilitatingtransitionbetweenmanagementregimes,(4)providingalternativeswhenrights-basedmanagementformsarenotanalternative,(5)providingdisasterorcrisesrelief,(6)addressingcompensationanddistributionissues,(7)helpingconserveorrebuildover-exploitedstocks,and(8)protectingecologicalpublicgoodsandbiodiversity.Theyrecognizethatabuy-backprogrammeoftentargetsseveraldifferentandevenconflictingobjectivesandthattheprogrammeistheoutcomeofapolicyprocessthat inmostcaseswill target improved,notoptimal,managementastheobjective.

Howwellabuy-backprogrammeworksdependstoalargeextentonitsobjectives,designandimplementation.Groves and Squires (2007) and Hannesson (2007) show that buy-back programmes in fisheries withoutaccessrestrictionscannotachieveitsobjective(withthepossibleexceptionoftransferringrevenuetoagroupof fishermen). In fact, if the programme is poorly designed and lacks restrictions on access or capacityexpansion for the remaining vessels, a buy-back programme can reduce the size of the fisheries stock. ArecentOECDreport(2009d)basedoncasestudiesofanumberofdecommissioningschemesinOECDandnon-OECDcountriesreachessimilarconclusions.Itrecognizesthatvesselbuy-backs,aspartofapackageoftransitional assistance and management changes, can accelerate the transition to a rationalized fisheriessystem. However, decommissioning schemes used on their own do not provide a long-term solution to theproblems in fisheries with poorly developed or enforced use and access rights. Unless complementarymeasuresaretakentoeffectivelymanagethefisheriesstock,short-termgainsfromthebuy-backarelikelytobeerodedasremainingfishermenexpandtheirefforts,previouslyinactivevesselsandlicencesareactivated,orasnewentrantsjointhefishery.

Sources:AscheandSmith(2009)andOrganizationforEconomicCo-operationandDevelopment(OECD)(2009d).

Figure35:effect of a subsidy on trade

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GH – imports ofnatural resourcegood by countrywith weak propertyrights after subsidy

HI – exports ofnatural resourcegood by countrywith strong propertyrights after subsidy

Harvest/Manufactures

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providing the subsidy demands a greater amount ofimports than before. This leads to a new equilibriumwithahigherworldpriceP**andhigherimports(equaltoGH)forthesubsidy-providingcountry.

Thus,itturnsoutthatasubsidybytheimportingcountrytoitsnaturalresourcessectorincreasesitsimportsandalsoleadstoadeteriorationinitstermsoftrade.Whilethesubsidyworsensthestateofitsnaturalresourcessector,themeasuredoesnotsteal tradeopportunitiesfromitstradepartners.Bythesametoken,itcanbeshownthatasubsidythatreducescapacityintheimportingcountrywillhave the opposite effect to that described above. Byreducing harvesting capacity, the subsidy-providingcountryimprovesproductionefficiencytosuchanextentthatitsharvestactuallyincreases,itsimportsarereducedandthereisanimprovementinitstermsoftrade.

In summary, the economic literature on trade inrenewablenaturalresourcesimpliesthatfreetrademaynot benefit both countries, particularly if the resourceexportersuffersfromaproblemofopenaccess.Sincethe inefficiency that plagues exhaustible naturalresourcesisdomesticinorigin,tradepolicywillnotbethe first-best policy instrument. The economicinefficiencywillbebetteraddressedatsourcethroughstronger property rights or through a production tax/quota. However, institutional limitations, particularly inpooranddevelopingcountries,maymakeitunlikelythatthey will be able to implement resource managementpolicieseffectively,whichmightjustifytheuseoftradeinstrumentssuchasanexporttax.43

4. Naturalresourcesexternalitiesandenvironmentalpolicy

The following discussion looks at a set of policyinstruments that governments could use to deal withthe environmental externalities deriving from theextraction and use of exhaustible resources. First, itfocusesonfossilfuelresources–andmorespecifically,on the optimal time pattern of consumptionenvironmental taxes44 to limit negative externalitiessuchaspollutionandhabitatdestruction.Itisimportanttonotethatsincemostenergyresourcesareunevenlydistributedgeographically,itisverylikelythatcountriesimporting those resources are not producing them.Thus,analysingtheeffectsofaconsumptiontaxwouldbeequivalenttoanalysingtheeffectsofanimporttariff.

Second,theeffectsoftradepolicyinstrumentssuchasimport tariffs on renewable natural resources areconsidered.Theeffectivenessof these instruments isanalysedinthecontextofcommonpoolproblemsandenvironmentalexternalitiessuchashabitatdestruction.Finally, policy instruments such as eco-label schemesand environmental standards are discussed asalternative policy instruments to deal with negativeeffectsonbiodiversity.

As noted earlier, policy instruments such as exporttaxes can also be used to address environmentalexternalities.Theensuingdiscussion,however,focuses

on those measures referred to most commonly in thespecializedliterature.

(a) Fossilfuelsandtheoptimalpatternofconsumptiontaxes(andimporttariffs)

Theoptimallevelofaconsumptionenvironmentaltax–alsoknownasPigouviantax–shouldreflectthecostsoftheenvironmentaldamagegeneratedby theextractionoruseofexhaustible resourcessuchas fossil fuels. Inaddition,theefficientimplementationofPigouviantaxesshouldtakeintoaccountthelinkbetweenenvironmentaldamageandresourcedepletion.Morespecifically,whendamage to the environment derives from the use of anon-renewable resource, policy-makers wishing toimposeataxonconsumptionshouldfocusonthetimepath of the tax rather than just its level. Doing thecontrary would be inefficient. In fact, as illustrated inSectionD.2, imposingaconstantad valorem Pigouviantax45onanon-renewable resourcewill not change thepathofproductionandconsumptionofsucharesourceandhencewillnotreducetheresultingpollution.

The followingsection focuseson taxeson thecarboncontentoffuels.46Conclusionsrelatedtothisparticularpolicy instrument are also valid for taxes on energyconsumption.Theliterature47showsthatinthepresenceofflowenvironmentalexternalities(i.e.theenvironmentaldamagecausedbythecurrentextractionoruseoftheresource),48afallingad valoremPigouviantaxwouldbeanoptimalpolicy todelaydepletionandhencetoslowtheaccumulationofCO2emissions.49 In theshort run,the introduction of a Pigouvian tax will increase theconsumerpriceoftheresourceineachperiodandwillconsequently reduce its total demand. A shift frompresent consumption towards future consumption iswelfare enhancing since it reduces both the absoluteamount of emissions and the present value of theenvironmental damage. As the marginal environmentaldamagedecreaseswithdecreasingconsumptionoftheresource,thetaxratefallsastimepasses.

When stock externalities are considered (i.e. whenenvironmental damage is a function of cumulativeemissions),thereisnogeneralrulethatcandeterminetheoptimal pattern of a carbon tax. The direction of themovement of a carbon tax will in fact depend on theeffectsandtheinteractionamongdifferentfactorssuchasthenaturalrateofdecayandtheinitialstockofcarbonemissionsandatwhat rate today’sconsumersdiscountfutureenvironmentaldamage in relation to thepresent.However,studiessuchasUlphandUlph(1994)showthatforaspecialandveryplausiblecaseinwhichthestockofthepollutantdecaysovertime,ad valorem carbontaxesshouldinitiallyberisingwhentheinitialstockofpollutionissmallandbefallingtowardstheendoftheresource’slife. The previous theoretical result is in line with someempiricalevidenceshowing that in theEuropeanUnionandtheUnitedStates,taxratesonfuelssuchasgasolinehaveincreasedsubstantiallyovertime.50

Howwouldtheoptimalpathofacarbontaxchangeifthe trans-boundary effects of environmentalexternalitiesare taken intoaccount? In thecontextof


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carbon emissions, for instance, it is likely that theactionstakenbyresourceusersinacertaincountryarenotentirelycontainedwithinnationalborders,butspilloverintoothercountriesindependentlyofinternationaltrade.Someeconomicmodels,forinstanceAmundsenandSchöb(1999),showthatinthepresenceofcross-border effects, an agreement to increase taxesuniformlyhigherthanthePigouvianlevelwouldprovideanefficientallocationofthenaturalresourceovertime.However,reachinganagreementiscostly:althoughallcountries could benefit from coordination, a singlecountry always has an incentive to deviate from thecoordinatedtaxschemesinceitsbestpolicywouldbetoimposethelowerPigouviantax.Hence,toovercomethis“prisoner’sdilemma”situation,coordinationrequiresbindingandenforceableagreements.

Finally,once the rightpolicy instrument isannounced,thespeedofintroductionofsuchapolicycanbecrucialto itssuccess. In fact, instudiessuchasLong(1975)andKonradetal.(1994)ithasbeenshownthatinorderforthepolicytobebeneficialfortheenvironment,anyproposed tax needs to be introduced quickly. This isbecause announcing the imposition of coordinatedtaxesactslikeanexpropriationthreattotheresource-owningcountries.Theyhave the incentive to increasepresent extraction prior to the date when the tax isimposedinordertoreducefuturelosses.

Inpractice,theleveloftaxesimposedbygovernmentsdeviates from the optimal Pigouvian tax level. Thereasons for this are twofold. First, the difficulty ofestimatingtheenvironmentaldamagecostsgeneratedby the use of fossil fuels makes countries implementmoreworkableapproaches,suchasthatintroducedbyBaumolandOates(1971),wherethetaxrate issettoinfluencethebehaviouroftaxpayersinordertoachievea predetermined set of objectives for environmentalquality.Second,differentstudies51show that the leveloftaxestodaydeviatesfromtheoptimalPigouviantaxlevelduetothestrategicinteractionbetweenconsumersand producers of resources. This is because, asexplored in Section D.2, the imposition of taxes alsoserves to capture resource rents from resource-exporting countries. For example, the fact thatpetroleum-producerandpetroleum-consumercountriesaretwoseparategroupswithdifferent interestsmightmake this lattergroupusecarbon taxesnotonlywiththeobjectiveofmakingconsumerstakeaccountoftheenvironmentaldamagederivedfromtheconsumptionofanexhaustibleresource,butalsotoappropriaterents.

(b) Renewableresources,biodiversityandenvironmentalpolicy

(i) Import tariffs

InSectionD.3 itwasshown thatwhenproperty rightswith respect to resource harvesting are not wellenforced, trade opening might have a negative impactonresourceconservation.Therefore,tradepoliciessuchastariffsimposedbytheresource-importingcountrywillreduce foreign demand for the resource commodity,

mitigating – to some extent – the over-harvestingproblem. In what follows, the analysis of trade policyinstruments is performed taking into account not onlytheopenaccessproblemrelatedtorenewableresourcesbut also the resulting environmental damage. Morespecifically,thefollowingquestionswillbeconsidered:isthe imposition of a tariff still optimal when a negativeexternality such as habitat destruction is taken intoaccount?Aretherealternativeinstrumentsthatcouldbeusedtodealwithhabitatdestruction?

The effect of a tariff on biodiversity depends on theprincipalcausesofhabitatdestruction.Thedestructioncanbeadirectresultofover-harvesting–forinstance,excessivetimberextractionimplieshabitat lossduetodecliningsoilfertility.Insuchasituation,theimpositionofatariffwillbeanoptimalpolicysinceitdecreasestheamountof theresourceharvestedandhencewillalsoreducehabitatloss.If,however,theexpansionofothereconomic activities takes place at the expense ofhabitat conservation, through land conversion (cross-industry externalities), then imposing a tariff will notalwaysbethebestpolicy.Infact,theworkofSmulderset al. (2004) shows that when there is a negativerelationship between economic activity and habitatconservation, the introduction of a marginal tariff onresourceimportswillhaveanambiguouseffectonboththeimporter’sandexporter’sstockoftheresource.

Tobetterillustratethelogicbehindthisresult,consideraneconomywithtwocountries,homeandforeign,andthreesectors–harvesting,agricultureandmanufacturing.Theproduction of each good requires labour as well as asector-specificinput,andlabourcanshiftfreelybetweenthe three sectors within each country. While thedevelopment of the manufacturing sector does notnecessarily have a negative impact on habitatconservation,anexpansionoftheagriculturalsectorwillhave twooppositeeffectson thestockof a renewableresource.Ontheonehand,itwillreduceitthroughlandconversionandhencehabitatdestruction.On theotherhand,lesslabourwillbeavailableforharvestingwhichwillhaveapositiveeffectontheresourcestock.

Supposenowthatthehomecountryimposesatariffontheharvestedgood.Theeffectofatariffontheforeigncountry’sresourcestockisambiguousanddependsontheintensityofitsdirecteffectonharvesting,throughadecreaseindemand,withrespecttoitsindirecteffecton other economic activities. More specifically, theintroduction of a tariff on the harvested good willdecreaseitsexportsandhencewillreduceharvesting.In addition, a decrease in harvesting will make labourresources shift to the manufacturing and agriculturalsectors and the expansion of the latter will be at theexpenseofhabitatconservation.Thenaturalresourcesstockwillthereforeincrease(decrease)–ifthenegativeeffectonhabitatconservationthroughlandconversionissmaller(larger)–thanthedirectpositiveeffectduetoadecreaseinharvesting.

Theanalysisoftheimportercountrycanbedividedintoshort-andlong-runeffects.Intheshortrun,atariffontheharvestedgoodwillreallocatelabourawayfromthe


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agricultural sector to more harvesting and hence thesizeofthehabitatwillincrease.52However,thepriceofagriculturalproductsrelativetoharvestingproductswilldecreaseandtheirrelativedemandwillrise.Inthelongrun, because of a reduction in the overall resourcestock, thecostsofharvestingwill increaseand labourwill shift back to the agricultural and manufacturingsectors. The more demand shifts to manufacturedgoods, insteadof agriculture, themore likely it is thattheresourcestockwillincrease.

(ii) Eco-labels and environmental standards

Animportantimplicationoftheabovediscussionisthatwhentherearecertaininterdependenciesbetweenanexhaustible resource and economic activity, theintroductionofatariffmighthaveanegativeimpactonhabitatconservation.Aretheresomealternativepolicyinstruments that governments could implement toefficiently address environmental problems such asbiodiversitylossduetohabitatdestruction?53

First, governments may enforce environmentalmandatory standards.54 These are a set of qualityconditionsthataretobeadheredtobyeachproducer.Standards, also known in the literature as command-and-controlsystems,areespeciallyattractivefromtheperspective of effectiveness. This is because thegovernment directly dictates a clear quantity target(restriction) that has to be followed by marketparticipants.55 Second, governments (or non-governmental agencies) can provide eco-labelschemes.56Aneco-labelisacertificationschemewiththe intention to provide information to consumers,helping them to identify green and environmentallyfriendly products. A typical eco-label scheme listsenvironmental criteria, and awards the eco-label toproducts that meet such criteria.57 Examples of eco-labelsrunbynon-governmentalagencies,inthecontextof trade in renewable resources, are the sustainableseafood eco-label by the Marine Stewardship Counciland sustainable timber eco-labels monitored by theForest Stewardship Council. An example of agovernment-run eco-label is the Blue Angel label inGermany, which is awarded, among other criteria, togoodsthatprotectresources.

Models such as Greaker’s (2002) and Rege’s (2000)showthataneco-labelschememaybeabletoachievesimilarenvironmentalgoalsasenvironmentalstandardsandcanevenbemoreefficient.However,oneimportantconditionmustbe fulfilled for aneco-label to achievepolicyobjectives,which isthatconsumersmustpreferenvironmentally friendlygoods.Only ifconsumersseean additional benefit in consuming the higher-pricedenvironmental quality goods (a so-called warm gloweffect), will they respond to eco-labels by switchingtowards eco-labelled goods. Indeed, there is someliterature documenting that consumers are willing topaymoreforgreenerproducts.58

To illustrate the extent to which eco-label schemesmight be more effective than environmental minimum

standards, a comparison of the two previous policyinstruments is performed in a simple model of tradewithonedomesticandoneforeignfirmwhichproduceanidenticalgoodandcompeteonpriceinthedomesticmarket. Depending on how much each firm cares fortheenvironment,theywilldecidewhethertoproducealow or a high environmental quality good. From theconsumers’side,thereisawarmgloweffectthatmakesthem have a higher willingness to pay for highenvironmental quality goods. However, their personaltastesarenegativelyaffectedbytransportationcosts,as goods get more expensive for consumers that livefurtherawayfromtheimportinglocation.Intheabsenceofregulation,consumerswillnothavethepossibilitytodistinguish whether firms produce environmentallyfriendly goods or not. In other words, consumers canonly be sure about the environmental quality if theproducerisregulatedbyanenvironmentalstandardorifaneco-labelcanbeobserved.59

Considerfirstthecasewherethedomesticgovernmentimposes a mandatory environmental standard andassumethatonlythedomesticfirmisobligedtoproducehighenvironmentalqualitygoods.60Sinceconsumersinthehomecountrywillhavenoinformationtodistinguishthequalityofthegoodsimportedfromtheforeignfirm,it will have no incentive to produce environmentallyfriendly goods and will continue to produce lowenvironmental quality goods, which are cheaper. Inequilibrium, both high and low environmental qualitygoods are going to be sold in the domestic market.Morespecifically,sincetheshareofconsumersbuyingthehigh(low)qualitygoodisincreasing(decreasing)inthewarmgloweffectbutdecreasing(increasing)inthetransportation costs, then the total demand for theenvironmentallyfriendlygoodwilldependontherelativestrength of the transportation costs effect over thewarmgloweffect.

Whatdoes theequilibrium look like if thegovernmentdecidesonaneco-labelschemeinsteadofimposingaminimum environmental standard? In such a situation,both the domestic and the foreign firm can decide iftheywanttoadopttheeco-label.61Moreprecisely,iftheaverage willingness to pay for an eco-label is higherthantheper-unitabatementcostbornebythefirm,bothfirms will adopt the eco-label and a higher overallenvironmental quality will be reached than withenvironmentalstandards.

5. Thepoliticaleconomyoftradepolicyinnaturalresourcesectors

Thediscussionsofarhasusedthesimplestassumptionabout themotivationofgovernment– that it seeks tomaximize economic efficiency or national welfare.However, policy-makers often take into account theinstancesofspecialinterestgroupsthattrytoinfluencetheoutcomeofthepoliticaldecision-makingprocesstobenefittheirmembers.62Theseconsiderationsnaturallyapplytotheextractionandtradeofnaturalresources.Ifgovernments are influenced by the activities of lobbygroups and other vested interests trying to “capture”


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the relevant regulations in their favour, the rate ofextraction of a renewable resource – or the rate ofdepletion of a non-renewable resource – is likely todifferfromthesocialoptimum,reflectingtheoutcomeoftheinteractionbetweenlobbiesandthegovernment.

(a) Examplesofpoliciesaffectedbypoliticaleconomyconsiderations

Systematicevidenceontheinfluenceofinterestgroupsonpolicyformationisobviouslyhardtofind,butitisnotdifficult to see how political economy considerationsexplain the use of some trade-related policies. A firstexample concerns subsidies to renewable naturalresources.Asexplained inSectionD.4,subsidies thatreducethecostofharvestingtheseresourcesworsentheexploitationofstocksthatalreadysufferfromopenaccess.AccordingtoAscher(1999),thesepoliciescanbe implemented by policy-makers to capture part ofthoseresourcesdirectly,ortograntthemtogroupswhowillreciprocatewithpoliticalsupportandcontributions.

Becker (1983) further notes that resource-relatedsubsidiescanbeusedbygovernmentsasapoliticallyeasy way to redistribute income. This is because theefficiencylossesaresmall,theyareusuallyfarfromtheelectorateanddifficult toquantify, and the losseswillonlybeincurredbyfuturegenerationsorbythepoor.63Asecondexampleconcernsexport taxes. Ithasbeenarguedinthisreportthatrestrictingexportsofaprimaryresource encourages downstream processing byproviding, in effect, an input subsidy to processors.Since they redistribute rents from upstream todownstreamproducers,theyarelikelytobeopposedbythe former, and supported by the latter.64 The use ofexport taxes on natural resources might thereforereflect a relatively higher weight of producers indownstream industries relative to natural resourceproducersinthepoliticaleconomycompetition.65

Athirdexampleconcernstheeffectsof“Dutchdisease”.The appreciation of the real exchange rate associatedwithitislikelytoinduceprotectionistlobbyingpressuresby the lagging sector. Hillman’s classical contribution(Hillman,1982)showsthat,althoughdecliningindustrieswill inexorably decline even when they benefit frompoliticallymotivatedprotection,thegovernmentcanslowdown their rate of decline by offering more generousprotection.Thisprovidesarationaleforlobbyinginfavourof more protection by declining industries. Freund andOzden(2008)furthershowthat,irrespectiveoftheextentoflobbying,therewillbeadeviationfromfreetradethattends to favour loss-making industries. It has beendocumented that in South America and sub-SaharanAfricaitwasquitecommonformineralrentstobeusedfortheprotectionofthenon-boomtradable(NBT)sectorsthroughsubsidiesandprotectioniststrategies.66However,the inadequate performance of the weakened NBTsectorsduringpost-boomdownswingsrequiredlevelsofsubsidy from the mining tradable sectors that wereunsustainable. As shown by Freund and Ozden (2008),protection following a downswing is likely to bepersistent.67

SachsandWarner(1995)provideanempiricaltestforthehypothesis thathigh resourcewealth isnegativelycorrelated with lack of openness to trade as aconsequence of governments trying to address theDutch disease effects of resource abundance. TheypostulateaU-shaped relationbetweenopennessandresourceintensity.Intheirlogic,Dutchdiseaseeffectsprovokeaprotectionistresponse,butonly incountrieswith intermediate levels of resource intensity. For themost highly resource-endowed economies, however,the natural resources base is so vast that there is nostrong pressure to develop an extensive industrialsector.Therefore,opennessto tradewouldtendtobehigh.TheoveralleffectwouldthereforebeaU-shapedrelationship between openness and resourceabundance.68Theyfindempiricalevidenceinfavourofthisprediction. Inparticular,almostallcountriesinthesample are in the downward-sloping segment of therelationship: higher primary exports tend to promoteeconomic closure. Extremely resource-rich countries,suchasSaudiArabiaandMalaysia,areintheupward-slopingpartontherelationship,withalongtraditionofopentrade.

(b) Corruption,tradeopeningandresourceutilization

Theinfluenceofspecialinterestgroupsonpoliciesthataffect resource utilization raises two questions: iscorruptionassociatedwithhigherresourceutilization?69And are the effects of trade policies on resourceutilizationdependentoncorruption?

The answer to the first question is unambiguouslypositive. A number of studies in environmentaleconomics consistently find that corruption is closelyassociated with environmental degradation. In atheoretical framework where the government uses aPigouviantaxasapolicyinstrumenttotakeaccountofpollution caused by resource utilization (i.e. pollutiontax), Damania et al. (2003) show that an increase incorruptionimpliesthatthegovernmentplacesagreaterrelativeweightonbribes,andthusonfirmprofits.Thepollutiontaxconsequentlyfallsascorruptionincreases,deviatingfromthewelfare-maximizingtaxrate.Similarly,Lopez and Mitra (2000) investigate the impact ofcorruption on the empirical relationship betweenincome and pollution – the Environmental KuznetsCurve (EKC).Theyshowthatcorruption increases theincome levelatwhich theEKCbegins todecline.Thepositive correlation between corruption andenvironmentaldegradationcaneasilyberecastintermsof a positive correlation between corruption andresourceextraction.70

Barbieretal.(2005)showthattherateofutilizationofarenewableresource(intheirmodel,theconversionofforest into agricultural land) increaseswith corruption(or intensified lobbying pressure). In their theoreticalmodel, the rate of utilization is determined by theinteraction between a government issuing extractionquotas,and resource-usingfirmsseeking to influencethe government’s decisions through political


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contributions.71 An increase in corruption implies thatthe government places a greater weight on bribes,relative to social welfare, issuing more conversionquotas. This creates a positive correlation betweenutilizationandcorruption.Theirempiricalanalysisonasampleoftropicalcountries72confirmsthisprediction.

Turning to the second question, the effect of tradeopening on resource utilization is ambiguous, even inthepresenceofhighcorruption.Considerfirstthecaseinwhichthereisnocorruption.AsshownbyBarbieretal. (2005), greater dependency on resource exports(which may be caused by trade opening) is notnecessarily linked to a higher cumulative level ofresourceuse.Sincegreater exports areaccompaniedbyhigherlevelsofimports(tokeeptradebalanced),thislowers the demand for domestically produced outputand land conversion pressures are thus reduced. Theimpactisthereforeambiguous.73

Barbier et al. (2005) further consider the effect ofchangesintermsoftrade,definedastheratioofexportto import prices, on the conversion of forest intoagricultural land. They find that a rise in the terms oftradeofacountryhasadirectandnegativeimpactonagricultural land expansion. The policy implication isthattheimpositionofpoliciesthatreducethetermsoftradeofcountries’economiescouldleadtomore,ratherthan less, cumulative agricultural land expansion.Moreover,anyreduction intermsof trademaydeprivecountriesof the foreignexchangeearnings thatcouldbe employed to diversify their economy, moving awayfromapathofdependenceonresource-basedexports.

Considernowthecaseinwhichthereiscorruption.TheresultsofDamaniaetal.(2003)suggestthattheeffectof trade opening on resource utilization will vary notonlyaccordingtothedegreeofcorruption(loworhigh),butalsoaccordingtothenatureoftradepolicyinplacebeforeliberalization(protectiveoranti-protective).74TheeffectsaresummarizedinTable15.

The pollution tax (or similarly a conservation policy)increaseswithtradeopeningwhentheinitialconditionsareprotectivetradepolicy(importtarifforexportsubsidy)andhighcorruption–orwhen the initial conditionsareanti-protectivetradepolicy(importsubsidyorexporttax)andlowcorruption.Considerthecaseofprotectivetradepolicyandhighcorruption.Liberalizationreducesoutputoftheprotectedsector.Thisreducesbribesofferedandleadstoahigherpollutiontax,orlowerlevelofresourceutilization. On the other hand, the welfare motive forincreasingthepollutiontaxisweaker,causingareductionin the tax (decrease in resource conservation). Sincecorruptionishigh,thefirsteffectdominates,leadingtoanincreaseinpollutiontax(increaseinconservation).75Theothercaseinwhichthepollutiontax(orconservationofa

natural resource) increases with trade opening is whentrade policy is anti-protective and corruption is low.Intuitively,liberalizationincreasesoutputoftheprotectedsector (whichcreatesmorebribesand leads toa lowerpollution tax, or higher level of resource utilization) andinduces the government to increase the pollution tax(increase resource conservation) to improve welfare.Sincecorruption is low, thissecondchanneldominates,leading to an increase in pollution tax (increase inconservation).76

It is interesting in this context to analyse possiblefeedbacks between trade openness and corruption.Rodriketal. (2004)show that trade integrationhasapositive effect on institutional quality.77 A number ofstudiesfurthershowthatastrongruleof lawreducescorruption.Damaniaetal.(2004),forinstance,findthatastrongruleoflaw,asdefinedbyRodriketal.(2004),78is associated with a low level of corruption.79 Theseresults together imply that more trade reducescorruption.Since,asarguedabove,therateofresourceutilization increases with corruption, it can be arguedthattradecanhaveanindirect,beneficialeffectonthemanagementandconservationofnaturalresourcesviaitseffectoncorruption.80

(c) Tradesanctionsandexploitationofrenewableresources

Some renewable resources such as tropical forestsmay confer significant cross-border external benefits,throughtheirroleasstoresofcarbon,geneticmaterial,habitatforendangeredspecies,etc.Thishaspromptedcalls for the use of various trade-based policies, so-called“tradesanctions”,tocoercenationstoreducethelevel of resource exploitation. The literature on this,however, has shown that trade sanctions are notappropriate to cover the complexity of long-runecologicaleffects.Thesanctionsmakeharvestinglessprofitable in theshort run,but in the longrunspecificmanagementpoliciesarenecessary.81

Moreover, it has been shown that trade sanctions canhave perverse effects if resource exploitation in theexporting country is determined in a political economysetting. Using a model where the government issueslicencesdefiningthemaximumallowableharvest–whilean industry group lobbies the government for greateraccesstotheresourcebyofferingpoliticalcontributions–Damania(2000)showsthattradesanctionsmayleadtolowerstocksoftherenewableresourceinequilibrium.Whensanctionsareimposed,theprofitsfromharvestingdeclineandpoliticalcontributionsfall.Agovernmentthatvaluespoliticaldonationssufficientlywilladoptpoliciestomitigate thedecline inprofitsandcontributions. Itdoesthisbyincreasingtheharvestrate.Thus,resourcestocksdeclineinresponsetotradesanctions.

Table15:effect of trade liberalization on pollution taxes(rateofconservation)Corruption

High Low

TradepolicyProtective Increases Decreases

Anti-protective Decreases Increases


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In the lightof this result,DamaniaandBarbier (2001)and Barbier and Rauscher (1994) argue in favour ofinternational transfers82 as the first-best managementtool of a natural resource whose depletion createscross-borderexternalities.Inparticular,ifforlowlevelsoftheresourcestock,theincreaseintransfersishighenough,transferswillalwaysinducethegovernmenttoincreaseequilibriumstocks.Theprofitsfromharvestingand thepolitical contributionspaid to thegovernmentarehighwhentheresourcestockislow.Inthissituation,a high rate of increase in transfers can reduce theinfluenceofthelobbyistonpolicydecisionsandinduceresource conservation. Damania and Barbier (2001)further argue that if resource exploitation createssignificant cross-border externalities, such transfersmaybeviewedasameansofinternalizingexternalitiesandpromotingmoreefficientresourceusage.

TheseinsightsqualifytheresulthighlightedinSectionD.4 that a tariff by the importing country favoursconservationofrenewableresources.83

6. Nationalresourceabundanceandregionalintegration

Thissectiontakesacloser lookattheissueofregionalintegration in the context of natural resources trade. Itfirstreviewstheconceptofregionalintegration,discussingitsnuancesandstagesofprogression.Subsequently, itanalyses issues that may provide incentives ordisincentivesforregionalintegrationagreements.Theseissues,whichassumesalience in thecontextofnaturalresourceabundance, relatetobotheconomicefficiencyandpoliticaleconomy.Theyrangefromstandardissuesoftradecreation,tradediversionandasymmetricshocksto the relatively unconventional issues of exportdiversificationand remote locations.Finally, thissectionanalyses thepotential impactof regional integrationonthesustainablemanagementofnaturalresources.

(a) Regionalintegration

In general, regional integration refers to a process bywhich countries enter into an agreement to enhanceregionalcooperation.Themotivationcanbeeconomicor political, and the degree of integration can varysignificantly. The most basic approaches involveframework agreements, which outline principles fordialogueon tradeand related issues,usuallybetweentwocountries.84Moreformaleconomicintegrationcanbe classified into four stages (Machlup, 1977). First,therearefreeorpreferentialtradeagreements(FTAs/PTAs)wherebymembercountrieseliminatetariffsandquotasonalmostallgoodsandservicestradedbetweenthem.CustomsunionsaugmentFTAsbyincorporatingacommonexternaltariffformembercountriesvis-à-vistherestoftheworld.Third,acommonmarketextendscustomsunionstoincludefreemovementoffactorsofproduction(capitalandlabour)andcommonpoliciesonproduct regulation. Fourth, there are economic andmonetary unions which consist of a common markettogetherwithacommoncurrency.

Furthermore,theliteratureclassifiesregionalintegrationschemesaseither“shallow”or“deep”(Lawrence,1996;Hoekman, 1998). The former involves the removal ofbarrierstotradeingoods,i.e.formingafree-tradeareaoracustomsunion.Thelattermovesbeyondthisformofsimpleeconomicintegration.Itentailstheremovalofinternal barriers that distort the allocation ofinternational production within the region – e.g. fairtreatment of foreign direct investment (FDI) and theprotection of intellectual property. The minimumrequirementofany“deepintegration”agreementistheprovisionofnationaltreatmenttobusinessactivitiesofothertradingpartners(i.e.theprincipleofgivingothersthesametreatmentasone’sownnationals).

Usually,however, “deep integration” requirescountriestoharmonizeavarietyofpolicies(fiscalandindustrial)andadoptcommonstandardsinmanyfields(e.g.labourand health). For example, the Canada-US Free TradeAgreement (FTA) included both national treatment aswellasrestrictionsonexpropriationandamovetowardsharmonizing corporate income taxes (United NationsConference on Trade and Development (UNCTAD),1992). Similarly, India and Singapore have aComprehensive Economic Cooperation Agreement,whichincludesanFTAingoodsandservices,abilateralagreementoninvestmentpromotionandprotection,anagreement on double taxation avoidance and a moreliberalairservicesagreement(Narayan,2005).

(b) Resourceabundanceanditsimplications

Tounderstand the incentives fora resource-abundantcountrytoenterintoaregionalintegrationagreement,issues of trade creation and trade diversion, potentialresponses to asymmetric shocks, diversification ofproduction and export structures, and the importanceofaremotelocationareanalysed.

(i) Trade creation and trade diversion

A central exception to the MFN principle of equaltreatment of all members in the GATT/WTO is forcustoms unions and free trade areas. There are twoarguments that explain the rationale behind thisexception.First,suchagreementscancontributetothegrowth of world trade. Second, regional tradeliberalization,enabledbythesepreferentialagreements,canserveasabuildingblocktofurtherliberalizationatthe multilateral level. (Viner, 1950) introduced theconcepts of trade creation and trade diversion in theeconomic analysis of preferential trade agreements.Withafocusontheproductioneffects,hedefinedtradecreationasthedisplacementofdomesticproductionbylower-cost imports from more efficient producers inother member countries. In contrast, he defined tradediversionastheshiftintheflowofimportsfromamorecost-efficientnon-membertoahigher-costmember.85

For trade in natural resources, the issue of tradecreationandtradediversionissomewhatdifferent,evenunique.Thisisbecause,relativetomanufacturedgoods,


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tariff and non-tariff barriers on natural resourcecommodities such as oil, natural gas, metals andmineralstendtobelow(Carbaugh,2007).86Hence,ananalysisofpotentialtradecreationandtradediversioneffects when two resource-abundant countries enterintoapreferentialtradeagreementwillbeafunctionofthe extent of specialization – whether both havecompletespecializationintheproductionandexportofresource-intensive goods (Case I), or whether therelativelyresource-poorcountryhasasmall,developingmanufacturingsectoraswell(CaseII).

Case I

Consider thatbothmember statesof a regional tradeagreementarenaturalresourceabundantwithcompletespecializationintheproductionandexportofresource-intensivegoods.First,ifthetwocountriesareabundantindifferentnaturalresources,tariffsimposedontheseresource commodities within the free trade area areunlikelytoconstituteamajorbarriertotradewithinthisarea(Fouquinetal.,2006).Forinstance,inastudyonresource-abundantcountriesinCentralAsia,Venables(2009)showsthattariffbarrierstointra-regionaltradeare low. Hence, trade creation effects for resource-abundantcountriesarelikelytobesmall.

Second, if the two resource-abundant countries areabundant in the samenatural resource, theywill havefewincentivestotradewitheachother,withorwithouttariffs, as there is very little product differentiation inthe same resource commodity. Hence, once again,tradecreationeffectsarelikelytobenegligible.Thisisespeciallytrueofsouth-southtradeaspartnersdonotappeartobemajorexportmarketsfornaturalresources(Fouquinetal.,2006).However, thereareexceptions.Take thecaseof IndonesiaandSingapore,where theformer exports crude oil to the latter which has athriving refining industry (Fouquin et al., 2006).Importantly, followingtheargumentspresentedabove,tradediversioneffectsarealsounlikelytobesignificant.

Case II

Consider thatbothmember statesof a regional tradeagreement are natural resource abundant, where onehas complete specialization in the production andexportofresource-intensivegoodsandtheotherhasasmall, developing manufacturing sector. There iscommoditydominanceintheentireregionandapolicyofimportsubstitutionvis-à-vistherestoftheworld.Inthis situation, the resource-abundant country with anon-existent manufacturing sector will enjoy no tradecreationeffectsbutwill suffernotable tradediversioneffects as imports from more efficient, low-costproducersinnon-memberstatesarereplacedbythosefromamemberstate.On theotherhand, themembercountrywithasmallmanufacturingsectorinitsnascentstages will benefit from privileged access to marketsinsidetheFTA,whilecontinuingascommodityexportertotherestoftheworld.Thiswaspreciselythesituationwhich prevailed in Latin America in the 1970s and1980s(Fouquinetal.,2006).

(ii) Asymmetric shocks

Countries in a regional integration agreement maysuffer from “asymmetric shocks”, including demandshocks, arising fromdisparategrowth rates, or supplyshocks, induced by sector-specific factors where theimportance of different sectors may vary acrossresource-abundant and resource-scarce countries.Hence, the success of any regional integrationagreementwilldependonthemechanismsthatexisttoaddress these potential stresses. Unlike other factorsof production, natural resources are immobile. Hence,an uneven allocation of resources across a group ofcountriesmaydefythetendencytowardsthelawofoneprice, and aggravate the impact of commodity priceshocksinintegrationagreements(Fouquinetal.,2006).Forinstance,resource-richandresource-poorcountrieswouldbeexportersandimportersofthesameresourcecommodity, crude oil for example. A price hike wouldinvolve the latterbearingahugecost, and the formerreapingahugegain.

Infact,thetwooilpriceshocksofthe1970sledtothecollapse of many south-south regional integrationschemes,asitwidenedthedifferencesbetweennetoilimporters and net oil exporters. Commodity importersdecided to focus on extra-regional trade agreementsandcommodityexportersabandoneddomesticreformsafter the windfall gains, thereby creating volatility inthese regional integration schemes (Fouquin et al.,2006).Apossiblesolutiontosuchasymmetricshocksmaybedeepregionalintegration,whichrequiressomeburden sharing. However, resource-rich commodityexportersmaybe reluctant toshare resource revenueowing to political economy constraints. Hence,resource-abundant countries tend to participate inshallow integration schemes, such as free tradeagreements (FTAs), and avoid deeper integrationschemes whose common policies might requireresourcerevenuesharing(Fouquinetal.,2006).

(iii) Diversification of production and export structure

Resource-abundantcountrieshaveneitherbeendrivingforces for establishing regional integration schemesnorfacilitatorsofdeeperintegrationoncetheyarepartof such schemes. Integration into world markets hasbeen faster for countries producing and exportingmanufacturedgoods(Fouquinetal.2006).Thismaybeattributable, in part, to the natural resource cursehypothesisdescribedearlierandtheconsequentdesireof resource-rich countries to diversify into theproduction and export of manufactured goods. Forinstance, poorer resource-rich countries may want todevelop a domestic industrial sector as they arecommonly exposed to “Dutch disease” shocks. Thisprovides a disincentive for these countries to joinregional integration agreements, as trade creationwould imply that goods produced by less efficientdomesticfirmsintheindustrialsectorwouldbereplacedbycheaperimportsfrompartnercountries.


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In addition, to help develop their domestic commodityprocessing industries, resource-abundant countriesmay often restrict natural resource exports. There isevidenceofsuchrestrictionswhenresource-abundantcountries are part of regional integration schemes,ostensibly justified on environmental grounds (i.e. toreduce the over-exploitation of natural resources)(Fouquinetal.,2006).

On the other hand, regional integration may actuallyhelp resource-abundant countries to diversify theirexport basket and break into the chain of globalmanufacturingproduction.Thismaybethecasewhennatural resource endowments are concentrated in aregion, but unevenly distributed between countrieswithin this region. Africa, whose abundant resourcesare dispersed over several small countries, is anexample of this situation, which has potentialimplications for economic efficiency. This is becausetheimpactofresourcerevenuesislikelytobesubjectto diminishing returns. Hence, while a country mayhave sufficient foreign exchange for vital imports, itmay be constrained by other inputs such as labour,thereby implyingthat itwillbeunabletodiversify intomanufacturing production and achieve economies ofscale.

Consider the following model constructed by Collierand Venables (2008). Both countries consume andproduceasinglenon-tradablegood,whichusesforeignexchange (to import oil or equipment) and domesticlabour in fixed proportions. Moreover, the supply oflabour is fixed and resource revenues are the onlysource of foreign exchange. In figure 36, if resourceexportsarelessthanthresholdlevelR*,thenproductionis foreign exchange constrained, and real income isgivenby theupwardsslopingsectionof the line (withslope equal to the foreign exchange content per unitGDP).Ifnaturalresourceearningsaregreaterthanthesame threshold level R*, then the economy is labourconstrained, implying that further resource earningsbeyond this point are simply accumulated as foreignassets.Thisreflectsthefactthattheresource-abundantcountryencountersdiminishing returns in itsability to

use resource revenues as it reaches full employment,i.e. no more labour is available to produce furtherincome.Importantly,thisargumentmayextendbeyondlabourtoarangeofinelasticallysuppliednon-tradablegoods and services. For example, a resource boomoften leads to inflation in the construction sector assupplybottlenecksareencountered.

Foranalyticalsimplicity,assumethatoneeconomyhasnoresourcerevenue, i.e.atpointB,andtheotherhasresource revenue and is at point A. Their averageincomeisthemidpointbetweenAandB.Itcanbeseenthat integration of the two economies would increaseoverallincomesubstantially,therebyimplyingthattherewill be large efficiency gains. This extreme casesuggests that all the gains from trade accrue to theresource-scarcecountry.However, ingeneral,regionalintegration will result in gains for both countries. Theresource-poor country can increase its foreignexchange earnings to import inputs and capitalequipmentbygainingduty-freeaccesstothemarketofitsresource-richpartnercountry.Ontheotherhand,theresource-richcountrycan import labourorgoods thatwere previously supply constrained, thereby inhibitingeconomiesofscaleandsuccessfuldiversification intomanufacturingproduction.

While regional integration can enable resource-richeconomies,specializingintheproductionandexportofprimary commodities, to diversify and becomesuccessfulexportersofmanufacturedgoods,anysuchsuccessful diversification may depend on the kind ofnatural resources which are abundant in that country.Forinstance,inanempiricalstudyof73countriesfrom1962to2000,FuentesandAlvarez(2006)showthatmineral-abundantcountriesareunlikelytoeverbecomenetexportersofrelativelycapital-intensivegoods.Thisis because of the combination of capital scarcity,mineral abundance and high world prices for primarymineralcommodities.

Mostmineral-abundantcountriesarecharacterizedbyarelatively lowcapital-labour ratioandacapital-intensiveminingsector.Giventhissituation,arelativelyhighprice

Figure36:overall income gain from regional integration

Resource exportsR*B

GDP

A

GDP

A and B averageincome if merged

A and B averageincome if separate

Forex constrained Labour constrained

Source: CollierandVenables(2008)


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for the mining good implies that it is always produced,therebytakinguptheextracapitalaccumulatedbythesecountries.Hence,even if regional integrationenablesamineral-abundant country to consistently accumulatecapital, increasing itscapital-labour ratio, it isunable todiversify successfully into the production and export ofmanufactured goods. As an exception to the norm,Fuentes and Alvarez (2006) reveal that after capitalaccumulation,afewmineral-abundantcountriesdogaincomparative advantage in machinery and chemicals.Similarly,NinaandAndersen(2005)examinethecaseofBolivia, a mineral-abundant country, and analyse theimpactof its integrationwithMERCOSURon itsexportpattern. They show that while regional integration hasstimulatedadiversionoftradeawayfromthetraditionalUSandEUmarketstowardsMERCOSURcountries,thecompositionofexportshasonlymoderatelydiversified.

(iv) Remote location and uneven distribution of natural resources in a region

Remote,landlockedcountrieshavefewopportunitiesforintegrationwiththeworldeconomyduetohighcostsoftrade.Criticallyshortoftheforeignexchangeneededto

finance essential imports, they have little chance ofeconomic development via exports of manufacturedgoods.Yet,inmanyregionsoftheworld,thesecountrieshave resource-rich neighbours that can be potentialexport markets. Given a comparative advantage inproducingandexportingresource-intensivegoods,theseresource-rich countries may be concerned about the“resourcecurse”butmay facedifficulties indiversifyingtheir production and export structure because of ashortageoflabourorothergoodsandservices.Greaterintegrationwiththeirrelativelyresource-poorneighboursmay help relax these constraints. So while remotenessandresourcedependencemakeitdifficulttoexportnon-resourcebasedgoodsoutsidearegion,therearepotentialopportunitiesforamutuallybeneficialintegrationwithinaregion–e.g.inCentralAsiaandtheGreatLakesRegioninAfrica(seeBox23).

Venables (2009) presents a highly stylized model toinvestigate the issue. Consider two countries, “A” and“B”, each endowed with a fixed supply of naturalresources and a fixed quantity of labour. Moreover,assumethatthesenaturalresourcesaretheonlyexportstotherestoftheworld(outsidetheregion).Furthermore,assumethatthevalueofthesenaturalresourceexports

Box23:the case of central Asia and the Great Lakes Region in Africa

Regional integration in Asia is usually focused on the development of global production networks throughexportsofmanufacturedgoods.However,unlikeEastandSouthAsia,thereisagroupofcountriesinCentralAsiawithsomewhatdifferentcharacteristics.Theyarelandlockedand,insomecases,richinnaturalresources.Atthesametime,thisregionisseekingtodevelopregionalintegrationagreementsaswell.CountriesintheregionaremembersoftheCommonwealthofIndependentStates(CIS)FreeTradeAgreement;Kazakhstan,theKyrgyzRepublic,TajikistanandUzbekistanarealsomembersoftheEurasianEconomicCommunity.

TheintegrationprocessisbeingdrivenforwardbytheCentralAsianRegionalEconomicCooperation(CAREC),whichseekstopromotecross-borderactivities–particularlyintheareasoftransport,tradepolicyandtradefacilitation, and in energy. It currently has eight members: Afghanistan, Azerbaijan, China, Kazakhstan, theKyrgyzRepublic,Mongolia,TajikistanandUzbekistan.

The remoteness of the Central Asian region can be calculated in various ways. The World Bank’s “DoingBusiness”databaserankssixCARECmembersinthebottom10of181countriesforitsmeasureoftransportcosts(WorldBank,2004).Remotenesscanalsobeassessedbycalculatingmeasuresofmarketaccessfromtradedataandgravitymodelling.Forexample,Mayer(2008)revealsthat, inarankingof196countries,sixcountriesintheregionrankamongthelowest,withtheirmarketpotentialbeingsixtimeslessthanMalaysia’sortheRepublicofKorea’s,and90timeslessthanBelgium’s,thetop-rankedcountry.

Anotherwayofseeingtheimpactofremotenessistolookatrelativepricesofcommoditieswithintheregion.Evidenceindicatestheextremelyhighpricesoftradablegoods,suchasmachineryandequipment,clothingand footwear, transport and communications relative to non-traded goods – in particular, services such aseducation,healthandutilities(WorldBank,2008).Similarly,resourceabundanceintheregion,albeitunevenacrossitsconstituentcountries,isalsoapparent.ForAzerbaijanandKazakhstan,hydro-carbonandmineralsaccountformorethan50percentofexports,whileoilandgasaccountformorethan25percentoffiscalrevenue.Moreover, thesecountrieshavehadmajor resourceboomsand theirexportsnearlyquadrupled invaluebetween1999and2004.Incontrast,Afghanistan,TajikistanandUzbekistanhavemuchlowerlevelsofnaturalresourceswealth,andtheexportsoftheKyrgyzRepublic,TajikistanandUzbekistanincreasedbylessthan50percentfrom1999to2004(Venables,2009).

TheEastandCentral regionsofAfrica, togetherknownas theRegionof theGreatLakes, isanotherareawhichcombinesremote,landlockedcountrieswithnaturalresource-abundantcountries.Forinstance,inthisregion,Burundi,RwandaandUgandaarelandlockedwhiletheDemocraticRepublicoftheCongoisresourcerich(CollierandGoderis,2008).CurrentinitiativesforregionalintegrationintheregionincludetheCommonMarket forEasternandSouthernAfrica. Inaddition, thereareproposals fordeeper integration in theEastAfricanCommunity.


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istheonlydifferencebetweenthetwocountries,i.e.itistheonlysourceofcomparativeadvantage.Inparticular,assume‘A’hasmoreoftheseexportsthan ‘B’, therebyimplyingthattheformerisresourcerichwhilethelatteris relatively resource poor. In addition, both countriesproduceandconsumefromacontinuumofsectorsthatuseimportedinputsandlabourtoproducenon-resource(manufactured) goods. Each of these goods can beproduced domestically, imported from the rest of theworld,andmayalsobetradedintra-regionally.

Given thatcountry “A”hasacomparativeadvantage innaturalresourceexports,theresource-poorcountry“B”willhaveacomparativeadvantageinproducingthenon-resource (manufactured) goods, i.e. “B” can producethosegoodsatarelativelylowerprice.Thisimpliesthattheresource-poorcountry,“B”,willimportfromtherestoftheworldbutnotfromcountry“A”,whiletheresource-richcountry,“A”,willimportfrom“B”andtherestoftheworld.Theneedtodistinguishbetween“globallytraded”and “regionally traded” goods, where the distinction issetbyrealtradecosts,andbarrierstotrade,isimportantfor two reasons. First, the changing sets of goodsproduced domestically, imported from the region, orimportedfromtherestoftheworldareindicativeofthetrade-creating and trade-diverting effects of regionalintegration. Second, although the countries are price-takersinworldmarkets,regionalintegrationmaychangethepriceof regionally tradedgoods, therebyaffectingthedistributionofrealincomebetweenthem.

Usingthisstylizedmodel,Venables(2009)showsthatregionalintegrationbringslargeoverallefficiencygainsfor these remote, landlocked countries. However, itturnsout that thegains from integrationareunevenlydistributed,asintegrationwitharesource-richeconomyisextremelyvaluablefortheresource-poorcountrybutnot vice-versa. Remote and landlocked developingcountries have very limited export potential with therestoftheworld,butneedforeignexchangetopurchaseinputs for production as well as consumption goods.Regional integration implies a reduction in tariffs onimports from country “B” in country “A”. This enablescountry “B” toearnforeignexchangevia theirexportsto the resource-rich partner country “A”. Furthermore,this extra foreign exchange accruing to country “B”raises income, thereby bidding up the prices of theseregionallytradedgoods,increasingwagesandcreatingaterms-of-tradegainfortheresource-poorcountry.

Ontheotherhand,resource-richeconomieslose(oratbest experience very modest gains) from regionalintegration.First,aterms-of-tradegainfortheresource-poorcountryisnecessarilyaterms-of-tradelossfortheresource-richeconomy.Inaddition,regionalintegrationresults in an increase in the share of imports comingfromthepartnercountry,“B”,whichfromtheviewpointofcountry “A”, is largely tradediversion, i.e.goods thatwere being imported from more efficient producers intherestoftheworldarenowimportedfromthepartner.In contrast, multilateral trade liberalization will bebeneficialfortheremoteresource-richcountryaslowertariffsonmorecost-efficientimportsfromnon-membercountrieswillentailtradecreation,butnotradediversion.

Moreover, external trade liberalization implies areductionintariffsonimportsfromtherestoftheworld.Sinceintra-regionaltradetakestheformofexportsofmanufacturedgoodsfromtheresource-poor“B”totheresource-rich“A”,thisreductioninthepriceofimportsfrom the restof theworld isa terms-of-tradegain fortheresource-richeconomy,“A”.Hence,whiletradeisaway for the resource-rich economy to relax theconstraintcausingdiminishingreturnsintheuseofitsresource revenues, these gains come from non-preferentialopening.

Theanalysispointstothepotentialforconflictinginterestsbetween resource-poor countries seeking preferentialregionalintegration,andresource-richcountriesseekingnon-preferentialtradeopening.Thewaytoovercomethisobstacle is to look for other policy measures that canaccompany a non-preferential opening. One possibilityis the use of resource wealth to develop regionalinfrastructure. This helps maintain the competitiveposition of the resource-poor country while externalliberalization takes place. Other ways of spreading thebenefitsofunevenlydistributedresourcewealthincludelabourmobilityandmonetarypolicymeasures.

In sum, there appears to be a two-way relationshipbetween natural resources and regional integration.Regionalintegrationaffectsthepotentialdevelopmentof resource-rich countries differently, relative toresource-poor countries (producing manufacturedgoods), in terms of economic efficiency, welfare andpolitical economy. However, this effect is oftencontingentuponthelocationofthecountriesconcernedand the kind of natural resource in which they areabundant.Hence,relativeresourceabundanceinthesedifferentcontexts,inturn,mayshapetheincentivesforcountriestoengageinregionalintegration.

(c) Sustainablemanagementofnaturalresources

(i) Regional and bilateral free trade agreements

Concerns about over-exploitation of natural resourcesandanyotherpotentialnegativeimpactthattrademayhaveontheenvironmentareaddressedinmanyregionaland bilateral free trade agreements – whether in thepreamble, in detailed chapters, in relevant provisions(suchasgovernmentprocurementordisputesettlement),or in accompanying environmental cooperationagreements(RobalinoandHerrera,2009).Forexample,the Association of Southeast Asian Nations (ASEAN)containsanagreementontrans-boundaryhazepollution,which serves to improve monitoring and reporting,promotegreentechnologiesandestablishanetworkofprotected areas (Organization for Economic Co-operationandDevelopment(OECD),2008).

The North American Free Trade Agreement (NAFTA)recommends appropriate limits for specific pollutants,thepromotionofpollutionpreventiontechniquesandaconservationofbiodiversityprogrammethatfocuseson


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shared and critical habitats, wildlife corridors andmigratoryandtrans-borderspecies(primarilybirdsandmarineanimals).AnFTAbetweenCanadaandColombiaspells out that specific multilateral environmentalagreements(MEAs),suchastheMontrealProtocolforozone layer depletion, will prevail in the event of aninconsistency between FTA and MEA obligations(Organization for Economic Co-operation andDevelopment(OECD),2009a).

Article108ofanFTAbetweenChileandChinaincludesa Memorandum of Understanding to promotecooperationinthefieldofenvironmentalprotection,onthe basis of equality and mutual benefit. Similarly,Chapter 18 of the US-Colombia trade agreementoutlines the importance of optimal use of naturalresourcesinaccordancewiththeobjectiveofsustainabledevelopment (Organization for Economic Co-operationand Development (OECD), 2008). There are severalotherexamplesofbilateral free tradeagreements thatinclude relevant provisions or are accompanied bybilateralenvironmentalcooperationagreements,wherecooperation includes management of the waterenvironment, pollution control and monitoring, andbiodiversity conservation. These include three recentfree trade agreements involving Canada (Canada-Colombia,Canada-Jordan,Canada-Peru)and theNewZealand-China agreement (Organization for EconomicCo-operationandDevelopment(OECD),2009a).

(ii) Deep integration: the case of fisheries

Fisheries are an open access natural resource, i.e.muchlikepublicgoods,it isdifficulttoexcludepeoplefromaccessingtheresource.At thesametime,unlikepublic goods, fisheries are characterized by rivalry inconsumption. Given the above, rapid growth in thedemandforfishandfishproducts,accompaniedbynewfishing techniquesandcommercialstructures,has ledto over-exploitation of fish stocks in internationalwaters. Over-fishing has also placed broaderecosystems, of which fish are an integral part, underthreat(EuropeanCommission,2009b).

Territoriesforfishingininternationalwatersaredefinedby“exclusiveeconomiczones”(EEZs)of200miles(seealsoSectionE)(AscheandSmith,2009).Thiswastheresultofagradualprocesswhichwasconsolidated in

theUNConventionontheLawoftheSea(UNCLOS)in1982. As a result, most fisheries fall within thejurisdiction of individual nations, thereby giving themlegalauthoritytobringanendtoopenaccessproblemsby excluding fishing vessels and by managing fisheryresourcesfortheireconomicbenefit.

Given these developments, over-fishing typically fallsundertwocategories:poorlymanagedfisheriesthatliewithin EEZs (Worm et al., 2009); and open accessproblemsforfisheriesthatremainoutsideasingleEEZ.Regional integration is likely toaffect the latterareaswhichconsistofsharedstocks(wherefishingcantakeplacewithin the jurisdictionof twoormorecountries),straddling stocks (where fish stock also moves intointernational waters) and highly migratory species(where fish stock is primarily in international waters)(AscheandSmith,2009).

Forsharedstocks,thecountriesinvolvedinmostcasesare likely tofindacooperativesolutionbysharing thequota, although sidepaymentsmayoftenbemade toobtainhigherquotas.Forstraddlingandhighlymigratorystocks,suchastuna,however,agreementismuchmoredifficulttoreach,asnosinglecountrycanpreventover-fishing and enforce a management plan (Asche andSmith,2009).Acooperativeoutcomemaybefacilitatedby “regional fisheries management organisations”(RFMOs)87whichwerecreatedunderthe1995UnitedNationsFishStocksAgreement.Thesebodiesconsistof coastal states and relevant distant-water fishingnations. However, their effectiveness so far isquestionable, partly because non-members to theRMFOcanstillfishfreely;andpartlybecausethereareno enforcement mechanisms even among members(Bjorndal,2009).

Someformofdeepregionalintegrationmayprovideanalternativesolutiontotheover-fishingproblem.Regionalintegration may also play an important role in theconservation of marine biodiversity, the benefits ofwhich will accrue to both member and non-memberstates.

The Common Fisheries Policy (CFP) of the EuropeanCommission/European Union is one example of apotentially effective regional approach to these issues(seeBox24) (EuropeanCommission,2009b).TheCFP

Box24:the european union’s common Fisheries Policy

TheCommonFisheriesPolicy(CFP)wasformallycreatedin1983,butitsoriginsgobacktotheearly1970swhenfisherieswereapartoftheCommonAgriculturalPolicy.Intheearlydays,themainconcernwastoavoidconflict at a time when many countries around the world were extending their territorial waters, until theycreatedexclusiveeconomiczones(EEZs),whichdefineterritoriesforfishingininternationalwaters.Toavoidthedisruptionthisnewregimecouldhavecaused,EUmemberstatesagreedtograntfreemutualaccesstoeachother’swaters,therebyenablingthepreservationofeachnation’straditionalfishinggroundsandpractices.

Hence,theCFPstartedoutasanattempttopreservethediversitywhichcharacterizedthetraditionalfabricoftheEuropeanfishing industry.Over the lastdecade,Europe, aswell as the restof theworld, have seenalarmingdeclinesinfishstocks.Hence,sustainablefisheriesarenowfirmlyatthetopoftheinternationalfisheriesagenda,withannualEUregulationssettingtotalallowablecatches(TACs)andquotasforthemostimportantcommercialspeciesoffish. Ina recentgreenpaper,whileobserving that theCFPhasnotworkedwellenough topreventproblemsofover-fishinganddecliningcatches,theEuropeanCommission(2009a)hasproposedmajorreforms.


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provides a comprehensive system of rules for theprotection and preservation of vulnerable fish stock.While it is theresponsibilityofnational inspectoratestomonitorwhatquantityoffishiscaught,inspectorsoftheEuropean Commission monitor the effectiveness ofnational inspection systems and ensure that CFP rulesare enforced effectively across thewhole of theEU. Infact,theEUhasplayedaleadingroleinpioneeringnewtechnologies,suchassatellitevesselmonitoringsystems(VMS), which have made control and monitoring moreefficient.88TheEUalsoprocessescatchdatareportedbythe member states and publishes regular reports. Inaddition, the CFP has the authority to close fisherieswhenaquota isexhausted.Finally, ifamemberstate isgravely endangering the sustainable management ofresourcesbynotimplementingrulesagreedatEUlevel,the Commission can bring proceedings against thembeforetheEuropeanCourtofJustice.

Othernatural resourcessuchaswater, forestry, fuels,minerals and metals are also characterized by similarproblemsofoveruseandcross-borderexternalities.Aswith fisheries, the sustainable management of theseresources is often facilitated by regional agreements,which may or may not be a part of trade agreementssigned by the same parties. Section E provides anoverviewofsuchagreements,byresourcesector.

7. Conclusions

Thesetoftradepolicyinstrumentscommonlyappliedtothenaturalresourcessectorincludeexporttaxes,quotasandprohibitions; importtariffs;non-tariffmeasures;andsubsidies. There appears to be a higher incidence ofexport taxesand restrictionsonnatural resources thanonothersectors.Tariffprotectioninthenaturalresourcessector is generally lower than for overall merchandisetrade, with the possible exception of fisheries. There issome evidence of tariff escalation in some naturalresources, namely forestry and mining. Subsidies tofisheriesarewidespread,providedbybothdevelopedanddevelopingcountries,andrepresentaheftyproportionofthevalueofthetotalcatch.Theavailableinformationonconsumptiontaxesonfuelsshowsthattheyarehighanddwarfthesizeofimporttariffs.

For natural resource exporters, export taxes orrestrictions can serve several purposes. They canincrease the rents received by the exporting countrythrough an improvement in its terms of trade. This isstrictlyabeggar-thy-neighboureffect,asthewelfareoftheexporterrisesattheexpenseofawelfarelossofitstrading partners. Where resource-exporting countriesface problems of open access, they can also help toaddresstheover-exploitationoftheresource.Theycanassist countries facing volatile commodity markets tostabilize producer revenues. For countries concernedaboutover-dependenceontheexportofafewnaturalresources,exporttaxesorrestrictionscanassistexportdiversificationbyencouragingdownstreamprocessingactivities.Finally, theycan formpartofa responsebynatural resource exporters to tariff escalation in theirtradepartners’markets.

For resource-importing countries, import tariffs canhelp “capture” some of the rents earned by exporterswith market power (the beggar-thy-neighbour effect).When property rights with respect to resourceharvestingarenotwell enforced, tradeopeningmighthave a negative impact on resource conservation. Atariff imposed by the resource-importing country willreduceforeigndemandfortheresourceandsomitigate,tosomeextent,problemsofover-harvestingandhelptoconserve the resource stock. Faced with “Dutchdisease”, industries thathavebeenadverselyaffectedbyaboominthenaturalresourcessectorcanbepartlysheltered by being given some degree of importprotectionthroughtariffs.

For countries facing increasing scarcities of energyresources, subsidies can help to correct sub-optimallevels of exploration arising from the inherentuncertainty and risk surrounding that activity and thelargesunkcostsinvolved.Governmentscanalsodirectsubsidies towards management and conservationprogrammesaimedatsustainingnaturalresources.

The availability of large rents and the prevalence ofrent-seekingbehaviourinnaturalresourcesectorscanhaveacorrosiveeffectonthe institutional framework.This means that policy choices purportedly aimed atimprovingspecificoutcomes–suchas reducingover-exploitationorhelpingtoconservenaturalresources–mayendupfavouringvestedinterests.

Inexaminingwhethergovernmentsshouldchoosetradepoliciesordomesticmeasures(productionrestrictions,consumption taxes, etc.) to address natural resourceproblems, two broad conclusions emerge. First, trademeasures are often a second-best policy to addressproblems associated with natural resources, as in thecase of open access and environmental externalitieslinked with consumption or production of naturalresources. The first-best policies are domesticmeasures – strengthened property rights or pollutiontaxes – that address the distortions at the source.Second,giventhegeographicalconcentrationofnaturalresources,domesticmeasuresareclosesubstitutesfortrademeasures.Thus,productionrestrictionshavethesame effect as export restrictions and consumptiontaxes have the same effect as import tariffs. Thissuggests that governments have greater leeway toaffect natural resources trade through the use ofdomestic measures compared with trade in otherproducts.

Finally, the value of regional integration schemes fornatural resource-abundant economies appearsambiguous. On the one hand, small trade creationeffects, potentially large trade diversion effects anddifficultiesinaddressingasymmetricshocksconstitutea set of disincentives for regional integration. On theother hand, potential diversification of production andexport structures, and the internalisation of cross-border externalities, provide strong incentives forregionalintegration.


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Endnotes1 Developed countries include: Australia, Canada, Iceland,

Japan, New Zealand, Norway, Switzerland and the UnitedStates.TheEuropeanUnionisalsoincludedinthiscategory.The group of developing countries also includes LeastDevelopedCountries(LDCs).

2 Determining semi-finished or finished products that arederived from natural resources is not a straightforwardprocessfor theobviousreasonthatallmanufacturedgoodsare ina fundamental sensebased initiallyon rawmaterials.For the purpose of this analysis, four finished products orproduct groups that in large part are based on the naturalresourceinitsrawstateareconsidered:cork,woodandpaperproducts;woodenfurniture;petrochemicals;andnon-metallicmineralsemi-manufacturesandmetalsemi-manufactures.

3 For a detailed description of these measures, see http://r0.unctad.org/trains_new/tcm.shtm.

4 Annex3of theMarrakechAgreement states that: “Thefirstfour trading entities so identified (counting the EuropeanCommunities as one) shall be subject to review every twoyears”.Currently,thefirstfourtradingentitiesaretheEuropeanCommunities,theUnitedStatesofAmerica,JapanandChina.FortheotherWTOmemberstheprocedureisasfollows:“thenext 16 shall be reviewed every four years. Other Membersshallbereviewedeverysixyears,exceptthatalongerperiodmaybefixedforleast-developedcountryMembers.”

5 Note that export tax on re-exported goods, as well asstatisticalcharge,guaranteefund,stampduty,re-exporttax,incometax,corporationtax,automationfee,exitduty,exportdevelopment charge and consent fee were not taken intoaccount.

6 The general rule of transparency (Article X of the GATT)appliestobothdutiesandquantitativeexportrestrictions,butthere isnoexplicitobligationofnotificationpursuanttothatarticle. There is a notification requirement for quantitativeresetrictionsunder theDecisiononNotificationProceduresforQuantitativeRestrictionsadoptedbytheCouncilforTradein Goods on 1 December 1995 (G/L/59). No export taxeshavebeennotifiedunderthisDecision.

7 See for instance http://www.ifpri.org/sites/default/files/bp013Table01.pdf.

8 Thevaluereferstothenetsalesintheindustryoftheacquiredfirm.

9 Recallthatestimatesareupperboundsandthattheextentofthe over-estimation may differ across countries. In addition,notethatthesedataonlyrefertothecoverageofexporttaxesandnottothedegreeofrestrictivenessofthemeasure.

10 AsdiscussedinBox15,theseresultsarebasedonlyonthetencountriesthathavenotifiedquantitativerestrictionstotheWTO.

11 Thesearticlesdefine thegeneral exceptions to thegeneralelimination of quantitative restrictions. See Section E for adiscussiononWTOrulesonexportrestrictions.

12 For detailed information on export restrictions on strategicmetalsandminerals,seeKorinekandKim(2009).

13 Under the SCM Agreement, a subsidy involves a financialcontributionbyagovernmentthatconfersabenefitspecifictoafirmorindustryorgroupoffirmsorindustries.

14 SeeOECD(2000).

15 Table 13 presents annual amounts of GFTs to the fisheriessectorin2006.Detailedfigurescovering1996to2006arepresentedinAnnexTable3.

16 Sumailaetal.(2009)findlowerlevelsforcapacity-enhancingsubsidies in 2003. Including fuel subsidies, this categoryamounts toUS$16.2billion.Other categoriesof subsidies,

suchasthosedevotedtoresourcemanagement,areofsimilarmagnitude.

17 However,oneshortcomingofthemodelusedinthesestudiesis that themonopolistsupplier isassumedtobe implausiblypassive.

18 Note, however, that the overall output path can be tiltedtowardsthepresentorawayfromit,whentheimportingandthe exporting countries differ in terms of technologies ordemandelasticities(BranderandDjajic,1983).

19 See Figure 12 for a more detailed description of theequilibriumconditionsinthisset-up.

20 These typesofstrategies thatdependonlyon thecalendartimeandtheinitialconditionsarecalled“openloopstrategies”.Inatheoreticalmodel,KarpandNewbery(1992)showthatitispossibleinsteadtodefinetime-consistentequilibriaunderMarkov-perfect strategies, that is, in each period, eachexporter chooses its current supply according to theremaining resource stock while each importer selects thetariffthatmaximizesinstantaneouswelfare,takingexporters’decisions(i.e.currentaggregatesupply)asgiven.

21 Thereappearstobenostudythatlooksattheoptimalpathofexport taxes on exhaustible resources. This sub-sectiontherefore relies on the analysis of an export tax in a staticframeworktoprovideanunderstandingofitseffectsandthemotivationsbehindit.Foradiscussiononthelegalaspectsofexporttaxes,seeSectionE.

22 Itisinterestingtonotethatinthecaseofnon-renewablenaturalresources,especiallyoil, this isnotanuncommonsituation. Infact, many oil-exporting countries have only a minor localdemand. In addition, since the marginal cost of extraction isnegligible,theoilsupplyislikelytobepriceinelastic.

23 Thispolicymaybewelfareimprovingfortheexportingcountryinthenaturalresourcessector.Economictheoryshowsthatin a partial equilibrium setting with perfect competition andconstant returns to scale, the optimal export tax is thereciprocal of the elasticity of residual demand facing theexportingcountry(DixitandNorman,1980).

24 For an analysis of the impact of an export tax in a smallcountry,seeGandolfo (1998), forexample. In thisset-upanexporttaxiswelfarereducingforthecountryconcerned.

25 SeeSectionE.

26 Foradetaileddescriptionoftheeconomiceffectsofexporttaxesandtherationalefortheiruseasapolicyinstrumentinprimarycommoditiesingeneral,seePiermartini(2004).

27 Thestudydefinesasheavilydependentonasinglecommodityacountrythatpresentsaratioofcommodityexportstonon-commodityGDPofabove10percent.Inaddition,itmeasuresvariabilityasthestandarddeviationofthede-trendedlogofcommodityexportsandcommodityGDP.

28 Asimilarjustificationfortheuseofexporttaxesisusedforthecaseofalargecurrencydepreciation.Thereisgenerallystrongpoliticalsupportforimposinganexporttaxatthetimeofalargecurrency depreciation. In these circumstances, exportersreceivewindfallgainsandataxonthesegainsisregardedasameanstoincreasegovernmentrevenue,whilerespondingtoaprincipaloffairredistributionofincome.It isworthnotingthatthelargecurrencydepreciationargumentfortaxationofexportsjustifies only temporary export taxes and potentially justifiestaxationofallexports,includingthosecommoditiesinrespectofwhichtheexportingcountrypossessesnomonopolypower.

29 The income multiplier refers to the fact that increasedspending(privateorpublic)hasanimpactonnationalincomegreaterthantheinitialamountofspending.

30 SeeSectionC.4.


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31 For some evidence on the use of natural resource rents tosubsidizethenon-boomingsectoroftheeconomy,seeSarrafandJiwanji(2001)andSachsandWarner(1995).

32 Theinfantindustryargumentisthatnewdomesticindustriesmay not be able to compete with well-established foreignfirms simply because they do not have enough experience.Overtimetheycanlearnbydoing,reducetheircostsandbecompetitiveintheinternationalmarkets.However,duetotheinitial absence of expertise, if the government does notintervene (this can take the form of a trade barrier or asubsidy),theindustrywillnevertakeoff.

33 Seesub-sectionD1andthesectiononnon-fuelcommodityprices in the World Trade Report 2003 (World TradeOrganization(WTO),2003).

34 Thesameset-uphasbeenusedinFigures12and32.Again,thequantityQSisthestockoftheresource.Consumptioninperiod1ismeasuredalongthehorizontalaxisfromthelefthandandinperiod2fromtheright.TheverticalaxesmeasurethepricesinthetwoperiodsandD1andD2denotethedemandcurvesinperiod1and2,respectively.Underfreetrade,theequilibriumisat point E where, at a given price (in present value terms),demandineachperiodfullyexhauststhestock.

35 Despite the extensive use of subsidies in non-renewablenatural resources, there appears to be no study that uses adynamicmodel toexamineoptimal subsidies forexhaustiblenaturalresources.Therefore,anyanalysisoftherationaleforand the effects of subsidies has to rely on traditional staticmodels.Aone-periodmodel,where thesupplycurve is rigidandfixedattheleveloftheprovenamountofacertainnaturalresourcereserve,seemstoprovideareasonablebenchmarkframeworkfortheanalysis(seeFigure31).However,theinter-temporaleffectswilldependonthetimepathofasubsidy.

36 ThispointcanbeillustratedbyreferringbacktoBox16.Likean export tax, a consumption subsidy will shift the exportsupplycurve(that is theresidualsupplynetof thedomesticdemandfortheresource)totheleft.ThenewequilibriumwillbeinX,theworldpricewillincreasetoPXbothintheforeignanddomesticmarket,butdomesticconsumerswillonlypaypartofthisprice,sayPD,wherePDistheworldpriceoftheresourcenetofthesubsidy.

37 Theincentivetoexplorewillalsodependonthecertaintyofcontract conditions between the government and theexploring company as well as the allocation of extractionrights.Problemsinthiscasearisebecauseofthedifficultyofgovernments to make credible commitments, thus creatingtimeinconsistencyproblems(CollierandVenables,2009).

38 SeeSectionC.

39 SeethediscussioninBranderandTaylor(1997).

40 SeeBranderandTaylor(1998),pages198-199.

41 Thisanalysisabstracts from the terms-of-tradeeffectofanincrease in the world price of the natural resource goodarisingfromtheapplicationoftheproductiontax.

42 Underuncertainty,andinthecontextofcontrollinganegativeexternality, price instruments are preferred if the marginalcost function is close to being linear or there is significantcurvature in marginal benefit. Quantitative controls arepreferred if the marginal cost function is highly curved andmarginalbenefitisconstant.

43 Note,however,thattherecentEUreportonitsownfisheriespolicy “Green paper on a reform of the Common FisheriesPolicy” suggests developed country management systemsoftenfallshorttoo.Seehttp://eur-lex.europa.eu.

44 Sincethefocusofthisreportisontradeinnaturalresources,instrumentssuchasbordertaxadjustmentsorcapandtradesystems will not be considered in this sub-section. Mostly,these policy instruments are not directly applied to naturalresourcesper sebuttofinalproductsoreconomicagentsthatusenaturalresourcesasintermediateinputs.Foradescriptionand analysis of these policy measures, see WTO-UNEP(2009).

45 Thead valoremPigouviancarbontaxisdefinedasthespecificPigouvian carbon tax divided by the producer price for theresource,sayoil.Thetimepatternofaspecifictaxwilldependthenonthetimepathofthead valoremtaxrelativetothetimepathoftheresourceprice.

46 Resultsontheoptimalpatternofcarbontaxesarealsovalidfortheimpositionofanimportquotaonpetroleum(withacap-and-trade scheme for consumers). Emission quotas are themainschemeforcontrollingcarbonemissionsundertheKyotoProtocolandtheEuropeanUnionemissionstradingscheme.

47 See Ulph and Ulph (1994), Sinclair (1992), Grimaud andRougé(2005)and(2008),Acemogluetal.(2009)andGrothandSchou(2007).

48 SeedefinitionofflowandstockexternalitiesinSectionC.3.

49 Thisistrueifzeroextractioncostsofaresourceareconsidered.

50 DatafromtheEnergyPricesandTaxesReport(2009)showthat, for the United States, the EU and Japan the taxes ongasolinehave increasedrespectivelyby17percent,40percentand15percent.

51 SeeforinstanceWirl(1994),RubioandEscriche(2001),LiskiandTahvonen(2004)andStrand(2008).

52 This istrueundertheassumptionthat labourproductivityofharvesting is large relative to the resource growth withrespecttohabitatsize.

53 While not discussed here, eco-labels and environmentalstandardscanalsobeappliedinthecontextofnon-renewableresourcessuchasfossilfuelsaswellasonfinalproductsthatusenaturalresources.

54 Voluntary standards set by a non-government entity alsoexist. An example of these voluntary standards is theISO14000 on environmental management systems that canbe applied to forestry management. For other examples onthesestandards,seeWTO-UNEP(2009).

55 Forafurtheranalysisofthis,seeNunesandRiyanto(2001).

56 Most voluntary eco-label schemes come from non-governmententities.However,sometimestheyareendorsedorfollowedbygovernments.

57 See definition of eco-labels in WTO-UNEP (2009), p. 120,andGreaker(2002).

58 See, for instance, Kapelianis and Strachan (1996), Pepper(2000), Teisl et al. (2002), Hemmelskamp and Brockmann(1997),GudmundssonandWessells(2000).

59 This is true under the assumption that there is perfectinformationbetweenthegovernmentandthetwofirms.Rege(2000) shows that regulation may also help to reach anefficient solution in situations with a large number of firmswhere it is difficult for the government to detect cheatingfirms (firms thatproduce lowqualitybutpretend toproducehigh quality). In addition, she shows that also a non-governmental party providing an eco-label scheme may beabletoachievesimilarenvironmentalqualityasgovernmentalregulation.

60 This assumption is purely theoretical. The legal issuesregarding the fact that environmental minimum standardscould,inpractice,beimposedonforeignfirmsaretreatedinSectionEofthisreport.

61 Inreality, instrumentssuchaseco-labelsandenvironmentalstandards are not considered by governments as mutuallyexclusive.For instance,aneco-labelcouldbeused toshowcompliance with a standard or to show if a product isexceedingtherequirementssetbyacertainregulation.

62 The branch of economics studying how interest groupsinfluencepolicy-making iscalledpoliticaleconomy.Seminalcontributions includeOlson (1965),Stigler (1971),Peltzman(1976)andBecker(1983).Forapplicationstotheformationof trade policies, see Hillman (1982) and Grossman andHelpman(1994).


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63 ForamorearticulatediscussionofAscher(1999)andBecker(1983),seeDeaconandMueller(2004).

64 Thisabstractsfromterms-of-tradeeffects,discussedinBox16above.

65 Thispoliticaleconomymotivefortradepolicyisindependentoftheterms-of-tradeconsiderationsdiscussedearlier.

66 Sarraf and Jiwanji (2001). Davis (1994) notices that SouthAfrica’stradepolicieshavelongsoughttodeflectitsnaturaladvantage in minerals by subsidizing manufacturing, a factthat might be attributed to the politico-economicconsequencesoftheDutchdisease.SeealsoRoemer(1985)andtherelateddiscussioninSectionD.3.

67 Van der Ploeg (2006) argues that if the funds are used tostimulateR&Dandeducationdirectly,thismaybelessofanissue.

68 Itshouldbenoted thatSachsandWarner’spostulate isnotentirely consistent with what we know about the wealthiestOPEC members. Amuzegar (2001) argues that thesecountriesdidhaveextremeinterestindiversifyingawayfromoil.Theyjusthadenoughfinancialresourcesthattheycouldattempt the first-best approach, subsidies and state-ledefforts, rather than second-best trade policies. Sachs andWarner’s explanation for the upward-sloping part of theU-shaped relation between openness and resourceabundance may therefore not be correct, though theunderlyingstatisticalrelationshipis.

69 Theweightgiventospecialinterestgroupsbythegovernmentmay be interpreted as a measure of corruption. Throughoutthis section, “corruption”, “special interest politics” and“political economy considerations” are therefore usedinterchangeably.

70 As noted in Section C.3, the use of natural resources cangenerate negative externalities such as environmentaldamageandhabitatdestruction,anditcanalsobetreatedasanexternalityitself.

71 This is the so-called “protection for sale” approach ofGrossmanandHelpman(1994).

72 Paneldataanalysisofagriculturallandexpansionover1960–99 for tropical low and middle-income economies in LatinAmerica,AsiaandAfrica.

73 The empirical results indicate, however, that increasedresource-tradedependencyleadstogreateragriculturallandexpansioninatropicaldevelopingeconomy.

74 Damaniaetal.(2003)considertheeffectofliberalizationontheoptimalpollutiontax.Theresultscan,however,beappliedtotherateofutilizationofanaturalresource.Anincreaseintheoptimalpollutiontax is interpretedasan increase intherateofconservationoftheresource(reductionintherateofutilization).

75 Intheempiricalanalysis,Damaniaetal.(2003)findthatthereisalso a significant interaction effect between corruption andtradeliberalization:distortedtradepoliciesincreasetheeffectof corruption. Since corruption increases pollution (rate ofresourceconversion),thismeansthatcorruptionandprotectionare complements in creating lax environmental policies(resourcedepletion).Thisisaninstanceinwhichprotectionhasadverseeffectsonthemanagementofnaturalresources.

76 Thereareotherstudieson theeffectof tradeopennessoncorruption. The conclusions are not clear-cut. Rauscher(1994)findsthattradeopennessmayhaveambiguouseffectson lobbying intensity. Fredriksson (1999) finds that in aperfectly competitive sector, trade liberalization reduces(increases) both industry and environmental lobby groups’incentivetoinfluenceenvironmentalpolicyifthecountryhasa comparative disadvantage (advantage) in the pollutingsector.Inarelatedstudy,BommerandSchulze(1999)arguethatenvironmentalpolicyistightenedbytradeliberalizationiftheexport sector is relativelypollution-intensive, butwill berelaxediftheimportcompetingsectorispollution-intensive.

77 Tradeintegrationismeasuredasde facto nominalopenness(ratioofexportsplusimportsoverGDP).Inordertocontrolforreverse causality, institutions (rule of law) are instrumentedusingsettlermortalityasinAcemogluetal.(2001).

78 TheruleoflawindexofKaufmannetal.(1999)measurestheextenttowhicheconomicagentsabidebytherulesofsociety,perceptions of the effectiveness and predictability of thejudiciary,andtheenforceabilityofcontracts.

79 Van Rijckeghem and Weder (2001) similarly suggest thatstrengthening the rule of law has beneficial effects oncorruption. Measuring the quality of institutions with risk ofexpropriation, Mocan (2008) also finds that higher-qualityinstitutionsreducecorruption,measuredastheincidenceofbeingaskedforabribe.Forasurveyof thedeterminantsofcorruption,seeGunardi(2008).

80 ThisobservationleadstointerprettheresultsofDamaniaetal. (2003) with some caution. In their model, corruption isexogenously given. In a richer model where corruptionendogenouslydecreaseswithtradeliberalization,trademightbemorelikelytoreduceresourceutilization.

81 SeeRobalinoandHerrera(2009).

82 Examples of such initiatives include debt-for-nature swapsand the World Bank’s Global Environmental Fund (GEF).Debt-for-nature swaps usually involve a portion of nationaldebtbeingconvertedatadiscounttoanenvironmentalfund.GEFprovidesdirectfundingforenvironmentalprojectsinfourkey categories: bio-diversity preservation, climate change,water pollution and ozone depletion. The distinguishingfeature of these schemes is that the transfer is conditionalupon environmental improvements being undertaken in therecipientnations.

83 SectionD.5hasalreadydiscussedanexceptiontothisresult,arguingthattheimpositionofanimporttariffbytheexportermayworsenthehabitatdestructionexternality.

84 Forexample, theUnitedStateshasaTradeand InvestmentFramework Agreement (TIFA) with Saudi Arabia, wherebyboth countries have agreed to develop their internationaltradeandeconomicrelationship(OfficeoftheUnitedStatesTradeRepresentative(USTR),2003).

85 This basic welfare analysis subsequently needs to take theconsumption effects into account as well (Lipsey, 1957;Carbaugh,2007).

86 The exception to this norm is agricultural commodities asseveraldevelopedcountriesimposehightariffsonagriculturalgoods to protect their own farmers. However, agriculturalcommodities,withtheexceptionofrawmaterials,arebeyondthescopeofthisreport.

87 TherearenineexistingRFMOs(Tarasofsky,2007).

88 Forinstance,itislikelytohelpmonitorillegallyharvestedfishfrom regulated fisheries, unreported or misreported fishingactivities, and unregulated fishing by unknown vessels(Metuzalsetal.2009).


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AnnexTable2:Applied mFn tariff rates of processed products, 2007(percent)

country cork and paper Petro-chemicals mineral-based semi-manufactures

Wooden furnitures

Afghanistan 5.3 4.5 7.7 10.0

Albania 0.1 1.2 9.4 0.0

Algeria 20.7 10.2 21.8 30.0

Angola 10.6 3.1 9.7 15.0

AntiguaandBarbuda 8.9 4.2 9.5 17.5

Argentina 12.3 7.2 13.2 18.0

Australia 4.1 2.4 3.7 5.0

Azerbaijan 12.3 1.2 12.8 15.0

Bahamas 29.3 28.9 32.2 31.9

Bahrain 5.0 4.3 5.0 5.0

Bangladesh 20.1 6.2 17.8 25.0

Barbados 9.8 4.2 11.3 56.7

Belarus 14.0 8.2 13.7 31.7

Belize 10.1 1.8 9.9 27.5

Benin 12.2 5.1 17.0 20.0

Bermuda 20.7 18.7 20.7 22.3

Bhutan 19.8 10.0 21.4 50.0

BolivarianRep.ofVenezuela 14.5 8.2 14.1 20.0

Bolivia 9.8 6.4 9.4 10.0

BosniaandHerzegovina 6.3 2.9 7.9 10.0

Botswana 7.1 1.8 6.8 20.0

Brazil 12.4 7.1 13.4 18.0

BruneiDarussalam 3.4 0.0 0.4 5.0

BurkinaFaso 12.2 5.1 17.0 20.0

Burundi 11.9 5.2 11.3 30.0

Cambodia 9.7 3.8 15.1 35.0

Cameroon 18.2 9.2 22.7 30.0

Canada 0.8 2.1 3.2 5.9

CapeVerde 9.7 0.0 11.4 50.0

CentralAfricanRepublic 18.2 9.2 22.7 30.0

Chad 18.2 9.2 22.7 30.0

Chile 6.0 6.0 6.0 6.0

China 6.4 7.1 11.8 0.0

Colombia 14.5 8.0 13.6 20.0

Congo 18.2 9.2 22.7 30.0

Congo,Dem.Rep.of 15.4 7.4 15.3 20.0

CostaRica 6.4 0.3 5.2 14.0

Croatia 1.3 1.6 6.8 4.6

Cuba 9.7 8.1 10.6 18.8

Côted’Ivoire 12.2 5.1 17.0 20.0

Djibouti 30.5 28.4 30.0 33.0

Dominica 7.9 1.9 9.0 35.0

Ecuador 13.9 6.1 13.0 20.0

Egypt 12.5 2.2 12.7 30.0

ElSalvador 6.6 0.5 5.6 15.0

EquatorialGuinea 18.2 9.2 22.7 30.0

Ethiopia 13.0 7.0 20.1 30.6

EuropeanUnion(27) 1.2 4.2 3.0 0.7

FYRMacedonia 2.3 2.8 9.9 12.0

Gabon 18.2 9.2 22.7 30.0

Gambia 20.0 20.0 19.9 20.0

Georgia 0.0 0.0 1.7 0.0

Ghana 18.7 8.2 13.6 20.0

Grenada 8.9 4.2 9.5 17.5

Guatemala 6.8 0.4 5.5 15.0

Guinea 11.9 4.2 16.4 20.0

GuineaBissau 12.2 5.1 17.0 20.0

Haiti 0.9 0.0 3.4 8.8

Honduras 6.8 0.3 5.5 15.0

HongKong,China 0.0 0.0 0.0 0.0


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Wooden furnitures

Iceland 2.3 0.0 2.7 10.0

India 10.0 6.1 9.6 10.0

Indonesia 5.6 3.8 8.6 8.8

Iran,IslamicRepublicof 21.7 7.0 25.3 55.0

Jamaica 5.8 0.2 6.7 17.5

Japan 1.1 2.4 1.1 0.0

Jordan 15.1 0.9 18.6 30.0

Kazakhstan 8.2 4.6 12.4 15.0

Kenya 20.8 1.1 16.0 25.0

Korea,Republicof 2.4 5.6 7.3 2.0

Kuwait 5.0 4.3 5.0 5.0

KyrgyzRepublic 0.0 1.0 5.2 2.5

LaoPeople’sDemocraticRepublic 14.0 5.0 6.4 40.0

Lebanon 7.4 1.5 6.7 30.0

Lesotho 7.1 1.8 6.8 20.0

Macao,China 0.0 0.0 0.0 0.0

Madagascar 14.6 4.2 14.0 20.0

Malaysia 14.7 3.1 13.8 0.0

Mali 12.2 5.1 17.0 20.0

Mauritania 11.6 5.1 17.2 20.0

Mauritius 5.6 2.3 4.1 23.4

Mayotte 6.1 8.4 8.3 10.0

Mexico 9.7 5.4 13.0 16.6

Mongolia 5.0 5.0 5.0 5.0

Montenegro 4.5 1.5 5.8 10.0

Morocco 43.7 15.7 29.6 50.0

Mozambique 10.0 2.5 9.9 20.0

Myanmar 5.5 1.1 4.7 15.0

Namibia 7.1 1.8 6.8 20.0

Nepal 15.6 13.3 14.0 25.0

NewZealand 1.3 0.6 3.5 7.0

Nicaragua 6.5 0.3 5.4 15.0

Niger 12.2 5.1 17.0 20.0

Norway 0.0 0.0 0.0 0.0

Oman 5.0 4.3 5.0 5.0

Pakistan 20.3 8.7 19.2 25.0

Panama 7.7 0.4 9.0 15.0

PapuaNewGuinea 10.4 0.0 2.8 25.0

Paraguay 11.6 6.5 12.7 18.0

Peru 10.8 5.7 8.6 12.0

Philippines 7.2 3.6 7.1 15.0

Qatar 5.0 4.3 5.0 5.0

RussianFederation 14.0 8.0 13.5 32.4

SaintKittsandNevis 9.6 1.9 10.1 20.6

SaintLucia 6.8 1.8 7.8 17.5

SaintVincentandtheGrenadines 8.9 1.9 9.0 17.5

SaudiArabia 5.0 4.3 5.0 5.0

Senegal 12.2 5.1 17.0 20.0

Serbia 4.7 2.0 7.4 20.0

Seychelles 2.1 0.0 3.5 0.0

Singapore 0.0 0.0 0.0 0.0

SolomonIslands 10.1 7.4 9.3 10.0

SouthAfrica 7.1 1.8 6.8 20.0

SriLanka 15.9 2.9 16.7 28.0

Swaziland 7.1 1.8 6.8 20.0

Switzerland 5.6 0.9 1.9 0.7

Taipei,Chinese 0.6 2.2 5.7 0.0

Tanzania 20.8 1.1 16.0 25.0

Thailand 7.5 3.8 11.3 20.0

Togo 12.2 5.1 17.0 20.0


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AnnexTable2:Applied mFn tariff rates of processed products, 2007(percent)continued


Wooden furnitures

TrinidadandTobago 5.8 0.2 6.7 17.5

Turkey 1.0 4.7 3.1 0.7

Uganda 20.8 1.1 16.0 25.0

UnitedArabEmirates 5.0 4.3 5.0 5.0

UnitedStates 0.7 2.7 2.6 0.0

Uruguay 11.0 6.0 13.2 18.0

Uzbekistan 16.4 8.6 18.5 30.0

Vanuatu 15.0 7.2 15.8 33.1

VietNam 19.3 2.3 19.0 36.9

Zambia 16.5 1.5 16.6 25.0

Zimbabwe 20.9 5.4 21.9 40.0

Note 1: Foreachcountry,nationaltarifflinesarefirstaveragedatthe6-digitlevel.Theaveragesatthe6-digitlevelarethenusedtocalculatethenationalaverage.Note 2:Themethodologyusedforcalculatingthead valoremequivalentsofnon-ad valoremdutiescanbefoundinWorld Tariff Profiles2006,pp186-197.Source: WTOIntegratedDatabaseandInternationalTradeCentre.


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AnnexTable3:oecD government financial transfers to fishing(USDmillions)

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Australia 37.4 41.2 .. .. 82.3 75.9 78.0 95.6 95.6 46.3 90.0

Belgium 5.0 4.9 .. 4.5 6.8 2.8 1.6 1.7 6.3 8.6 7.8

Canada 545.3 433.3 .. 606.4 564.5 521.4 497.8 590.0 618.8 591.0 591.0

Denmark 85.8 82.0 90.5 27.8 16.3 .. 68.8 37.7 28.5 58.1 113.2

Finland 29.0 26.2 26.9 19.2 13.9 16.5 16.0 20.2 19.4 24.8 23.4

France 158.2 140.8 .. 71.7 166.1 141.8 155.3 179.7 236.8 126.2 113.8

Germany 81.6 63.2 16.5 31.3 29.8 29.0 28.2 33.9 18.3 30.9 30.7

Greece 52.3 47.0 26.9 43.0 87.3 87.0 88.3 119.0 35.5 61.0 79.6

Iceland 43.8 38.7 37.0 39.8 42.0 28.3 29.0 48.3 55.7 64.3 52.4

Ireland 112.7 98.9 .. 143.2 .. .. 63.6 65.0 21.4 22.1 29.4

Italy 162.6 91.8 .. 200.5 217.7 231.7 159.6 149.3 170.1 119.2 119.2

Japan 3,186.4 2,945.8 2,135.9 2,537.5 2,913.1 2,574.1 2,323.6 2,310.7 2,437.9 2,165.2 1,985.1

Korea 367.8 379.0 211.9 471.6 320.4 428.3 538.7 495.3 495.3 649.4 752.2

Mexico 14.2 16.8 .. .. . . . . . . 177.0 114.0 85.0 89.1

Netherlands 39.9 35.8 .. .. 1.4 12.8 12.4 6.6 5.2 13.7 21.3

NewZealand 37.2 40.4 29.4 29.6 27.3 15.1 19.0 38.3 50.1 32.2 38.6

Norway 172.7 163.4 153.0 181.0 104.6 99.5 156.3 139.2 142.3 149.5 159.5

Portugal 71.8 65.1 .. 28.7 25.6 25.1 24.9 26.9 26.9 32.8 29.3

Spain 246.5 344.6 296.6 399.6 364.1 376.6 301.9 353.3 256.6 433.8 425.4

Sweden 62.3 53.5 27.0 31.1 25.2 22.5 24.8 30.7 34.4 36.6 41.5

Turkey 28.7 15.1 .. 1.3 26.4 17.7 16.2 16.3 59.5 98.1 133.9

UnitedKingdom 115.4 128.1 90.8 76.0 81.4 73.7 .. 82.7 87.5 103.2 114.7

UnitedStates 891.2 1,002.6 1,041.0 1,103.1 1,037.7 1,169.6 1,130.8 1,290.4 1,064.4 .. 2,128.8

OECDtotal 6,547.6 6,258.2 4,183.5 6,046.7 6,154.0 5,949.3 5,734.9 6,307.8 6,080.6 6,174.5 7,169.9

Source:OrganizationforEconomicCo-operationandDevelopment(OECD),2009b.


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This section discusses international regulation of trade in natural resources. It starts with an overview of the legal framework of the WTO and briefly addresses how natural resources fit within this. Rather than attempt an exhaustive treatment of every WTO rule that may have a bearing on trade in natural resources, this section sets out the rules that have particular relevance for this kind of trade, and considers whether, and to what extent, these rules respond to the salient characteristics of natural resource sectors. This section also presents a selection of international agreements that regulate trade in natural resources and discusses their relationship with WTO disciplines. It ends by focusing on a number of issues in this sector that appear to be of actual or potential relevance to international cooperation and to the multilateral trading system.

e. Natural resources, international cooperation and trade regulation


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Contents 1. TradeinnaturalresourcesandWTOrules 162

2. Otherinternationallawandnaturalresources 176

3. Trade-relatedissuesaffectingnaturalresources:Challengesahead 183

4. Conclusions 196


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1. TradeinnaturalresourcesandWTOrules

(a) Traderulesandnaturalresources

Totheextentthatanaturalresourcemaybetraded,itis covered by the obligations contained in the GATTand the other WTO agreements relating to trade ingoods.Thisisthecase,forexample,ofextractedcoaland oil, lumber that has been cut down or marinespeciesthathavebeencaught.Conversely,WTOrulesgenerally do not regulate natural resources beforetheyareextractedorharvested.

Nevertheless,insomecircumstances,WTOrulesmayhave implicationsforproducts in their “natural”state.Forexample,intheUS – Softwood Lumber IVdispute,oneoftheissuesthatarosewaswhethertheprovisionby provincial governments of harvesting rights fortimber at less than adequate remuneration could beconsidered a subsidy within the meaning of theAgreementonSubsidiesandCountervailingMeasures(SCMAgreement).Morespecifically,thequestionwaswhethertheterm“goods”asusedinArticle1.1oftheSCMAgreementcould include“treesbeforetheyareharvested,thatis,standingtimberattachedtotheland(butseverable from it)and incapableofbeingtradedas such” (Appellate Body Report, US – Softwood Lumber IV, para. 57). Ultimately, it was decided thattherewasnobasis toexclude“tangible items–suchasstanding,unfelledtrees–thatarenotbothtradableas such and subject to tariff classification” from thescope of the term “goods” in Article 1.1 (AppellateBodyReport,US – Softwood Lumber IV,para.67).

TheissuealsoaroseintheNorthAmericanFreeTradeAgreement (NAFTA) with respect to a proposal forbulkwatertransfersfromBritishColumbia(Canada)tothe United States through diversion of the Canadianwaterflow.Forenvironmentalreasons,thegovernmentofBritishColumbiasoughttopasslegislationbanninglarge-scale transfers of water. Quantitative bans onexports are arguably contrary to provisions of theNAFTA,towhichbothCanadaandtheUnitedStatesare parties. However, before the legislation could bedeemed to be inconsistent with the agreement, athresholdquestioniswhetherwaterinitsnaturalstateis covered by NAFTA. A useful starting point isthe Harmonized Commodity Description and CodingSystems(oftencalledthe“HS”),whichisamultipurposeinternational product nomenclature developed by theWorldCustomsOrganization.

The HS comprises several thousand commoditygroups and has been used by WTO members inpreparing their schedules of commitments (Ehring,2007). Sub-heading 2201 of the HS is entitled“Waters, including natural or artificial mineral waters and aerated water ”,andexplicitlylists“snow”and“ice”,which could support the view that ground or surfacewater is covered by trade rules (Horlick, 2001). Acontrarypositionisthat,becausesub-heading2201is

contained within the chapter of the HS entitled“Beverages”, then water is only considered a productwhen it is destined for consumption. Because bulktransfersofgroundorsurfacewaterareusuallyusedforagriculturalor industrialpurposes, theywouldnotbecovered.

Withaviewtoresolvingthedebate,thesignatoriestothe NAFTA (Canada, Mexico and the United States)releasedajointstatementin1993proclaimingthat“(t)he NAFTA creates no rights to the natural waterresourcesofthepartiestotheAgreement”.Althoughthe legal status of this proclamation is unclear, itaccords with views of those observers who considerthatwaterdoesnotbecomeagoodforthepurposesoftheNAFTAuntilitisremovedfromitsnaturalstateand transformed into a saleable commodity, such asbottled water (International Joint Commission, 1999;McRae,2001;Cossy,2005).

Similar issues also arise in relation to other naturalresources.Forexample,membersoftheOrganizationof the Petroleum Exporting Countries (OPEC) haveoftenimposedrestrictionsonproductionandassertedthat such action is not inconsistent with the GATTbecauseoildoesnotbecomesubjecttothedisciplinesof the WTO until it has been extracted. Some arguethat the international law principle of sovereigntysupportsthepropositionthatnationsareunrestrainedin the manner in which they deal with their naturalresources until they are mined, drilled or otherwiseproduced (Crosby, 2009). Even then, a distinctionbetween measures affecting output and measuresaffectingtradebearsrelevancetothediscussion.

Aservicerelatingtonaturalresourcesissubjecttothedisciplines of the General Agreement on Trade inServices(GATS)unlessitisprovidedintheexerciseofgovernmentalauthority. Inpractice,servicesrelatetonatural resources in many different ways, frommanagement and protection, to exploration,exploitation, technical testing, transport, brokeringand commercialization. A range of services directlyconcernnatural resources (e.g.services incidental tomining, pipeline transportation of fuels, servicesincidentaltoagriculture,huntingandforestry,servicesincidental to fishing). Other services may relate to avariety of sectors, including natural resources(managementconsultingservices,forinstance).

No GATS provision specifically addresses naturalresources and the application of GATS obligationsdependstoalargeextentonWTOmembers’individualcommitmentsinthesectorconcerned.ThefactthattheWTOsystemhasdifferentrulesfortradeingoodsandtradeinservicesraisescomplexquestionsinrelationtothe exploitation of natural resources and associatedactivities(seesub-section3).


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Box25: Historical overview of natural resources in the GAtt/Wto

The history of natural resources in the General Agreement on Tariffs and Trade (GATT) and the WTO isgenerallyoneofprogressivemarketopenness–tothepointwhereawiderangeofrawmaterials,frommetalsandminerals,tofuelandwood,todayfacelittleornoprotectioninmostmajormarkets.However,anumberof resource-related issues remain or are becoming of major concern to some WTO members. One long-standing issue is thecontinueddependencyofmanydevelopingcountriesoncommodityexports,and thewaysthatsupplyfluctuations,marketinstability,pricevolatilityandcontinuedbarrierstoprocessedresourcesadverselyaffectthegrowthanddevelopmentprospectsofthesecountries.

Provisions for international commodity agreements (ICAs), the negotiation of the Generalized System ofPreferences(GSP)grantingpreferentialtariffstoimportsfromdevelopingcountries,aspectsofspecialanddifferentialtreatmentfordevelopingcountriesandrepeatedeffortstotackletariffescalationinsuccessivetrade negotiating rounds, were explicitly or implicitly aimed at addressing the unique challenges facingcommodity-exportingcountriesandtheperceivedstructuralimbalancesinthetradingsystem.

Concernsaboutdependenceoncommodityexportsandtheadverseeffectsofmarketinstabilityanddecliningpricespre-datedthecreationoftheGATTin1948.Thecommoditypriceslumpoftheearly1920s,andmoredramatically during the Great Depression of the 1930s convinced policy-makers of the need for greaterinternational cooperation and management of commodities trade, culminating in efforts in the 1920s and1930stonegotiateaseriesofICAsaimedatstabilizingpricesbycontrollingquantitiesproducedandsold(typically involving the creation of buffer stocks, long-term purchase guarantees, and quantity and exportrestrictionschemes).1

Theseagreementsfiguredprominentlyinthedraftingoftheill-fatedHavanaCharterof1948andtheGATTitself.Article6oftheCharterpermittedexceptionstonon-discriminationforICAs,providedthattheyweredesignedtoencouragethestabilizationofprices,theexpansionofconsumptionandthereliefof“burdensome”surpluses.Theconditionsgoverningtheacceptableoperationofsuchagreementswereclearlyspelledout:theyshouldbenegotiatedatpublicconferencesopentobothconsumersandproducersofthecommodityinquestion;theyshouldlastforamaximumoffiveyears;andtheiroperationsshouldbejointlyadministeredbyproducerandconsumerinterests.

WiththefailuretoratifytheHavanaCharter,theGATTwastaskedwithconductinganannualreviewoftrendsanddevelopments in internationalpricingandwithendorsing internationalcommodityagreements(both ingeneraland inspecifics).Much later,with theadditionofPart IV(TradeandDevelopment) to theGATT in1965, contracting parties were also tasked with devising measures to stabilize and improve conditions inworld markets for the primary exports of developing countries in order to enable them to attain “stable,equitableandremunerativeprices”,andtoprovidethemwithexpandingresourcesforeconomicdevelopment.

The success of ICAs, however, was mixed at best. With the exception of coffee and, for a time, tin, fewmanagedtoreversedecliningpricetrendsfortherelevantcommodities.Moreover,withtheexceptionoftheTokyoRound’sBovineMeatandDairyProductsArrangements,bothofwhichwerefocusedondeveloped-country producers, the GATT had little direct involvement in the design and operation of ICAs (Gordon-Ashworth,1984).

Asecondmajorefforttoaddressdeveloping-countrydependencyonrawmaterialexportscameinthe1960sand 1970s. As early as 1958, the Haberler Report, prepared by a panel of experts commissioned by theGATT,arguedthattheneedsofproducersofprimaryproducts,andparticularlythoseofdevelopingcountries,were“differenttoanddistinctfromthoseofproducersofmanufacturedgoods”andsuggestedthat“existingrulesandconventionsconcerningcommercialpolicywereingeneralunfavourabletodevelopingcountries”.During this same period, the ideas of Raul Prebisch (1950) and Hans Singer (1950) were increasinglyinfluential–especiallytheircontentionthatunder-developmentwastheresultofstructuralinequalitiesintheinternationaleconomicsystem,and inparticular thedeclining termsof tradefacingcommodity-dependentdevelopingcountries.Thisanalysisheldconsiderablesway in intellectualandpolicydebate,butdidnotgouncontested(Viner,1953;Baldwin,1955;Johnson,1967).

This“dependencytheory”helpedprovidetheintellectualfoundationsforthefirstUnitedNationsConferenceonTradeandDevelopment(UNCTAD)in1964.AkeyproposalattheConference(endorsedatthesecondUNCTADmeetinginNewDelhifouryearslater)wasthatdevelopedcountriesshouldgrantpreferentialtarifftreatmentto importsofmanufacturedandsemi-manufacturedproductsoriginatingindevelopingcountries–theso-called“GeneralizedSystemofPreferences”(GSP)–toencouragethegrowthofstronganddiversifiedmanufacturingsectorsinpoorercountries.Ayearlater,thenewPartIVoftheGATTcommitteddevelopedcountriesto“positiveeffortsdesignedtoensurethatless-developedcontractingpartiessecureashareofthegrowth in international trade commensurate with the needs of their economic development”. Part IV also


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included the principle that developed countries would not expect developing countries to reciprocatecommitmentstoreduceorremovetariffandothertradebarriers,andthat“morefavourableandacceptableconditionsofaccesstoworldmarkets”shouldbeprovidedforthem.

In 1971, the GATT followed UNCTAD’s lead and enacted two waivers to the most-favoured nation (MFN)principle(limitedtotenyears)whichpermittedtariffpreferencestobegrantedtodeveloping-countryexports.In1979,theGATTestablishedapermanentexceptiontotheMFNobligationbywayoftheEnablingClause.ThisexemptionallowedGATTcontractingpartiestoestablishsystemsoftradepreferencesfordevelopingcountries,withthecaveatthatthesesystemshadtobe“generalized,non-discriminatory,andnon-reciprocal”.OveradozenWTOmembersofferGSPschemesandcurrenteffortstoformalizeduty-freeandquota-freeaccessforexportsfromleast-developedcountries(LDCs)intheDohaRoundpromisetoexpandtheconceptevenfurther.

Fromtheperspectiveofdevelopingcountries,thesesystemshavebeenamixedsuccess.Ontheonehand,mostdevelopedcountrieshavecompliedwiththeobligationtogeneralizetheirprogrammeswithrespecttomembership,byofferingbenefitstoawiderangeofdevelopingandleast-developedcountries,althoughovertime some geographical “graduation” has been applied through the exclusion of entire countries and ofproductsfromindividualnationalschemes.

Mostschemesarenotgeneralizedwithrespecttoproducts,inthattheydonotcoveralldeveloping-countryexports(notableexceptions,untilrecently,beingagricultureandtextiles),andinparticulartendtofavourrawmaterialexportsoverexportsofprocessedandsemi-processedresources,thusexacerbatingtheproblemof commodity dependence that GSP schemes were meant to address. They can also lead to embeddedoppositiontonon-discriminatorytradeopening,whichisseenasathreattopreferencemargins.Moreover,ithasbecomeincreasinglyunderstoodandacknowledgedthatthecapacitytotakeadvantageofpreferencesis strongly influenced by domestic conditions and supply capacity in the economies of the putativebeneficiaries.

Athirdconcernthroughoutthisperiodwastheprevalenceoftariffescalation–wherebyhigherprocessedgradesofacommodityfaceescalatingtariffs,discouraginghighervalue-addedproductionandinvestmentindevelopingcountries, reinforcingprimary-productexportsandexacerbatingpoorercountries’ terms-of-tradedifficulties.Thisproblempartlyresultedfromtheeffortsofindustrializedcountriestoprotectlow-skill,low-technologymanufacturingindustriesandjobs(suchastextiles,apparelorfootwear),butitalsopartlyreflectedthecompositionandmechanicsofsuccessiveGATTnegotiationswhich,atleastuntilthelaunchof theUruguayRound in1986, tendedtobedominatedby industrializedcountriesandreflect their tradeconcernsandnegotiatedbargains(Gordon-Ashworth,1984).TheTokyoRound(1973-79)andtheUruguayRound(1986-93)made the reductionof tariffescalationakeyobjective,butachieved limitedsuccess. ItmaywellbethattheDohaRound,launchedin2001withitsnon-linearformulaapproach,willdobetter.

Inrecentdecades–especiallyoverthepastfewyears–discussionssurroundingnaturalresourcestradeinthe GATT/WTO have increasingly focused on the concerns of commodity-importing countries which areworriedaboutrisingresourcepricesandsignsofincreasingrestrictionsontheexportofrawmaterials.Theissuestemsinpartfromgrowingglobaldemandforscarceresourceswhich,moreover,areoftenexportedbyarelativelysmallnumberofcountries.Resourcescarcityandunevengeographicaldistributioncreatescopeforcountriesholdingreservestoinfluencethepricesandquantitiesoftherawmaterialsmadeavailableonworldmarkets(KorinekandKim,2009).

Ineffect,producingnationsmay restrictor taxexports forseveral reasons.These includeoffsetting tariffescalationinimportingcountries,guaranteeinglocalsuppliesofstrategicresourcestodownstreamdomesticindustries,improvingterms-of-tradebylimitingmarketsupplyandraisingworldprices,creatingcomparativeadvantages in high-tech industries that depend on access to rare metals or minerals and protecting theenvironment.

ManyoftheseissueswereraisedduringtheUruguayRound.Attheinsistenceofanumberofcommodity-exporting countries, a specific Negotiating Group on Natural Resource Based Products (NRBPs) wasestablishedattheoutsetoftheRound,whichnotonlylookedatlong-standingissuessuchastariffs(includingpreferences, tariff peaks – relatively high tariffs – and tariff escalation), non-tariff barriers to trade, andsubsidies,butalsoattempted–unsuccessfully–tobringenergyissuesandexportrestrictionsintothescopeofitsnegotiations(Stewart,1993).Similarpressuretobringexporttaxesandrestrictionsand“dualpricing”2

(see Section D) into WTO negotiations has been felt in the current Doha Round and in the accessionnegotiationsofanumberofcountries.


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(b) WTOrulesandtheparticularcharacteristicsofthenaturalresourcestrade

(i) Trade rules and the uneven global distribution of natural resources

Import tariffs (Article II of the GATT 1994)

ArticleIIoftheGATT1994prohibitsWTOmembersfromapplying“ordinarycustomsduties”ontheimportationofaproductthatarehigherthantheratespecified(or“bound”)in theirschedulesofcommitments.Throughsuccessiverounds of trade negotiations, the number of productssubjecttotariffbindingshasincreasedandthelevelsatwhichtariffsareboundhavebeenprogressivelybroughtdown.3 Members are also prohibited from applying anyotherdutiesorchargesontheimportationofaproduct,unlessspecifiedinthescheduleofcommitments.4SimilarlimitationsapplytoagriculturalgoodsunderArticle4oftheAgreementonAgriculture.

Maximumtariffrates(referredtoas“tariffbindings”)havebeenprogressivelyreducedintheeightroundsofGATTnegotiations, the lastofwhichwas theUruguayRound.FurtherreductionsarepresentlybeingnegotiatedaspartoftheWTODohaRound.TarifflevelsonnaturalresourceswereexaminedinSectionD,whichconcludedthattariffprotectionfornaturalresourcesectorsisgenerallylower

than for overall merchandise trade, with the possibleexceptionoffisheries.Tariffescalationcanbeseen forsome natural resource goods, such as forestry andmining,butnotforothers,suchasfuels.

Import and export restrictions (Article XI of the GATT 1994)

ArticleXIoftheGATT1994providesthatnoprohibitionsorrestrictions,otherthanduties,taxesorothercharges,shallbeappliedbyanyWTOmemberontheimportationofanyproductorontheexportationorsaleforexportofany product. This provision covers quotas and othersimilarmeasuresthatestablishquantitativelimitationsonimports or exports (other than duties, taxes or othercharges).BecauseArticleXIrefersbothto“prohibitions”and“restrictions”,aWTOpanelhasfoundthat“’restriction’neednotbeablanketprohibitionoraprecisenumericallimit”(PanelReport, India – Autos,para.7.270).Followingthis interpretation,a recentpanel found thatameasurethat limited the number of ports through which certaingoodsenteredaWTOmember(albeitnotthequantitiesthat could enter through the authorized ports) wasinconsistentwithArticleXIbecausethemeasurehada“limiting effect” on imports (Panel Report, Colombia – Ports of Entry,para.7.240).

ArticleXIprovisionsapplyingtoexportrestrictionsareparticularly relevant for some of the natural resourcesectors covered in this report.Asnoted in SectionD,

Box26: “commercial presence” mode of supply under the GAts: Rules relevant for investment in services

Manyservicesarecharacterizedbythesimultaneityofproductionandconsumption,whichmeansthatinsomesectorsitisimportantforservicesupplierstoestablishacommercialpresenceinthemarketswheretheywanttosellservices.

Commercialpresenceisestimatedtorepresentcloseto60percentofinternationaltradeinservices.The“commercialpresence”modeofsupply,alsoreferredtoasmode3,coversthesupplyofaservice“byaservicesupplierofoneMember, throughcommercialpresence in the territoryofanyotherMember” (Art. I:2(c)).Thiscoversany typeofbusinessorprofessionalestablishment,includingthrough(i)theconstitution,acquisitionormaintenanceofajuridicalperson;or(ii)thecreationormaintenanceofabranchorarepresentativeoffice,withintheterritoryofaMemberforthepurposeofsupplyingaservice(Art.XXVIII(d)).Commercialpresencemaytakeplacethroughanewestablishment,orthroughacquisition,inwholeorinpart,ofanexistingfirm.

TheGATSdoesnotmakeadistinctionbetweenpre-andpost-establishmentphases,butitde factoaddressesbothofthem.Thedifferencestemsfromthenatureoftheobligationsthemselves.Forinstance,whilenationaltreatment(MFN)addressbothpre-andpost-establishmentrestrictions,themarketaccessprovisiontendstoberelatedmoretopre-establishment.

GATSobligationsoncommercialpresencedependtoalargeextentonthetypeofspecificcommitmentsundertakenbyWTOmembers.Marketaccessandnationaltreatmentobligationsexistonlyinsectorswheremembershaveundertakenspecificcommitments,andassumingthatmode3hasnotbeenleft“unbound”.Membersretainflexibilitywhenschedulingmode3commitments.Theymaysubjectthesecommitmentstovarioustypesofmarketaccesslimitations:forinstance,theymaylimitthenumberofsuppliersthrougheconomicneedstests,excludecertaintypesoflegalentity,requirejoint-venture, or limit the participation of foreign capital. National treatment limitations may include restrictions on landownership, different subsidy and tax regimes, residency requirements, etc.Regardlessof theexistenceof specificcommitments,theMFNobligationappliestoallgovernmentmeasuresaffectingtradeinservices.

ThereareseveralimportantdifferencesbetweenGATSmode3andbilateralinvestmenttreaties(BITs)orinvestmentchapterscontainedincertainpreferentialtradeagreements.Amongotherthings,thedefinitionofinvestmenttendstobebroaderinthelattertwothanundertheGATS.Moreover,theGATSdoesnotprovideforaninvestor-statedisputesettlementmechanismanddoesnotcontaininvestmentprotectionobligations,suchasminimumstandardsofprotectionorcompensationincasesofexpropriation.ThelargemajorityofBITs,ontheotherhand,coveronlythepost-establishmentphaseastheytendtofocusonprotectingforeigninvestmentratherthangrantingmarketaccessopportunities.


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information extracted from the WTO’s Trade PolicyReviews showsahigher incidenceof export taxesonnaturalresourcesthanonothersectors.Theuseofthephrase “other than duties, taxes or other charges” inArticleXIhasbeengenerallyunderstoodtomeanthatthis provision does not prohibit WTO members fromapplying export taxes. Another issue is whetherArticleXIappliestoproductionlimitations,asopposedtoexportrestrictions.Again,basedonthelanguageofthe provision, it has been generally understood thatproductionrestrictionsarenotcoveredbyArticleXIandthuswouldbepermissible.

ThereisanexceptiontotheprohibitioninArticleXIthatpermitsWTOmemberstoimposeexportprohibitionsorrestrictions temporarily “to prevent or relieve criticalshortagesof foodstuffsorotherproductsessential totheexportingcontractingparty”.Thisexception,whichisfoundinArticleXI:2(a),isdiscussedbelowinSectionE.1(b)(ii).5

Non-discrimination (Articles I and XIII of the GATT)

ArticleIoftheGATTsetsoutthemost-favoured-nationprinciple, one of the fundamental obligations of themultilateral trading system. This provision prohibits aWTOmemberfromtreatingtheproductsoriginatinginor destined for another member less favourably thanthe “like” products originating in or destined for anyothercountry(includingnon-WTOmembers).

Article I is broad in scope and covers customs dutiesandchargesofanykind imposedonor in connectionwith importation or exportation or imposed on theinternational transfer of payments for imports orexports,themethodoflevyingsuchdutiesandcharges,and all rules and formalities in connection withimportation and exportation, as well as internal taxesanddomesticregulations.Thisprovisionhasimportantimplicationsfortradeinnaturalresources.

UnderArticleI,aWTOmemberthatisaconsumerofanatural resource must provide similarly favourabletreatment (in terms of tariffs, customs formalities,internal taxes,domesticregulations,etc) to importsofthelikenaturalresourceoriginatinginothermembers.6Thus, WTO member A cannot subject imports of coalfromWTOmemberBtoahighertariffthanimportsofcoal from WTO member C. Export taxes and otherexportregulationsarealsosubjecttotheobligationsinArticleI,evenifsuchmeasuresarenotprohibitedunderArticle XI. This means that WTO member A cannotsubjectitsexportstoWTOmemberBtoahigherexporttaxthanitappliestoexportstoWTOmemberC.

Article XIII of the GATT states that no prohibition orrestrictionshallbeappliedbyanyWTOmemberontheimportationofanyproductoftheterritoryofanyothermemberorontheexportationofanyproductdestinedfor the territory of any other member, unless theimportationof the likeproductofall thirdcountriesortheexportationofthelikeproducttoallthirdcountries

issimilarlyprohibitedorrestricted.ArticleXIIIappliestotariff rate quotas on imports. Moreover, even where aWTOmemberisallowedtoapplyanexportprohibitionorrestriction,itsapplicationmustbenon-discriminatory.The non-discrimination obligation in Article XIII wouldberelevant,forexample,whereamember imposesanexport prohibition or restriction temporarily to preventor relieve critical shortages of foodstuffs or otheressential products under Article XI:2(a) of the GATT(Mavroidis,2005).

State-trading enterprises (Article XVII of the GATT)

Article XVII:1 of the GATT recognizes that WTOmembersmayestablishormaintainstateenterprisesorgrant exclusive or special privileges to privateenterprises. Several state-trading enterprises relatingto natural resources have been notified by membersunder Article XVII. Examples of such notificationsinclude those by Brazil relating to ITAIPU Binacional(importedelectricalenergy)andIndustriaNuclearesdoBrasil S.A.-INB (imports of spare parts and fuel fornuclearinstallations),andbytheBolivarianRepublicofVenezuela on Petroleos de Venezuela S.A. (PDVSA)and its subsidiaries (hydrocarbons).7 An initial pointworthnoting is that theprohibition inArticleXIof theGATT and the non-discrimination obligation in ArticleXIIIoftheGATTapplytoimportandexportrestrictionsmadeeffectivethroughstate-tradingoperations(AdnotetoArticlesXI,XII,XIII,XIVandXVIIIoftheGATT).

Sub-paragraph (a) of Article XVII:1 states that state-trading enterprises shall, in their purchases or salesinvolving either imports or exports, act in a mannerconsistent with the general principles of non-discriminatory treatment prescribed in the GATT forgovernmentalmeasuresaffectingimportsorexportsbyprivatetraders.Sub-paragraph(a)“seekstoensurethataMembercannot,throughthecreationormaintenanceofastateenterpriseorthegrantofexclusiveorspecialprivileges to any enterprise, engage in or facilitateconduct that would be condemned as discriminatoryundertheGATT1994ifsuchconductwereundertakenbytheMemberitself”(AppellateBodyReport,Canada – Wheat Exports and Grain Imports,para.85).

Sub-paragraph(b)providesthattheprovisionsofsub-paragraph(a)shallbeunderstoodtorequirethatsuchenterprises shall make any such purchases or salessolely in accordance with commercial considerations,andlistsanumberoffactorstobetakenintoaccount.TheAdNotetoArticleXVII:1(b),however,clarifiesthata state enterprise may charge different prices for itssales of a product in different markets, provided thatsuch different prices are charged for commercialreasons, to meet conditions of supply and demand inexport markets. Moreover, the Appellate Body hasstatedthat,whileArticleXVII:1aimstopreventcertaintypes of discriminatory behaviour, it does not impose“comprehensive competition-law-type obligations” onstate-trading enterprises (Appellate Body Report,Canada – Wheat Exports and Grain Imports,para.145).


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Freedom of transit (Article V of the GATT)

ArticleVsetsoutrulesthatapplytogoods,vesselsandother means of transport that are “traffic in transit” –that is, when they cross the territory of another WTOmemberandthepassageisonlyaportionofacompletejourneybeginningand terminatingbeyond the frontierof the member through whose territory the trafficpasses. Article V ensures that freedom of transit isextended through the territory of each WTO member,viatheroutesmostconvenientforinternationaltransit,for traffic in transit to or from the territory of othermembers.TrafficintransitmustalsobeaccordedMFNtreatmentwith respect toall charges, regulationsandformalitiesinconnectionwithtransit.

GoodsintransitthroughaWTOmember’sterritorydonotenterthemarketofthatmember(theyarenot“imported”),sothereisnonationaltreatmentobligationinthesenseofArticle IIIof theGATT.However, inaddition to requiringthatfreedomoftransitisextendedtoallgoodsintransitfromothermembersvia themostconvenient routes forinternationaltransit,ArticleV:2prohibitsanydiscriminationwithrespecttothenationality,placeoforigin,departure,entry,exitordestination,oranycircumstancesrelatingtotheownershipofgoods,ofvesselsorofothermeansoftransport.Inthatcontext,whileArticleVdoesnotrequirethatgoodsintransitaretreatedlikegoodsdestinedfor,ororiginating in, the WTO member’s domestic market, itmightbearguedthatArticleV:2entailsalimitedformofnationaltreatment, i.e.arequirementnottodiscriminatebetween foreign-owned and nationally-owned goods intransit(Cossy,2010).Inaddition,onecouldcontendthatArticleV:2seems,incertainrespects,tofavourgoodsintransit over national goods as it requires members toguarantee international transit via the most convenientroutes.

TherehasbeensomediscussionastowhetherArticleVapplies only to “moving” modes of transport, such asvesselsandtrucks,oralsoapplieswhentransitoccursthrough the use of fixed infrastructure, such aselectricitygridsorgasandoilpipelines.Cossy(2010)argues that there isnothing in the textofArticleV tosupportanarrowreadingofArticleVthatwouldexcludetransportation via fixed infrastructure. She notes thatArticleVrefersgenerally to“vesselsandothermeansof transport” and includes an explicit exception foraircraftintransit,whichwouldsuggestthatthedraftersdidnotintendtoexcludeotherformsoftransportation.

TheobligationsofArticleVapplyonlytoWTOmembersand are thus of limited relevance where a naturalresourceistransportedviaathirdcountrythatisnotamember.Today,suchascenarioiscommonplaceinthecontextoftradeinenergyproducts,whereoilandgasare transited from Central Asia or Eastern Europe toWestern Europe through a large number of countriesthat are still negotiating their accession to the WTO,such as Azerbaijan, Belarus, Kazakhstan, Russia,TajikistanandUzbekistan.Indeed,theissueoffreedomoftransitiscentraltotheaccessionprocessesofmanynon-WTOmembers(seesub-section3).

Another important limitation is that Article V imposesobligationsonWTOmembers–it isnotclearwhetherand how such disciplines would apply to situationswhereinfrastructureisownedandoperatedbyastate-trading enterprise or a private corporation (Cossy,2010).Aproposalhasbeenmadeinthetradefacilitationnegotiations formembers toagree thatenterprises towhichtheyhavegrantedspecialprivilegescomplywithGATTprovisionsontransit.

(ii) Trade rules and the exhaustibility of natural resources

Subsidies and countervailing measures

In some circumstances, subsidies can exacerbate theover-exploitationofscarcenaturalresources.TheWTOincludes importantdisciplineson theuseof subsidiesbyWTOmembers.Subsidiestonon-agriculturalgoodsare regulated under the SCM Agreement. Specificdisciplines on agricultural subsidies are set out in theAgreementonAgriculture.TheSCMAgreementdefinesa“subsidy”asafinancialcontributionbyagovernmentoranypublicbodywithintheterritoryofamemberthatconfersabenefit.Afinancialcontributionisdeemedtoexistwhere(i)agovernmentpractice involvesadirecttransfer of funds; (ii) government revenue that isotherwisedue is foregone; (iii)agovernmentprovidesgoodsorservicesotherthangeneralinfrastructure;or(iv)agovernmententrustsordirectsaprivatebody tocarryoutoneormoreofthetypesoffunctionslistedin(i) to (iii). A benefit is conferred where a financialcontributionisreceivedontermsmorefavourablethanthoseavailabletotherecipientonthemarket(AppellateBodyReport,Canada – Aircraft).

Only subsidies that are “specific” to an enterprise,industry or a group of enterprises or industries areregulatedbytheSCMAgreement.Exportsubsidiesandsubsidiescontingenton theuseofdomesticproductsareprohibited.Theremainingsubsidiesareconsidered“actionable”,whichmeansthattheycanbechallengedif they have adverse effects. A WTO member that isaffectedbysubsidiesgrantedbyanothermembercanchallenge those subsidies in the WTO disputesettlement mechanism. Alternatively, the affectedmember can apply countervailing duties to thesubsidized imports if it shows that they cause orthreatentocauseinjurytoitsdomesticindustry.

Someoftheproductsdiscussedinthisreport,suchascertainwoodproductsandrawmaterials,aresubjecttothe Agreement on Agriculture. The disciplines onagriculturalsubsidiesdifferfromtherulesapplicabletonon-agriculturalsubsidies.AgriculturalexportsubsidiesaresubjecttolimitationsagreeduponbyeachmemberoftheWTOin itsscheduleofcommitments.Memberswhohaveincludedexportsubsidycommitmentsintheirschedulesmaynotgrantexportsubsidiesthatexceedthose commitments. Those who have not includedexport subsidy commitments in their schedules areprohibitedfromgrantingsuchsubsidies.WTOmembersalso undertook commitments to reduce the domestic


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support provided to their agricultural sectors. It hasbeen estimated that agriculture is responsible for85 per cent of global water consumption (Hoekstra,2010). Thus, to the extent the disciplines of theAgreement on Agriculture have an impact on globalagriculturalproduction, theyalsohave implications forthepreservationofwatersupplies.

Article XVI of the GATT also regulates subsidies andincludes less stringent disciplines for certain exportsubsidies toprimaryproducts. TheAdNote toArticleXVIdefines“primaryproducts”as“anyproductoffarm,forest or fishery, or any mineral, in its natural form orwhichhasundergonesuchprocessingasiscustomarilyrequired to prepare it for marketing in substantialvolumein internationaltrade”.Theremaybequestionsabout the continued relevance of this provision in thelight of the adoption of the SCM Agreement and theAgreement on Agriculture. Some of the primaryproductscoveredbyArticleXVI,suchasminerals,fishandfishproducts,arenotcoveredbytheAgreementonAgriculture and, therefore, would be subject to theprohibitiononexportsubsidiesintheSCMAgreement.UnderthegeneralinterpretativenotetoAnnex1A,theprovisionsoftheSCMAgreementwouldprevailoveraprovisionoftheGATTanditsschedulesintheeventofaconflict.Bycontrast,theGATT,itsschedulesandtheSCM Agreement are subject to the provisions of theAgreementonAgriculture.

WTO exceptions that permit otherwise inconsistent conduct (Article XX of the GATT)

ArticleXXof theGATT,entitled “General Exceptions”,permitsWTOmemberstotakecertainactionsthatareinconsistent with their GATT obligations. The WTOAppellateBodyhasfoundthatinorderforsuchconducttobeprotectedbyArticleXX,amembermustshowfirstthatthemeasureatissueisofthetypethatiscoveredbyoneofthesub-paragraphsofArticleXX.Secondly,the measure must be applied in a manner that isconsistent with the chapeau of Article XX, whichrequiresthatmeasuresnotbeappliedinamannerthatwould constitute a means of arbitrary or unjustifiablediscrimination between countries where the sameconditions prevail, or a disguised restriction oninternational trade (Appellate Body Report, US – Shrimp, paras. 118-121). Article XX has ten sub-paragraphs, of which (g) and (j) relate directly to theissueof exhaustibility.Sub-paragraph (b)mayalsoberelevant.Itconcernsmeasurestakentoprotecthuman,animalorplantlifeorhealthandisdiscussedinSectionE.2(b)(iii)below.8

Article XX(g) of the GATT permits the adoption ofmeasures that are related to the conservation ofexhaustible natural resources, provided that suchmeasures are made effective in conjunction withrestrictions on domestic production or consumption.This provision was first invoked in the WTO disputesettlement inUS – Gasoline,where itwasdeterminedthat“apolicytoreducethedepletionofcleanairwasapolicy to conserve an exhaustible natural resource

within the meaning of Article XX(g)” (Appellate BodyReport,US – Gasoline,p.14).InUS – Shrimp,theissuearosewhether the term “exhaustiblenatural resource”refersexclusivelytomineralornon-livingresourcesorcouldalsoencompass livingand renewable resources(particularlyseaturtlesinthatcase).Onthequestionofwhether a renewable natural resource could beconsideredexhaustible,theAppellateBodystated:

“Onelessonthatmodernbiologicalsciencesteachesusisthatlivingspecies,thoughinprinciple,capableofreproductionand,inthatsense,‘renewable’,areincertaincircumstancesindeedsusceptibleofdepletion,exhaustionandextinction,frequentlybecauseofhumanactivities.Livingresourcesarejustas‘finite’aspetroleum,ironoreandothernon-livingresources”(para.128).

In addition to showing that the natural resource inquestion is “exhaustible”, a WTO member relying onArticleXX(g)must alsoensure itsmeasure relates tothe conservation of this resource. In one dispute, thisrequirement was satisfied because the measure was“primarily aimed” at the conservation of a naturalresource (Appellate Body Report, US – Gasoline).9 Inanotherdispute,itwasnotedthat“themeansandendsrelationship” between the measure and the legitimatepolicy of conserving an exhaustible natural resourcewas“observablyacloseandrealone”(AppellateBodyReport, US – Shrimp, paras. 142-144). Finally, therequirement that the measure be “made effective inconjunctionwithrestrictionsondomesticproductionorconsumption”hasbeendescribedas“arequirementofeven-handedness in the imposition of restrictions, inthenameofconservation”(AppellateBodyReport,US – Gasolinepp.20-21).

Article XX(j) allows WTO members to take measuresthat are essential to the acquisition or distribution ofproductsingeneralorlocalshortsupply.However,anysuch measures must be consistent with the principlethatallmembersareentitled toanequitableshareoftheinternationalsupplyofsuchproducts.Thisprovision,initsoriginalform,wasadoptedforalimitedperiodoftimeto“takecareoftemporarysituationsarisingoutofthe war”,10 before being accepted as a permanentprovisionin1970.11

Thephrase“generalorlocalshortsupply”wasintendedto apply to “cases where a product, although ininternationalshortsupply,wasnotnecessarily inshortsupply in all markets throughout the world. It was notused in the sense that every country importing acommoditywasinshortsupply.”12Thisexceptionwouldprovide WTO members with some flexibility to taketrade-restrictive action when a particular resourcebecomes temporarily scarce. This flexibility isconstrained by the requirement imposed by sub-paragraph (j) to respect the principle of equitableshares for members and the requirements of thechapeauofArticleXX.


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The 1950 Working Party on “The Use of QuantitativeRestrictions for Protective and Other CommercialPurposes”notedthattheequitableshareprincipleinsub-paragraph (j) is different from the principle of non-discrimination, and emphasized that a determination ofwhatisequitable“willdependuponthefactsin...anygivencircumstances”.ItalsonotedthatcircumstancesinwhichaWTOmember“divertsanexcessiveshareofitsownsupplyto individualcountries”willbecontrarytotheprincipleofequitable distribution. To date, there have been no WTOdisputesettlementproceedingsaddressingthisprovision.16

Exceptions to the prohibition of non-tariff restrictions (Article XI of the GATT)

AsdiscussedinSectionE.1(b)(i)above,ArticleXIoftheGATTprohibitsnon-tariff import restrictionsandbansexport restrictions other than duties, taxes or othercharges.ArticleXI(2)(a)providesanexceptiontothisprohibition, and permits WTO members to imposeexport prohibitions or restrictions temporarily “toprevent or relieve critical shortages of foodstuffs orother products essential to the exporting contractingparty”.Although thisprovisionhasnotbeenexaminedin either a GATT or WTO dispute, GATT preparatoryworkindicatesthatthewords“preventor”wereaddedto“enablea[m]embertotakeremedialactionbeforeacriticalshortagehasactuallyarisen”(EPCT/141).

TheReportoftheReviewWorkingPartyon“QuantitativeRestrictions”states that “to theextent that the rise inprices was associated with acute shortages of theproducts inquestion ... (a temporaryexport restriction

whether affecting foodstuffs or other products, wasclearly covered by ... sub-paragraph (2(a))” (GATT Analytical Index, p. 326). De Han (1997) argues thatexport restrictions on water could be covered by thisexception,asaproductessentialtotheexportingstateorasafoodstuff.

Article12oftheAgreementonAgriculturesetsouttwoobligations that are triggered when a WTO memberinvokes Article XI:2(a) of the GATT 1994 to institute anewexportprohibitionorrestrictiononfoodstuffs.First,Article12requiresthememberinstitutingthemeasuretogivedueconsiderationtotheeffectsofsuchaprohibitionor restriction on importing members’ food security.Second,themembermustgivenoticeinwriting,asfarinadvanceaspracticable,totheCommitteeonAgricultureandshallconsult,uponrequest,withanyothermemberhaving a substantial interest as an importer. TheobligationsinArticle12applyonlytodevelopedcountrymembers and to developing country members that arenetfoodexportersofthespecificfoodstuffconcerned.

(iii) Trade rules and the existence of externalities

Principle of non-discrimination: MFN and national treatment (Articles I and III of the GATT)

The principle of non-discrimination may constrain theways in which a WTO member can impose measuresdesignedtomanageexternalities.Asmentionedearlier,

Box27:General exceptions in the GAts and the protection of the environment

TheGATScontainsageneralexceptionsprovisionwhichismodelledonGATTArticleXX.ThepreambleofGATSArticleXIVisnearlyidentical,butthelistofpossibleexceptionsisshorter.WhiletheGATSalsocontainsanexceptionallowingWTOmemberstotakemeasures“necessaryfortheprotectionofhuman,animalorplantlifeorhealth” (Art.XIV(b)), itdoesnotprovideforanexceptionaddressing“theconservationofexhaustiblenaturalresources”(GATTArt.XX(g)).

ThescopeofGATSgeneralexceptionsastheyrelatetotheenvironmentwasdiscussedduringtheUruguayRound.Somedelegationsproposedanexceptionreferringtothe“conservationofnaturalresources”orto“theenvironment”.Theseproposalswerenotretained,butthecompromisesolutionwasthatWTOmemberswouldrevisittheissueaftertheentryintoforceoftheGATS.

Inthe1995MinisterialDecisiononTradeinServicesandtheEnvironment,13theCouncilforTradeinServices(CTS)acknowledgesthatmeasuresnecessarytoprotecttheenvironmentmayconflictwiththeprovisionsoftheGATSandnotesthat“sincemeasuresnecessarytoprotecttheenvironmenttypicallyhaveastheirobjectivetheprotectionofhumananimalorplantlifeorhealth,itisnotclearthatthereisaneedtoprovideformorethaniscontainedinparagraph(b)ofArticleXIV”.TheCTSfurtherdecided:

“[i]nordertodeterminewhetheranymodificationofArticleXIVoftheAgreementisrequiredtotakeaccountofsuchmeasures,torequesttheCommitteeonTradeandEnvironmenttoexamineandreport,withrecommendationsifany,ontherelationshipbetweenservicestradeandtheenvironmentincludingtheissueofsustainabledevelopment.TheCommitteeshallalsoexaminetherelevanceofinter-governmentalagreementsontheenvironmentandtheirrelationshiptotheAgreement.”

InDecember1996,theCommitteeonTradeandEnvironment(CTE)reportedthatpreliminarydiscussionsonthis issue “hadnot led to the identificationofanymeasures thatMembers feelmayneed tobeapplied forenvironmental purposes to services trade which would not be covered adequately by GATS provisions, inparticularArticleXIV(b)”.14TheissueisstillunderconsiderationintheCTE.15


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theprincipleofnon-discrimination isarticulated in theMFN (Article I of the GATT) and national treatmentobligations (Article III of the GATT). Prohibitions andrestrictionsonimportsandexportsarealsosubjecttoanon-discrimination obligation under Article XIII of theGATT.

A key question is whether it is consistent with theprinciple of non-discrimination for WTO members totreatproductsdifferentlybasedonnon-productrelatedprocessandproductionmethods (PPMs).Anexampleofthiswouldbetotreatproductsdifferentlydependingon the source of energy used in the manufacturingprocess. A specific example would be the situationwherethevalue-addedtax(VAT)appliedtoaplastictoymanufacturedusing“clean”electricityislowerthantheVAT applied to the same toy when it is manufacturedusingelectricityfromothersources.

Some argue that it is consistent to treat goods withPPMs that minimize negative externalities differentlyfrom goods with PPMs that do not minimize theseexternalities (Potts, 2008). Others argue that policiessuchastheseareinconsistentwiththeprincipleofnon-discriminationbecause“like”productsarenotaffordedequal treatment. The basis of this argument is thatdifferent PPMs are not an appropriate basis to treatdifferently products that are otherwise physicallyidentical.Manyequatesuchdiscriminationwith“richercountriesattemptingtoimposetheirenvironmentalandsocials standards on the rest of the world”.17 From alegalperspective,thefocusofthedebateconcernsthemeaning of the term “like products” as it appears invariousprovisionsoftheGATT.

Theanalysisoflikenessbetweentwoproductsmustbeundertakenonacase-by-casebasis.The fourcriteriathathavebeenconsideredintheprocessare:

• theproperties,natureandqualityoftheproducts

• theendusesoftheproducts

• consumers’tastesandhabits

• thetariffclassificationoftheproducts.18

Thoseseekingto justifydifferential treatmentbasedonnon-productrelatedprocessandproductionmethodsarelikelytoemphasizethat inEC – Asbestos theAppellateBodyconsideredthehealthrisksassociatedwithcrysotileasbestosfibresinitsanalysisoftheproducts’properties(AppellateBodyReport,EC – Asbestos,paras.135-136).By analogy, it has been suggested that distinctionsrelatingtoPPMscouldalsobetakenintoaccountintheanalysis of likeness – for example, under consumers’tastesandhabits,ifconsumersperceivethoseproductsthatminimizenegativeexternalitiesdifferentlyfromthoseproductsthatdonot.

Some commentators have interpreted the AppellateBody’sdecisionsinUS - ShrimpandEC – AsbestosassupportingthepropositionthatdifferentiationbasedonPPMs is permitted by the GATT (Charnovitz, 2002;Halle,2007).Conversely,thereareothersthatconsider

that differences in PPMs do not necessarily makeproductsunlike.Thoseholdingthisviewemphasizethattheproperties,end-usesandthetariffclassificationarethesame forbothproducts,even if theirPPMsdiffer.TheywouldrefertotheGATTPanelin Tuna/Dolphin II,which found that “... Article III calls for a comparisonbetween the treatment accorded to domestic andimported like products, not for a comparison of thepoliciesorpracticesofthecountryoforiginwiththoseof the country of importation” (GATT Panel Report,Tuna/Dolphin II). It is worth noting, however, that thispanelreportdatesbackto1994andwasnotadoptedby the contracting parties, which means that it wasneverlegallybinding.

Labelling (Technical Barriers to Trade Agreement)

A WTO member may seek to encourage bettermanagement of certain negative externalities byrequiring products to bear “eco-labels” (see SectionD.4). An eco-label is a policy instrument designed toprovide consumerswith informationabout the impactof a product (including its PPM) on the environmentand on sustainable development (Staffin, 1996;Chalifour, 2000). The rationale underpinning eco-labelling is that consumers will usually select theproduct for which negative externalities were bestmanaged, and in doing so compel environmentallyunfriendlyproducerstoadjusttheirproductsandPPMsto better address these externalities (Staffin, 1996;Chalifour,2000).

The Agreement on Technical Barriers to Trade (TBTAgreement) governs the use of technical regulationsand voluntary product standards. The definition oftechnical regulations includesdocuments that refer to“productcharacteristicsortheirrelatedprocessesandproduction methods”. Similar language is used in thedefinitionofastandard.Thesecondsentenceofbothdefinitions,however,referstolabellingrequirements“astheyapplytoaproduct,processorproductionmethod”.Theabsenceofthequalifyinglanguage“relatingto”inthesecondsentence“hasbeeninterpretedbysomeasprovidingsomescopeforthelabellingofanon-productrelatedprocessorproductionmethod(i.e.thatdoesnotleave a trace in the final product, so-called‘unincorporated PPMs’) to be covered by the TBTAgreement”(WTOandUNEP,2009).

If an eco-label is regulated by the TBT Agreement, aWTOmembermustensure that it isapplied inanon-discriminatory manner to imported “like” products(Article2.1,TBTAgreement).Moreover,membersmustensure that the eco-label is not prepared, adopted orapplied with a view to, or with the effect of, creatingunnecessary obstacles to international trade (Article2.2,TBTAgreement).Article2.4oftheTBTAgreementexpresses a preference for use of internationalstandards as a basis for technical regulations wherethose standardsexist or their completion is imminent.UnderArticle2.5,wheneveratechnicalregulationisinaccordance with relevant international standards, itshall be rebuttably presumed not to create an


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unnecessary obstacle to international trade. However,membersarenotrequiredtouseinternationalstandardswhere those standards would be an ineffective orinappropriatemeansforthefulfilmentofthelegitimateobjectivespursued.

Sanitary and phytosanitary measures (SPS Agreement)

The Agreement on Sanitary and PhytosanitaryMeasures (SPS Agreement) recognizes that WTOmembers have the right to adopt sanitary andphytosanitary measures to protect human, animal orplant life or health (Article 2(1), SPS Agreement).However, the SPS Agreement imposes a number ofconditionsonthisright.

First,SPSmeasuresmustbeappliedonlytotheextentnecessary to protect human, animal or plant life orhealth,andmustbasedonscientificprinciplesandnotmaintained without sufficient scientific evidence(Article2(2),SPSAgreement).Second,SPSmeasuresmustnotarbitrarilyorunjustifiablydiscriminateamongWTO members where identical or similar conditionsprevail(Article2(3),SPSAgreement).Finally,membersmaychoosetobasetheirSPSmeasuresoninternationalstandards (Article 3(1), SPS Agreement). Measureswhich conform to international standards shall bedeemed to be necessary to protect human, animal orplantlifeorhealthandpresumedtobeconsistentwiththerelevantprovisionsoftheSPSAgreement andthe GATT (Article 3(2), SPS Agreement). Members mayintroduce measures which result in a higher level ofSPS protection than would otherwise be achieved bymeasures based on international standards, providedthatthereisscientificjustificationorasaconsequenceofthelevelofSPSprotectionamemberdeterminestobeappropriate(Article3(3),SPSAgreement).

Article 2(4) of the SPS Agreement provides that if aSPS measure conforms with the requirements of theSPS Agreement, it is deemed to comply with theexceptioncontained inArticleXX(b). Inthecontextoftradeinnaturalresources,theSPSAgreementprovidesWTOmemberswithamechanismtolimit,orevenban,the importation of certain harmful natural resourceproductswithoutbreachingtheirWTOobligations.Thiscould, forexample, includeprohibiting the importationof certain forestry products that are likely to containinvasive species, such as Chestnut Blight, Dutch ElmDiseaseorAsianLonghornedBeetles(Chalifour,2000;Hughes,2010).

Charges equivalent to an internal tax on inputs

ArticleIIoftheGATTallowsWTOmemberstoimposeachargeequivalenttoaninternaltaxontheimportationofanyproduct. Issues relating to the interpretationofthis and other related GATT provisions have beendebated in relation to carbon taxes (WTO and UNEP,2009).

WTO exceptions that permit otherwise inconsistent conduct (Article XX of the GATT)

The WTO recognizes that a member, in certaincircumstances,mayneedtoact inconsistentlywith itsobligations in order to manage negative externalities,such as a negative impact on the environment. In thecontextoftradeinnaturalresources,themostrelevant“exceptions”arecontainedinArticleXXoftheGATT.19Foramemberseekingtomanageanegativeexternalityby implementing a WTO-inconsistent measure, themostrelevantprovisionsofArticleXXarecontainedinsub-paragraphs (b), (d) and (g). Sub-paragraph (g) isdiscussedaboveinSectionE.1(b)(ii);sub-paragraphs(b)and(d)arediscussedbelow.

ArticleXX(b)permitstheadoptionofmeasuresthatarenecessary to protect human, animal or plant life orhealth. When invoking Article XX(b), a member mustfirstshowthat thepolicyunderpinningthemeasure inquestion fallswithin the rangeofpoliciesdesigned toprotect human, animal or plant life or health. Next, itmustprovethattheinconsistentmeasurewasnecessarytofulfilthepolicyobjective.

Onthefirstquestion,itisoftenthecasethatpartiestoa dispute will agree that the policy in question isdesignedtoprotecthumanoranimallife,andthusfallsunderArticleXX(b).20Wherepartiesdisagree,apanelwillundertakeanassessmentofthepurportedrisk,anddeterminewhetherthepolicyinquestionisdesignedtoprotecthumanoranimallifefromthisrisk.Forexample,inEC – Asbestos,theWTOAppellateBodyaffirmedafindingbythepanelthat“theevidencebeforeittendstoshow that handling chrysotile-cement productsconstitutesarisktohealth(…)”andthattherefore“theECha[s]shownthatthepolicyofprohibitingchrysotileasbestos implemented by the Decree falls within therange of policies designed to protect human life orhealth”(paras.8.193-8.194).

On thesecondquestion, inBrazil – Retreaded Tyres, theAppellateBodystated thatadeterminationofwhetherameasureis“necessary”forthepurposesofArticleXX(b)involves an assessment of “all the relevant factors,particularlytheextentofthecontributiontotheachievementofameasure’sobjectiveanditstraderestrictiveness,inthelightoftheimportanceoftheinterestsorvaluesatstake”(para. 156). The Appellate Body further stated that ameasurewill be “necessary” if it is “apt tobringaboutamaterial contribution to theachievementof itsobjective”(Appellate Body Report, Brazil – Retreaded Tyres, para151).MarceauandWyatt(2009)havearguedthatthetestappliedbytheAppellateBodyinBrazil –Retreaded Tyres“seems less stringent in terms of what relationship itrequires between the measures adopted and the policyobjectivepursued–thusproducingmorepolicyspacefor,amongstotherthings,environmentalprotectionmeasures”.Theyfurthersuggestthatthismeansthatsub-paragraph(b)allowsforsimilarflexibilityassub-paragraph(g),whichconcerns measures relating to the conservation ofexhaustiblenaturalresources.21


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ArticleXX(d)permitstheadoptionofmeasuresthatarenecessarytosecurecompliancewithlawsorregulationswhich are not inconsistent with the provisions of theGATT. In order for a measure otherwise inconsistentwiththeGATT1994tobejustifiedunderArticleXX(d),itmustfirstbeshownthat themeasure isdesignedtosecurecompliancewithlawsorregulationsthatarenotthemselves inconsistent with some provision of theGATT 1994 (Appellate Body Report, Mexico – Soft Drinks, para. 67). The term “laws or regulations” hasbeen understood to cover rules that form part of thedomestic legal system of a WTO member, includingrulesderiving from international agreements thathavebeen incorporated into thedomestic legalsystemofamemberorhavedirecteffectaccordingtothatmember’slegal system. In reaching this conclusion, a concernidentifiedwasthatacontraryinterpretationwouldmeanthatWTOpanelsandtheAppellateBodywouldbecomeadjudicators of non-WTO disputes (Appellate BodyReport,Mexico – Soft Drinks,paras.78-79).

Therequirementthatthemeasures“securecompliance”wasdiscussedbythepanelinUS - Gasoline,whichhadtodetermine whether the methods used by the UnitedStatestoassessthecompositionandemissioneffectsofimportedgasolineweremeasuresnecessary to “securecompliancewithalaworregulation”forthepurposesofArticle XX(d). The panel found these methods did notsecure compliance with a law or regulation because“(they)werenotanenforcementmechanism.Theyweresimply rules for determining the individual baselines”(para.6.33).InrelationtothesecondelementofArticleXX(d) – that the measure be “necessary” to securecompliance–thepanelinThailand – Cigarettesheldthatthe word “necessary” has the same meaning underArticlesXX(d)asitdoesunderArticleXX(b)(para74).

Ithasbeensuggestedthatsub-paragraph(d)couldbeused to justify import restrictions on illegally loggedtimberasitcouldbearguedthattherestrictionsseektosecurecompliancewithforestry laws.Onedifficulty isthatArticleXX(d)isusuallyunderstoodasapplyingtomeasuresthatseekenforcementofthedomesticlawofthe WTO member applying the import restriction. Inother words, the enforcement measure and the lawsandregulationsbeingenforcedaretakenbythesamemember.Bycontrast,intheexampleconcerningillegallyloggedtimbermentionedearlier, the importrestrictionwouldbeappliedbythe importingmember inorder tosecure compliance with the exporting member’sforestrylaw(Brack,2009).

Subsidies to manage externalities (SCM Agreement)

Article 8 of the SCM Agreement deems certaingovernmental assistance as non-actionable (i.e. notsubject to challenge in the WTO or to countervailingmeasures). This includes assistance granted forresearchanddevelopment,andassistancetopromotetheadaptationofexistingfacilitiestonewenvironmentalrequirements.Thisprovision,however,expiredin1999andhasnotbeenrenewed.

The SCM Agreement may also have a bearing on aWTO member’s ability to provide access to naturalresources to domestic users in exchange forundertakingsby thoseusers toharvestorextract thenatural resources inamannerthatminimizesnegativeexternalities. For example, in a WTO challenge to acountervailing measure, the complaining party arguedthatstandingtimberprovidedtodomesticusersshouldnot be characterized as subsidy because the pricereflected “various forest management obligations andother in-kind costs relating to road-building orsilviculture” (Panel Report, US – Softwood Lumber IV,para.7.15).

There has been some discussion regarding whetherArticle XX of the GATT could be invoked to justify ameasure that iscontrary to theSCMAgreementor toother agreements regulating trade in goods. Someconsider that the text of Article XX – particularly thephrase“nothinginthisAgreement”–makesitclearthatthisprovisionmayonlybeusedtojustifymeasuresthatare inconsistentwith theGATT.ThereareotherswhoseescopeforArticleXXtoapplytootheragreementsregulatingtradeingoods,suchastheSCMAgreement;they find support for this in a recent decision of theAppellateBody to theeffect thatArticleXXcouldbeinvoked in relation to a specific provision in China’sProtocolofAccession(Pierola,2010).

Import licensing

Import licences are sometimes used to control theimportationofproductsforconservationpurposes.Forexample, endangered specimens of wild animals andplantscoveredbytheCITESAgreement(theConventionon InternationalTrade inEndangeredSpeciesofWildFaunaandFlora)mayonlybe imported inexceptionalcircumstancesandimportationrequiresapermit.Somecountrieshavealsoadoptedimport licensingschemestocontrol the importationofcertain forestryproducts(Brack, 2009). The WTO Agreement on ImportLicensing may be relevant in these cases. TheAgreement provides that import licensing should besimple, transparent and predictable. It requirespublication of information that allows traders to knowhow and why the licences are granted and includesrequirements regarding notifications to the WTO. TheAgreementalsoprovidesguidanceonhowgovernmentsshouldassessapplicationsforlicences.

Government procurement

Some WTO members impose conditions on thepurchasesoftheircentralandsub-centralgovernmententitiesasameansofminimizingcertain internationalexternalities, such as the negative environmentalconsequences of certain practices. Brack (2009), forexample, notes that several countries require thattimberproductspurchasedbygovernmententitiesmustcome from timber that is legally and sustainablyharvested.TheAgreementonGovernmentProcurement(GPA) is plurilateral, which means that it only applieswithrespecttothosecountriesandcustomsterritories


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thatarepartiestoit.Furthermore,theobligationsintheGPA apply only to government entities and sectorswhich the corresponding party has included in itsscheduleofcommitments.Brack(2009)observesthatseveral important consumers of timber are parties totheGPA,butmanyofthelargestproducersarenot.

For those entities and sectors that are covered, theGPA establishes obligations concerning openness,non-discrimination, and transparency. For instance, inrespectoftheprocurementcoveredbytheAgreement,parties are required to accord the products, servicesand suppliers of any other party to the Agreementtreatment “no less favourable” than thatgiven to theirdomestic products, services and suppliers (ArticleIII:1(a)). Furthermore, parties may not discriminateamong goods, services and suppliers of other parties(Article III:1(b)). In addition, each party is required toensurethatitsentitiesdonottreatdomesticsuppliersdifferentlyonthebasisofagreaterorlesserdegreeofforeign affiliation or ownership and to ensure that itsentitiesdonotdiscriminateagainstdomesticsuppliersbecauseagoodorserviceisproducedintheterritoryofanotherparty(ArticleIII:2).

The GPA also prohibits the use of offsets, such asmeasures to encourage local development or improvethe balance-of-payments accounts by means ofdomestic content, licensing of technology, investmentrequirements, counter-trade or similar requirements.Article VI of the GPA allows technical specificationslaying down the characteristics of the products orservices to be procured, including the processes andmethods for their production, provided that suchspecificationsdonotcreateunnecessaryobstacles tointernational trade. Article XXIII sets out variousexceptions, including one for measures necessary toprotecthuman,animalorplantlifeorhealth.

The revised GPA text (GPA/W/297), which is yet tocome into force, has specific provisions regardingenvironmental concerns. For instance, Article X:6 willpermit parties, including their procuring entities, toprepare, adopt or apply technical specifications topromote the conservation of natural resources orprotect the environment. Article X:9 provides thatenvironmental characteristics may be taken intoconsiderationinspellingoutevaluationcriteriaintenderdocumentationornotices.

Brack(2009)explainsthatsomedomesticgovernmentprocurement policies allow the use of certain privatecertification schemes to demonstrate that timberproducts meet procurement criteria. He argues thatcertificationunderthemaininternationalschemes(theForestStewardshipCouncilandtheProgrammefortheEndorsement of Forest Certification Schemes) hasproved tobe theeasiestwayofmeetingprocurementcriteria, and the latter have boosted the market forcertifiedtimber.Inhisview,theuseofthesecertificationschemes is consistent with the GPA where otherequivalentformsofproofarealsoallowed.

(iv) Trade rules and dominance in markets for natural resources

Dual pricing

Dual pricing arrangements establish different prices indomesticandexportmarkets.Thismaybeachieved,forexample, through the imposition of export taxes,quantitative export restrictions, or through statemonopolies. A maximum domestic price may also beestablished administratively at a lower level than theexport price. Dual pricing may be used as a means ofdiversifying the domestic production structure or theexport base. Such policies can raise issues under theWTO.Wheredualpricesareestablishedthroughexportrestrictions,forexample,thoserestrictionsmaybefoundinconsistentwithobligationsinArticleXIoftheGATT.

The SCM Agreement may also be relevant. As notedearlier, the SCM Agreement defines a subsidy as afinancial contribution provided by a government thatconfersabenefit.AWTOmemberthatadoptsapolicyof dual pricing may be accused of subsidizing itsdomestic producers by providing discounted inputmaterials.IthasbeenarguedbyRipinsky(2004)thatadual-pricingprogrammecouldbeconsideredequivalenttotheprovisionofgoodsorservicesbyagovernmentunderArticle1.1(a)(1)(iii)oftheSCMAgreement.

In2000,CanadachallengedbeforeaWTOpaneltheUSapproach of treating export restraints as a “financialcontribution”incountervailingdutyinvestigationsagainstallegedlysubsidizedimports.CanadaarguedthattheUScountervailing duty regime wrongly treated exportrestraints as financial contributions as government-entrustedorgovernment-directedprovisionofgoodsbyaprivatebody,alongthelinesspecifiedinArticle1.1(a)(1)(iv). The United States argued that export restraintscould indeed (at least in some factual circumstances)constitute government-entrusted or government-directedprovisionofgoodsbyaprivatebody.

The panel concluded that the treatment of exportrestraintsasfinancialcontributionsisinconsistentwithArticle1.1(a)oftheSCMAgreement.ItrejectedtheUSargumentthat,totheextentanexportrestraintresultedinanincreaseddomesticsupplyoftherestrainedgood,thiswasasifagovernmenthadexpresslyentrustedordirectedaprivatebodytoprovidethegooddomestically.However, the panel emphasized that its findingsconcernedanexportrestraintasdefinedbyCanadainthecontextofthatparticulardispute–namely,abordermeasurethatexpresslylimitsthequantityofexportsorplacesexplicit conditionson thecircumstancesunderwhichexportsarepermitted,orthattakestheformofafeeortaxonexportsoftheproductcalculatedtolimitthe quantity of exports (Panel Report, US – Export Restraints,paras.8.19,8.75and8.76).

Another issue is whether the provision of goods atsuppressedpricesconfersabenefit.Article14(d)oftheSCMAgreementprovidesthattoconferabenefitagoodhastobeprovidedatlessthanadequateremuneration.


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Under this provision, the adequacy of remuneration isdeterminedwithreferencetoprevailingmarketconditionsin the country of provision. In countries where there isdualpricing, itmaybe thecase that thegovernment isthe predominant provider of the good. In the US – Softwood Lumber IV case, where Canadian provincialgovernmentswerethepredominantsuppliersofstandingtimber,theAppellateBodyfoundthat“itislikelythat(thegovernment)canaffectthroughitsownpricingstrategythepricesofprivateproviders...inducing(thoseproviders)toaligntheirpricestothepointwheretheremaybelittledifference,ifany,betweenthegovernmentpriceandtheprivateprices” (AppellateBodyReport,US – Softwood Lumber IV,paras.101,103).Inthesecircumstances,theAppellateBodyheldthatitmaybenecessarytoconsiderprivatepricesinanothermarkettoassessaccuratelythelevelofbenefitconferred.22

Even if the provision of discounted goods under aprogrammeofdualpricingamountstoasubsidy,somecommentatorscontendthatitwouldnotbeanactionablesubsidy because it would not satisfy the specificityrequirement contained in Article 2 of the SCMAgreement (Quick,2009;Benitah,2010). It is arguedthat a system of dual pricing is unlikely to provide de jurespecificsubsidiesbecause,inmostcases,the“low-priced ... product is generally available within theeconomy of the subsidizing government (i.e. availablewithout restriction to all users)” (Marceau, 2010a,2010b).

Article2.1(c)of theSCMAgreement lists four factorsthat may be considered when assessing whether asubsidy that is not specific in ade jure sensemaybespecificinitsoperation(i.e.inade factosense).Thesefactors are: i) the use of a subsidy programme by alimitednumberofcertainenterprises;ii)thepredominantuseofsuchaprogrammebycertainenterprises;iii)thegrantingofdisproportionatelylargeamountsofsubsidyto certain enterprises; and iv) the manner in whichdiscretionhasbeenexercisedbythegrantingauthorityinthedecisiontograntasubsidy.Theextenttowhichagiven dual-pricing programme involves subsidies thatrespond to any of these factors is a factual matterrelevanttotheprogrammeinquestion.

Canuto and Finenberg (2003) note that a provisionspecifically dealing with dual pricing of government-supplied inputs was included in an early draft of theSCM Agreement during the Uruguay Roundnegotiations. The provision, included in a November1990draftofArticle14,readasfollows:

“Whenthegovernmentisthesoleproviderorpurchaserofthegoodorserviceinquestion,theprovisionorpurchaseofsuchgoodorserviceshallnotbeconsideredasconferringabenefit,unlessthegovernmentdiscriminatesamongusersorprovidersofthegoodorservice.Discriminationshallnotincludedifferencesintreatmentbetweenusersorprovidersofsuchgoodsorservicesduetonormalcommercialconsiderations.”

The provision was deleted in a December 1991negotiatingdraft.

Essential quantities exception (Article XX(i) of the GATT)

Article XX(i) permits otherwise WTO-inconsistentrestrictions on exports of domestic materials wheresuch restrictions are necessary to ensure essentialquantitiesof suchmaterials to adomesticprocessingindustry during periods when their domestic price isheld below the world price as part of a governmentalstabilizationplan.Suchrestrictions,however,“shallnotoperate to increase the exports of or the protectionaffordedtosuchdomesticindustry,andshallnotdepartfrom the provisions of the (GATT) relating to non-discrimination”. The exception was proposed by NewZealand at the Geneva session of the PreparatoryCommitteein1947andwasdesigned:

“...toprovideforthecaseofcountrieslikeNewZealandwhichmaintainasamatterofpermanentpolicypricestabilizationschemescovering,generally,thewholerangeoftheireconomy.Acountrywhich,likeNewZealand,stabilizesitsgeneralpricelevelsisfacedwiththeproblemthattheworldpriceforcertaincommodities,particularlyrawmaterialswhichitexports,willbesubstantiallyhigherthanthestabilizedpriceforthelikecommodity”(GATTAnalytical Index,p.591).

As an example of why this provision was necessary,New Zealand mentioned that leather was sold to itsdomestic producers at a price much below the worldprice. It thenexplainedthat, inthesecircumstances, itwas necessary to ensure that local requirements ofleatherweresatisfiedbyapplyinganexportrestriction;otherwisetherewouldbenoleatherforthelocalmarketorthelocalpriceofleatherwouldrisetotheworldlevel(GATT Analytical Index,p.591).

Nevertheless,the1950ReportoftheWorkingPartyon“TheUseofQuantitativeRestrictionsforProtectiveandother Commercial Purposes” noted that Article XX(i)“doesnotpermittheimpositionofrestrictionsupontheexportofarawmaterialinordertoprotectorpromoteadomestic industry, whether by affording a priceadvantage to that industry for the purchase of itsmaterials, orby reducing thesupplyof suchmaterialsavailable to foreign competitors, or by other means”(GATTAnalytical Index,p.592).

Part IV of the GATT: trade and development

In 1965, Articles XXXVI, XXXVII and XXXVIII wereaddedtotheGATT1947toformPartIV,entitledTrade and Development.23AnumberofprovisionscontainedintheseArticlesaddresstheissueofdominance.ArticleXXXVIsetsouttheprincipleandobjectivesofPartIV,and recognizes the need for a “rapid and sustainedexpansionoftheexportearningsoftheless-developed


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(members)”.Sub-section5ofArticleXXXVIrelatestothe export earning capacity of the less-developedmembersanddirectlyaddressesdominance:

“Therapidexpansionoftheeconomiesoftheless-developed(members)willbefacilitatedbyadiversification*ofthestructureoftheireconomiesandtheavoidanceofanexcessivedependenceontheexportofprimaryproducts.Thereis,therefore,needforincreasedaccessinthelargestpossiblemeasuretomarketsunderfavourableconditionsforprocessedandmanufacturedproductscurrentlyorpotentiallyofparticularexportinteresttoless-developed(members).”

“Diversification” is defined in the Ad Note to ArticleXXVIasfollows:

“Adiversificationprogrammewouldgenerallyincludetheintensificationofactivitiesfortheprocessingofprimaryproductsandthedevelopmentofmanufacturingindustries,takingintoaccountthesituationoftheparticular(member)andtheworldoutlookforproductionandconsumptionofdifferentcommodities.”

The scope and operation of Part IV of the GATT wasconsideredintheGATTPanelReportinEC – Refunds on Exports of Sugar. In that case, the complainant,Brazil,arguedthattheEuropeanCommunities’systemforgrantingrefundsonexportsofsugarwasinconsistentwith commitments under Article XXXVI of the GATT.The European Communities argued that Brazil’scomplaintcouldnotbegroundedonArticleXXXVIoftheGATTalonebecause“theprovisionsof(this)Article...constitutedprinciplesandobjectivesandcouldnotbeunderstood to establish precise, specific obligations”(para.2.28).Inrejectingthisargument,theGATTpanelaffirmed that developing members could expect toenjoy the benefits articulated in Article XXXVI of theGATT (para. 4.30). Based on this interpretation,developing members may be able to invoke ArticleXXXVI tosupportefforts todiversify theireconomieswithaviewtoaddressingdominance.

Article XXXVI also recognizes the “need for positiveefforts” and “individual and joint action” so thatdeveloping countries would be able to share in thegrowthininternationaltradeandfurthertheireconomicdevelopment.This resulted in theAgreedConclusionsof the United Nations Conference on Trade andDevelopment (UNCTAD) Special Committee onPreferences which recognized that preferential tarifftreatment accorded under a generalized scheme ofpreferences was key for developing countries “(a) toincrease their export earnings; (b) to promote theirindustrialization; and (c) to accelerate their rates ofeconomicgrowth”(para.I.2).Withaviewtoachievingthesegoals,theGATTcontractingpartiesadoptedthe

1971WaiverDecision,whichhadtheeffectofwaiving,foraperiodoftenyears,theobligationsofArticleIofthe GATT 1947 in respect of the granting of tariffpreferencestodevelopingcountries.

In 1979, the GATT contracting parties adopted theDecision on Differential and More FavourableTreatment, Reciprocity and Fuller Participation ofDeveloping Countries (the “Enabling Clause”), whichhad the effect of making permanent the waivercontained in the 1971 Waiver Decision. The EnablingClause isnowpartof theGATT1994andthusof theWTOagreements.

The Enabling Clause was considered by the WTOAppellateBodyin EC – Tariff Preferences. Inexaminingtheobligation imposedon theEuropeanCommunitiesby Article I of the GATT to afford MFN treatment toIndia,theAppellateBodyheldthattheEnablingClause:

“...exceptsMembersfromcomplyingwiththeobligationcontainedinArticleI:1forthepurposeofprovidingdifferentialandmorefavourabletreatmenttodevelopingcountries,providedthatsuchtreatmentisinaccordancewiththeconditionssetoutintheEnablingClause.Assuch,theEnablingClauseoperatesasan‘exception’toArticleI:1”(para.90).

TheWTOAppellateBodyalsointerpretedfootnote3toparagraph 2(a) of the Enabling Clause, which requiresthatanypreferentialtarifftreatmentundertheEnablingClausemustbe“non-discriminatory”.TheAppellateBodyfound that “the term ‘non-discriminatory’ shouldnotbeinterpretedtorequirethatpreference-grantingcountriesprovide identical tariff preferences to all developingcountries” (para. 155). Rather, preference-grantingcountriesareauthorized“to‘respondpositively’to‘needs’that are not necessarily common or shared by alldevelopingcountries.”Thus,developed-countrymembersmay grant different tariffs to products originating indifferent beneficiaries, provided that such differentialtariff treatment meets the remaining conditions in theEnablingClause.Nonetheless,WTOmembersgrantingthepreferences“arerequired,byvirtueoftheterm‘non-discriminatory’, to ensure that identical treatment isavailabletoallsimilarly-situatedbeneficiaries,thatis,toallbeneficiariesthathavethe‘development,financialandtrade needs’ to which the treatment in question isintendedtorespond”(para.173).

Many WTO members have implemented preferentialprogrammesunderPart IVoftheGATT1994andtheEnablingClause(Wang,2005).24The2007World Trade Reporthasanextensivediscussionoftheeffectivenessoftheseprogrammes,anddescribessomeoftheothermeasures that may be taken under provisions thatprovidespecialanddifferentialtreatmenttodevelopingcountries.


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(v) Trade rules and volatility

International commodity agreements (Article XX(h) of the GATT)

Pricestabilizationwasoneoftheprincipalobjectivesofinternational commodity agreements negotiatedbetween supplier and consumer countries. ArticleXX(h)providesaspecificexceptionformeasurestakenunder international commodity agreements. Morespecifically, it provides an exception for measures“undertaken in pursuance of obligations under anyintergovernmental commodity agreement whichconformstocriteriasubmittedtothecontractingpartiesand not disapproved by them or which is itself sosubmittedandnotsodisapproved”.

TheAdNotetoArticleXX(h)furtherstatesthat“[t]heexceptionprovidedforinthissubparagraphextendstoany commodity agreement which conforms to theprinciplesapprovedbytheEconomicandSocialCouncilin its Resolution 30 (IV) of 28 March 1947”. ThisResolution calls for the creation of an Interim Co-ordinating Committee for International CommodityArrangementsandforUNmemberstatestoadopttheprincipleslaidoutinChapterVIIoftheHavanaCharterasageneralguideforinternationalactionwithrespecttocommodityproblems(seesub-section2below).

No commodity agreement has been formally notifiedunder Article XX(h) and measures taken under aninternational commodity agreement have never beenchallenged in GATT/WTO dispute settlement (GATT Analytical Index,p.591).Thisprovisionmaybeoflimitedrelevancetoday,atleastforthenaturalresourcesectorscoveredbythisreport.Otherinstrumentsofinternationallawarediscussedinwhatfollows.

2. Otherinternationallawandnaturalresources

The WTO is part of a much broader framework ofinternational cooperation. Many aspects of naturalresourcesareregulatedbyotherrulesof internationallaw outside of the WTO. Some international rulesdeveloped as customary international law, much ofwhich was codified in international agreements in thesecondhalfofthe20thcentury.

(a) RelationshipbetweenWTOagreementsandotherinternationallaw

The WTO agreements are treaties and as such areregulatedbytheinternationalrulesontreatiescodifiedintheViennaConventionontheLawofTreaties(Abi-Saab, 2005). Likewise, the WTO is an internationalorganization and its international personality alsodependsongeneral international law.AsexplainedbyWTO Director-General Pascal Lamy, “WTO norms arenothierarchicallysuperiororinferiortoanyothernorms(exceptjus cogens25)”(Lamy,2007).

Some provisions of the WTO agreements expresslyrefer to other international agreements. In thesecircumstances, the relationship between WTO andgeneral international law is more straightforward. Forexample,Article2.1oftheAgreementonTrade-RelatedAspects of Intellectual Property Rights expresslyincorporatesseveralprovisionsoftheParisConventionfor theProtectionof IndustrialPropertyof1967.Asaresult,theseprovisionsarebindingonallWTOmembersandaresubjecttotheWTO’sdisputesettlementsystem,asoccurredintheUS – Section 211 Appropriations Actdispute.AnotherexampleistheexceptioninArticleXXof the GATT for measures undertaken under certaininternationalcommodityagreements.

Aconcernexpressedbysomeobserversisthattrade-related measures taken under other internationalagreements, particularly multilateral environmentalagreements, could be challenged in the WTO asincompatible with the obligations in the WTOagreements.ThisisanissuethathasbeendiscussedintheWTOCommitteeonTradeandEnvironment(CTE).The CTE has noted that only about 20 of theapproximately 250 multilateral environmentalagreementsinforceincludetradeprovisions.26Thishasledsome toargue “that thedimensionof theproblemshouldnotbeexaggerated”.

The debate about the relationship between the WTOandotherinternationalagreementshasalsofocusedonthe extent to which international law is applicable indisputesbrought to theWTO. It isgenerallyacceptedthat only claims brought under the WTO agreementsmaybebroughttotheWTOdisputesettlementsystem(VanDamme,2009).ThismeansthataWTOmembercouldnotbringadisputetotheWTOclaimingaviolationof another international agreement or generalinternational law, unless those obligations have beenincorporatedintheWTOagreements.Thereis,however,less clarity about the extent to which non-WTOagreements and general international law may beapplied by panels and the Appellate Body whenresolvingadisputebroughtundertheWTOagreements.

It has been suggested that the WTO’s DisputeSettlementUnderstanding (DSU)doesnotprovideanexplicit delimitation of applicable law in WTO disputesettlement(VanDamme,2009).Article3.2oftheDSUprovidesthatoneofthefunctionsoftheWTOdisputesettlementsystem is “toclarify theexistingprovisionsof those agreements in accordance with customaryrulesof interpretationofpublic international law.” TheWTOAppellateBodyhas interpreted the reference to“customaryrulesofinterpretationofpublicinternationallaw”as including the rulescodified inArticles31and32oftheViennaConventionontheLawsofTreaties.Inaddressing this issue, the Appellate Body made theoften-quotedstatementthattheGATT1994cannot“beread in clinical isolation from public international law”(US – Gasoline).

There is little disagreement about the applicability oftherulesofinterpretationcodifiedinArticles31and32of the Vienna Convention in WTO dispute settlement.


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There is,however,significantdivergenceofopinionastowhetheranyscopeexistsinWTOdisputesettlementto apply rules of international law other than thosecodifiedinArticles31and32.

Thegeneral ruleof interpretationsetout inArticle31statesthat“(a)treatyshallbeinterpretedingoodfaithinaccordancewiththeordinarymeaningtobegiventothetermsofthetreatyintheircontextandinthelightofitsobjectandpurpose”.Paragraph (3)(c)ofArticle31providesthat,togetherwiththecontext,thereshallbetaken into account “any relevant rules of internationallaw applicable in the relations”. For some observers,Article 31(3)(c) of the Vienna Convention provides anavenue for a WTO adjudicator to refer to otherinternationalagreementsortogeneralinternationallawwhen interpreting provisions of the WTO agreements.One issue here is whether only the disputants or allWTO members would have to be parties to the otherinternational agreement for it to have relevancepursuanttoArticle31(3)(c).

The panel in EC – Approval and Marketing of Biotech Products took the view that, for an internationalagreement to be relevant under Article 31(3)(c), allWTO members would have to be parties to theagreement.Thepanel’sapproachhasbeencriticizedbysomeacademics(Howse,2008)andbytheRapporteuroftheUNInternationalLawCommission’sStudyGrouponFragmentation,whowrotethatthepanel’sapproach“makesitpracticallyimpossibleevertofindamultilateralcontextwherereferencetoothermultilateraltreatiesasaids to interpretation under article 31(3)(c) would beallowed”(InternationalLawCommission,2006).

TheAppellateBodyhasoccasionallysoughtguidancefrom other international agreements or generalinternational law when interpreting provisions of theWTO agreements. In US – Shrimp, for example, theAppellate Body referred to various internationalenvironmental instruments when interpreting the term“exhaustiblenatural resources” inArticleXX(g)of theGATT1994.Relyingontheprincipleofeffectivenessintreaty interpretation, the Appellate Body, in that case,also emphasized the need to interpret the term“exhaustible natural resources” in an evolutionarymanner, noting that Article XX “is not ‘static’ in itscontentorreference”(para.130).27

It is important to distinguish the situation where anadjudicator seeks “guidance” frombroader sourcesofinternational law, as the Appellate Body did in US – Shrimp, fromthesituationwhereanother internationaltreatyoraruleofgeneralinternationallawisconsideredtobebindingontheWTOmembersthatarepartiestothedispute.

Someseelittlescope,ifany,fortheapplicationofotherinternationalagreementsorgeneralinternationallawasbinding rules in theWTO(Marceau,1999;Trachtman,1999). They find support for their position in the lastsentenceofArticle3.2oftheDSU,whichprovidesthatdispute settlement rulings “cannot add to or diminishthe rights and obligations provided in the covered

agreements”.Others,however,seesomescopefortheapplication of outside international rules in the WTO.Pauwelyn(2003)hasarguedthatanotherinternationaltreatyora ruleofgeneral international lawmayapplywhereamatterisnotregulatedbytheWTOagreements.He has also noted that there may be circumstanceswhere a WTO member could argue that its conductconforms to another international agreement and thiswouldconstituteadefencetoaclaimthattheconductviolatesitsWTOobligations.

The debate about the relationship between the WTOagreements and other international law is not settled.The UN International Law Commission has identifiedseveral principles that may be of assistance whenseeking to understand the relationship betweendifferent international norms (International LawCommission,2006).TheWTOAgreement itselfoffersavenuesformemberstoreconciletheirWTOobligationswith those under other international agreements. IfWTOmemberswanttoprivilegeanobligationinanotherinternationalagreementthatisinpotentialconflictwiththeir obligations under the WTO, they can adopt awaiverunderArticleIX:3oftheWTOAgreement,thusavoiding any uncertainties about the relationshipbetweenthetwo.ThisishowWTOmembersproceededin relation to certain measures taken as part ofinternational efforts to control the trade of “conflict”diamonds, known as the “Kimberley process” (seeSectionE.2(b)below).

(b) Tradeinnaturalresourcesandotherinternationallaw

(i) Sovereignty over natural resources

The WTO does not regulate ownership of naturalresources. An important body of international lawconcerns sovereignty over territories, land masses,lakes, rivers, and areas of the ocean. These rules arealso relevant for purposes of determining which statehas sovereignty over the natural resources that arepresent in these territories, land masses and waters.Claims of sovereignty by states over territories andother landmasses,aswellastheoceansandseabed,haveoftenbeendrivenbyadesiretoassertcontroloverthe natural resources that may be contained in theseareas.

Itisuniversallyacceptedthatthesubsoilbelongstothestate that has sovereigntyover the surface (Brownlie,2008). A state is also sovereign over any internalwaters, such as lakes and rivers wholly within itsterritory,land-lockedseasandhistoricbays.Sovereigntyextendstotheriverbedorlakebedofanyinternalwaters(Brownlie,2008).Therightsandobligationsofstatesinrelation to riversand lakes thatbordermore thanonestatearefrequentlyestablishedbytreaty.

Coastal states have asserted sovereignty over thecontinental shelf, which is a stretch of seabed thatseparatesthedeepoceanfloorfromthecoastoflandmassesandis,ingeologicalterms,partofthecontinent.


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Thecontinental shelf canhave significantdeposits ofoil and gas, and its seabed has sedentary fisheryresources(Brownlie,2008).

The 1958 Convention on the Continental Shelfrecognizes that the “coastal state exercises over thecontinental shelf sovereign rights for the purpose ofexploringitandexploitingitsnaturalresources”(Article2.1,ContinentalShelfConvention).Thisisanexclusiveright and no-one may explore or exploit the naturalresourcesonthecontinentalshelfwithouttheexpressconsent of the coastal state. The natural resourcescovered “consist of the mineral and other nonlivingresourcesoftheseabedandsubsoiltogetherwithlivingorganismsbelongingtosedentaryspecies”(Article2.4,ContinentalShelfConvention).Thestatusofthewatersabovethecontinentalshelfisnotaffectedbyacoastalstate’s rights over its continental shelf (Article 3,ContinentalShelfConvention).

Coastalstateshavesovereigntyovertheirterritorialsea,which includes the seabed and subsoil. Although thebreadthoftheterritorialseawasdebatedforsometime,most coastal states today claim a territorial sea of 12miles,whichisthelimitestablishedinthe1982UnitedNations Law of the Sea Convention (Brownlie, 2008).Additionally, some states claim a fishing zone of 200miles(Brownlie,2008).AlargernumberofstatesclaimanExclusiveEconomicZone(EEZ)of200milesandanEEZ of 200 miles is recognized also under the 1982ConventionontheLawoftheSea(Article57,UNCLOS).

Within the EEZ, the coastal state enjoys “sovereignrights for the purpose of exploring and exploiting,conservingandmanagingthenaturalresources,whetherlivingornon-living,ofthewaterssuperjacenttothesea-bedandofthesea-bedanditssub-soil,andwithregardto other activities for the economic exploration andexploitation of the zone, such as the production ofenergy from water, currents and winds” (Article 56,UNCLOS). Coastal states also have jurisdiction withintheirEEZasregardstheprotectionandpreservationofthemarineenvironment(Article56,UNCLOS).

Thehighseasareconsideredas“beingopentoallnations[and]noStatemayvalidlypurporttosubjectanypartofthem to its sovereignty” (Article 2, Convention on theHigh Seas). Thus, freedom of fishing is generallyrecognizedonthehighseas(Brownlie,2008).The1982LawoftheSeaConventionmakescertainchangestotheregime of the high seas. First, it provides that the highseas do not include the EEZs (Articles 55 and 86,UNCLOS;Brownlie,2008).Furthermore,theConventionestablishes a special regime for the resources of theseabedandsubsoilthatareoutsidenationaljurisdictions(Brownlie, 2008). The Law of the Sea ConventiondeclaresthattheArea,definedastheseabedandoceanfloor and subsoil thereof and its resources, are beyondthe limits of national jurisdiction and therefore are thecommon heritage of mankind (Articles 133 and 136,UNCLOS). An International Sea-Bed Authority isestablishedundertheLawoftheSeaConventionandtheAuthority is given exclusive responsibility for organizingandcontrollingallactivitiesintheAreasodefined.

Thefactthatthehighseasremainopentotheuseandenjoymentofallstatesandthatmanyfisharemigratory(referred to in the economic literature as fugitiveresources)poseschallengesforthesustainableuseofthese resources.TheLawof theSeaConventionandthe UN Fish Stocks Agreement attempt to regulatefishing practices on the high seas and in relation tofugitive species, but significant challenges remain.Thesechallengesarediscussedinsub-section3.

Severalstateshavemadeclaimsoverthepolarregions.Theseclaimshavegainedprominence in recentyearsas some predict that global warming could make thepolar areas more accessible to oil and mineralsexploration, fishing, and shipping (Ebinger andZambetakis, 2009; Dutter, 2006). There is no treatyregimefortheArcticregion.TheArcticCouncil,whichwas established in 1996, serves as a forum fordiscussion and collaboration. Claims relating to theArcticregioninvolvemaritimeboundariesinrelationtoareas of the Arctic Ocean or the continental shelf.Theseclaimsaremadeundercustomary internationallaw,theLawoftheSeaConventionortheConventionontheContinentalShelf.

AruleofparticularrelevancefortheArcticregionistheprovisionintheLawoftheSeaConventionunderwhichastatemaytrytodemonstratethatitscontinentalshelfextendsbeyond200nauticalmilesfromitsshoreline.Iftheclaimissuccessful,thestateobtainslegalrightstoexploit oil, gas and minerals in the extended zone(EbingerandZambetakis,2009).Statesonlyhaveoneopportunity to claim an extension of the continentalshelfandtheymustdosowithintenyearsofsigningtheLawof theSeaConvention.Severalstateshavedonesoalready,sometimesmakingheadlinesbyplantingaflag on the seabed (Ebinger and Zambetakis, 2009;(Reynolds,2007).

IncontrasttotheArcticregion,atreatyregimewassetupforAntarcticain1959.TheAntarcticTreaty,however,expressly states that it does not affect the territorialclaimsmadebysomestates(anddeniedbyothers),norprovides a basis for the assertion of territorialsovereignty. The purpose of the Antarctic Treaty is toensure “in the interest of all mankind that Antarcticashallcontinueforevertobeusedexclusivelyforpeacefulpurposes”. It establishes “freedom of scientificinvestigation in Antarctica” and provides a frameworkfor cooperation. The Protocol for EnvironmentalProtection,whichenteredintoforcein1998,prohibitsall activities relating to mineral resources other thanscientificresearch.AConventionontheRegulationofAntarcticMineralResourceActivitieswasnegotiatedin1988. It set out rulesonprospecting, explorationandthe development of mineral resources activities. TheConventionneverenteredintoforcebecausenotallofthestateswithterritorialclaimsoverAntarcticabecamepartiestoit(U.S.DepartmentofState,2002).

Antarctica isthoughttoholdreservesofoil,gas,coal,iron, chromium and other precious metals (Dutter,2006).Concernshavebeenraisedover“bioprospecting”(searchingforandcollectingbiologicalresources)and


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the commercial exploitation of scientific research ofbiologicalorganisms inAntarctica.Astudyby theUNUniversity in Tokyo reportedly found that 92 patentsreferringtoAntarcticorganismsormoleculesextractedfromthemhavebeenfiled intheUnitedStates,andafurther62patentshavebeenfiled inEurope(Sample,2004).

Issues concerning sovereignty over natural resourceswereraised in thecontextof thedebatethat followedthepost-SecondWorldWarwaveofnationalizationofpropertyheldbyforeigncorporationsinEasternEurope,Africa, theMiddleEastand in severalLatinAmericancountries (Lowenfeld, 2003). The debate concernedwhether the nationalizing state had an obligation tocompensate the foreign investor and, if so, how thiscompensationshouldbedetermined. In1962, theUNGeneralAssemblyadoptedaResolutionon“PermanentSovereigntyOverNaturalResources”,whichstatedthatthe “right of peoples and nations to permanentsovereignty over their natural wealth and resourcesmust be exercised in the interest of their nationaldevelopmentandofthewell-beingofthepeopleoftheStateconcerned.”

TheGeneralAssemblyadoptedafurtherResolutionin1973 stating “that the application of the principle ofnationalizationcarriedoutbyStates,asanexpressionof theirsovereignty inorder tosafeguard theirnaturalresources, implies that each State is entitled todetermine the amount of possible compensation andthe mode of payment, and that any disputes whichmight arise should be settled in accordance with thenational legislation of each State carrying out suchmeasures”.In1974,theUNGeneralAssemblyadoptedaResolutionentitled“CharterofEconomicRightsandDutiesofStates”,whichdeclaredthat“[e]veryStatehasand shall freely exercise full permanent sovereignty,including possession, use and disposal, over all itswealth,naturalresourcesandeconomicactivities.”

ThereisnoprovisionintheWTOthatspeaksdirectlytothe issues of ownership of natural resources or theallocation of natural resources between states andforeigninvestors.NordoestheWTOdisputesettlementsystemprovideameansforforeign investorstoobtainmonetaryredressforanyharmtotheirinvestmentdonebythehostgovernment(bilateralinvestmenttreatiesarediscussedbelowinSectionE.2(b)(v)).TheWTOprovidesonly for state-to-state dispute settlement and theremediesaregenerallyprospectiveandnon-monetary.

(ii) Price stability, addressing terms of trade, and rent-shifting

The Havana Charter for an International TradeOrganization recognized that the “special difficulties”confronting primary commodities “may, at times,necessitatespecialtreatmentoftheinternationaltradein such commodities through inter-governmentalagreement” and included an entire chapter withprovisions on international commodity agreements(HavanaCharter,chapterVI).

International commodity agreements encompassedboth producer and consumer countries. Among theirstated objectives were to: i) prevent or alleviate theserious economic difficulties which may arise whenadjustments between production and consumptioncannot be effected by normal market forces alone asrapidlyascircumstancesrequire;ii)preventormoderatepronounced fluctuations in the price of a primarycommodity; and iii) maintain and develop the naturalresources of the world and protect them fromunnecessary exhaustion (Havana Charter, Article 57).These objectives were later recognized in Resolution30(IV)adoptedbytheUNEconomicandSocialCouncilandbecame thebasis for theworkof the InterimCo-ordinating Committee for International CommodityArrangements. UNCTAD broadened the objectives ofinternational commodity agreements in the 1960s byincluding increased export earnings for developingcountries, re-allocation of resources, and increasedconsumption(Gariepy,1976).

Internationalcommodityagreementswereestablishedforthreeproductscoveredbythisreport:tropicaltimber,natural rubber and tin. The only one that remainsoperational today is the International Tropical TimberAgreement(ITTA),whichwasfirstnegotiatedin1983.The ITTA however, has been described as “noconventional commodity agreement”, but rather “asmuch an agreement for forest conservation anddevelopment as for trade”. (See the InternationalTropicalTimberOrganization(ITTO)website:www.itto.int). The International Tin Agreement operated from1955 to 1985, while the International Natural RubberAgreementwasinforcebetween1979and1999.Bothof these agreements tried to stabilize prices usingbuffer stocks and export controls. A difficulty arisingwith these agreements concerned divergent views onthe distinction between interventions that stabilizedprices and those that affected price trends. As notedearlier,aspecificexceptionisprovidedinArticleXX(h)of the GATT for measures undertaken underinternational commodity agreements that conform totheprinciplesapprovedbytheUNEconomicandSocialCouncilinitsResolution30(IV)of28March1947.

A number of commodity-specific agreements existamongproducercountries,themostrelevantofwhichistheOrganizationofthePetroleumExportingCountries(OPEC).28 As it does not include consumer countries,OPEC is not understood to be an internationalcommodityagreementandthustheexceptioninArticleXX(h)wouldnotbeapplicable.However,Desta(2008)hassuggestedthatthiscouldbechanging.Hereliesonparagraph 95 of the Doha Draft Modalities forAgriculture,whichstatesthat“[t]hegeneralexceptionsprovisions of Article XX(h) of GATT 1994 shall alsoapply to intergovernmental commodity agreements ofwhich only producing countries of the concernedcommoditiesareMembers”.

The primary aim of OPEC is “the coordination andunification of the petroleum policies of MemberCountriesandthedeterminationofthebestmeansforsafeguardingtheirinterestsindividuallyandcollectively”,


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whichincludes“devis[ing]waysandmeansofensuringthe stabilization of prices in international oil marketswith a view to eliminating harmful and unnecessaryfluctuations”(Article2,OPECStatute).OPECpursuesthisaimbyrecommendingoilproductiontargetsto itsmembers(Crosby,2009).

Twenty-eightadvancedeconomiesthatareconsumersof oil have created the International Energy Agency(IEA).29 The IEA was created during the oil crisis of1973-74, and its principal mandate was to coordinatemeasures in times of oil supply emergencies. Itsmandate has been broadened beyond oil crisismanagement and now also encompasses issuesrelating to energy efficiency, climate protection andenergy technology collaboration. Producer andconsumer countries discuss issues relating to energyresources and markets in the International EnergyForum(Selivanova,2007).

(iii) Regional and bilateral agreements

Some regional andbilateral tradeagreements includeobligations thatgobeyondWTOcommitments. Theseagreementsgenerallyprovideformorefavourabletarifftreatment for the products covered.30 They may alsoinclude rules that go beyond WTO disciplines. Forexample,Article314oftheNorthAmericanFreeTradeAgreement(NAFTA)prohibitsapartyfromadoptingormaintaining“anyduty,taxorotherchargeontheexportof any good to the territory of another Party, unlesssuchduty, taxor charge isadoptedormaintainedon:a)exportsofanysuchgoodtotheterritoryofallotherParties; and b) any such good when destined fordomesticconsumption.”31

Some of the bilateral agreements that the EuropeanUnionhasconcludedalsoincludeadditionaldisciplineson the use of export taxes. Article 17(1) of theagreementconcludedwithAlgeriastatesthat“[n]onewcustomsdutiesonimportsorexportsorchargeshavingequivalenteffectshallbe introducedintradebetweenthe Community and Algeria, nor shall those alreadyapplied upon entry into force of this Agreement beincreased”. The agreement between the EuropeanUnion and South Africa contains a similar provision,whiletheagreementwithCroatiacallsfortheabolitionof“anycustomsdutiesonexportsandchargeshavingequivalenteffect”uponitsentryintoforce.

TheNAFTAhasachapteronenergyandpetrochemicals,which sets out specific rules for these sectors. Iteliminated import tariffs and quantitative restrictions,butallowedMexico tomaintaina licensingsystemforpetroleumandelectricity trade (HufbauerandSchott,2005).Minimumandmaximumimportandexportpricesareprohibited,whiledomesticpricesarenotregulated.The chapter also clarifies that energy regulatorymeasures–definedas“anymeasurebyfederalorsub-federalentitiesthatdirectlyaffectsthetransportation,transmission or distribution, purchase or sale, of anenergy or basic petrochemical good” – are subject tothedisciplinesonnationaltreatment,importandexport

restrictions, and export taxes. Another provision ofinterestisArticle605,whichdefinesthecircumstanceswhenapartymayadoptormaintainarestrictionunderArticleXI:2(a)orXX(g),(i)or(j)oftheGATTinrelationtotheexportofenergyorabasicpetrochemicalgood.32

AnagreementthatisofparticularrelevancetosomeofthesectorscoveredbythisreportistheEnergyCharterTreaty(ECT),whichcameintoforcein1998.TheECThasbeensignedby51states,theEuropeanUnionandtheEuropeanAtomicEnergyCommunity(Euratom).Itsmembership comprises energy producers, consumersand transit states, including some that are not WTOmembers.

According to some commentators, the ECT has a“unique role as the only energy-specific multilateralagreementthatcoversallmajoraspectsofinternationalenergy turnover: trade, transit, investment and energyefficiency” (Rakhmanin,2009).TheECTalso includesprovisions on competition, transfer of technology, andaccesstocapital.VictorandYeuh(2010)pointoutthatthe effectiveness of the ECT has been affected by alackoffullparticipationinthetreatybyRussia.RussiahassignedtheECTbutindicatedin2009thatitdidnotintendtobecomeacontractingpartytotheECT.

TheECThasbeendescribedas“primarilyamultilateralinvestment protection treaty” (Selivanova, 2007).Nevertheless, the ECT includes a number of tradeprovisions,someofwhichareincorporatedbyreferencetotheWTO.ECTprovisionsonenergytradearebasedon the GATT/WTO principles of non-discrimination,national treatment, prohibition of quantitative exportand import restrictions and access to markets on anopenandtransparentbasis(Herman,2010).Article4ofthe ECT provides that nothing in the treaty shallderogate, as between parties that are parties to theGATT, from the provisions of the GATT as appliedbetween them. According to Selivanova, “[n]on-derogationfromtheprovisionsof theGATT/WTOisacore principle” of the ECT. GATT/WTO rules that areincorporated by reference apply to energy traderelations between the contracting parties of the ECT,includingwhereapartyisnotaWTOmember.

In relation to energy transit, “the (ECT) contains in itsArticle7severaldisciplines thataremorespecificanddetailed than those of Article V of the GATT 1994”(Ehring, 2007). These include the obligation not toobstructarbitrarilythecreationofnewcapacityiftransitcannot be carried out through existing infrastructureduetolackofcapacity,andtheobligationnottointerruptorreduceexistingtransitflows,evenifthereisadisputewithanothercountryconcerningthistransit.Thereisaspecialconciliationprocedureforeseenforresolutionoftransitdisputes.33TheTransitProtocol to theECT, thenegotiations of which are pending, would elaborate inmore detail some specific aspects of energy transit,such as conditions for access to networks andmethodologiesforcalculationoftransittariffs.

The ECT does not prescribe the structure of thedomestic energy sector, the ownership of energy


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companiesorobligemembercountriestoopenuptheirenergysector to foreign investors.TheECTexpresslyrecognizesnationalsovereigntyoverenergyresources:eachmembercountryisfreetodecidehow,andtowhatextent,itsnationalandsovereignenergyresourceswillbedeveloped,andalso theextent towhich itsenergysectorwillbeopenedtoforeigninvestments(Article18of theECT).At thesame time, there isa requirementthat rules on the exploration, development andacquisition of resources be publicly available, non-discriminatoryandtransparent.

Onceaforeigninvestmentismade,theECTisdesignedtoprovideareliableandstable interfacebetweenthisinvestment and the host government. Investors areprotected against the most important political risks,such as discrimination, expropriation andnationalization,34 breach of individual investmentcontracts,35damagesduetowarandsimilarevents,andunjustified restrictions on the transfer of funds. Hoststates are obliged to grant to investments from otherECTmembersaswellas to relatedactivities, suchasmanagement,maintenance,use,enjoymentordisposal,treatmentatleastasfavourableasthataccordedtotheinvestments of their own investors or of investors ofother countries. The non-discrimination obligation isapplicableonlytothepost-investmentstage,i.e.onlytoinvestmentsalreadymade.

Asregardsthepre-investmentphase,36there isonlya“bestendeavour”obligationtograntnon-discriminatorytreatment.Furthermore,ECTmembersmustendeavournot to introduce new restrictions on foreign investorsconcerning the making of an investment (“standstill”)and to progressively reduce remaining restrictions(“rollback”).

(iv) Externalities

A large number of international agreements establishmechanisms for states to cooperate in dealing withinternationalexternalities,manyofwhich relate to theprotectionoftheenvironment.Therearemorethan250multilateral environmental agreements currently inforce. They cover a broad array of issues, such asendangered wild fauna and plants (Convention onInternational Trade in Endangered Species), fisheries(UnitedNationsFishStocksAgreement),tropicaltimber(International Tropical Timber Agreement), climatechange (United Nations Framework Convention onClimateChangeandtheKyotoProtocol),andhazardouswastes (Basel Convention on the Control ofTransboundary Movements of Hazardous Wastes andtheirDisposal).

As noted earlier, about 20 of these multilateralenvironmental agreements include trade provisions.37Forexample, theConventionon InternationalTrade inEndangered Species subjects trade in certainspecimens of wild animals and plants to controlsthrough the use of a licensing system. The BaselConventionontheControlofTransboundaryMovementsof Hazardous Wastes and their Disposal imposes

prohibitions on the exportation of hazardous wastes.The UN Fish Stocks Agreement allows parties toprohibit landings and trans-shipments where it hasbeen established that the catch has been taken in amanner which undermines the effectiveness of sub-regional, regional or global conservation andmanagementmeasuresonthehighseas.

Some observers have expressed concern about therelationship between these trade-related measures inmultilateral environmental agreements and theinternational trade rules in the WTO agreements. Theneedtoensurecoherencebetweenmultilateraleffortsaimedatpreservingtheenvironmentandthemultilateraltrading regime has been emphasized both ininternational environmental discussions and at theWTO.Ontheenvironmentalside,theneedforcoherenceis expressly acknowledged in Principle 12 of the RioDeclaration on Environment and Development, whichreads:

“Statesshouldcooperatetopromoteasupportiveandopeninternationaleconomicsystemthatwouldleadtoeconomicgrowthandsustainabledevelopmentinallcountries,tobetteraddresstheproblemsofenvironmentaldegradation.Tradepolicymeasuresforenvironmentalpurposesshouldnotconstituteameansofarbitraryorunjustifiablediscriminationoradisguisedrestrictiononinternationaltrade.Unilateralactionstodealwithenvironmentalchallengesoutsidethejurisdictionoftheimportingcountryshouldbeavoided.Environmentalmeasuresaddressingtransboundaryorglobalenvironmentalproblemsshould,asfaraspossible,bebasedonaninternationalconsensus.”

ThePreambleof theWTOAgreementrecognizesthattheexpansionof tradeandproductionmustallow“fortheoptimaluseoftheworld’sresourcesinaccordancewith the objective of sustainable development” andmust “seek to protect and preserve the environment”.The1994MinisterialDecisiononTradeandEnvironmentstates“thatthereshouldnotbe,norneedbe,anypolicycontradictionbetweenupholdingandsafeguardinganopen, non-discriminatory and equitable multilateraltradingsystemontheonehand,andactingforthepro-tection of the environment, and the promotion ofsustainabledevelopmentontheother”.

ArticleXXof theGATT1994providesexceptions formeasures“necessarytoprotecthuman,animalorplantlife or health” or “relating to the conservation ofexhaustible natural resources”. The TBT AgreementallowsWTOmemberstoadopttechnicalregulationstoprotect humanhealthor safety, animal or plant lifeorhealth, or the environment. In the case of trade inservices, Article XIV of the GATS permits WTOmembers to adopt or enforce measures necessary toprotecthuman,animalorplantlifeorhealth.38


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Todate,no trademeasures takenunderamultilateralenvironmental agreement have been challenged asbeing incompatible with WTO obligations. Multilateralenvironmental agreementswere referred to in theUS – Shrimp dispute, which involved a restriction onimportedshrimpharvestedwithout theuseofdevicesthatpreventtheaccidentalcaptureofseaturtles.Oneoftheissuesraisedinthatcasewaswhethertheterm“exhaustiblenaturalresources”coveredlivingorganismsor only covered non-living mineral resources. TheAppellateBodyconcludedthatthetermincludedlivingorganisms after referring to several internationalenvironmental instruments,suchastheConventiononBiologicalDiversityandAgenda21.

Another issue that was raised in the US – Shrimpdispute was whether the measure was appliedconsistentlywiththechapeauofArticleXXoftheGATT1994,whichrequiresthatitnotbe“appliedinamannerwhich would constitute a means of arbitrary orunjustifiable discrimination between countries wherethe same conditions prevail, or a disguised restrictiononinternationaltrade”. Intheoriginalproceedings,theWTOmemberapplyingtheimportrestrictionwasfoundnot to have met this requirement because it had“negotiated seriously” with one group of exportingcountries,butnotwiththeexportingcountriesthathadinitiated the dispute. This was deemed to have adiscriminatoryeffectandwasconsideredunjustifiable(AppellateBodyReport,US – Shrimp,para.172).

However,inasubsequentproceeding,theconditionsinthechapeauofArticleXXwerefoundtohavebeenmetafteritwasshownthattheWTOmemberapplyingtheimportrestrictionhadmade“serious,goodfaithefforts... to negotiate an international agreement” with thegroup of exporting countries concerned. Thoseproceedingsalsoclarifiedthat“itisonethingtopreferamultilateralapproachintheapplicationofameasurethat is provisionally justified under one of thesubparagraphs of Article XX of the GATT 1994; it isanother to require the conclusion of a multilateralagreement as a condition of avoiding ‘arbitrary orunjustifiable discrimination’ under the chapeau ofArticle XX”. No such requirement was found in thatcase(AppellateBodyReport,US – Shrimp (Article 21.5 – Malaysia),paras124and134).

Anotherconcernisthatdisputesinvolvingenvironmentalmeasures may be brought to the WTO andsimultaneously to another forum, and that each mayissueconflictingdecisions.WTOmembershavesofaravoidedsuchsituations.Thisisillustratedbyadisputebetween Chile and the EU concerning the landing ofswordfish.

In April 2000, the EU requested consultations withChileinrelationtoChileanlegislationthatprohibitedECvesselsfromunloadingtheirswordfishinChileanportseithertolandthemforwarehousingortotranshipthemontoothervessels(WT/DS193/1).TheEUallegedthatsuch a prohibition made transit through Chilean portsimpossible,andassuchwasinconsistentwithArticleVoftheGATT1994.Chile,foritspart,assertedthatthe

EUwas required,under itsobligations inUNCLOS, toenactandenforceconservationmeasuresforitsfishingoperations on the high seas, and Chile initiatedproceedings against the EU before the InternationalTribunal for the Law of the Sea (ITLOS). However, inMarch 2001, the EU and Chile informed the DisputeSettlement Body that they had come to a provisionalarrangement concerning this dispute and accordinglyhadagreed tosuspend theWTOpanelprocess.Chileand the EU eventually reached a settlement of thedispute and, at their request, the ITLOS Tribunaldiscontinuedthecaseon16December2009.

Some consider it advisable to spell out further therelationship between the WTO and multilateralenvironmental agreements. Thus, at the 2001 DohaMinisterial Conference, WTO members agreed tonegotiateon the relationshipbetweenWTO rulesandthemultilateralenvironmentalagreements,particularlythose that contain “specific trade obligations”. ThesenegotiationstakeplaceinspecialsessionsoftheTradeand Environment Committee. Members have agreedthatthescopeofthesenegotiationswouldbelimitedtothe applicability of WTO rules to WTO members thathave signed the multilateral environmental agreementunderconsideration.

Corruption is another issue on which states havecooperatedtoaddressaninternationalexternality.TheOECD Convention on Combating Bribery of ForeignPublicOfficials in InternationalBusinessTransactionsrequires its signatories to criminalize the bribing offoreignofficials in internationalbusiness transactions.TheExtractive IndustriesTransparency Initiative (EITI)is a coalitionof governments, companies, civil societygroups, investors and international organizations thatseekstopromoteimprovedgovernanceinresource-richcountries through the verification and publication ofcompanypaymentsandgovernmentrevenuesfromoil,gasandmining.

An international initiative thathasbeen thesubjectofdiscussion in the WTO is the Kimberley ProcessCertificationScheme(KPCS).Thisisajointinitiativeofgovernments, industry and civil society that seeks tostem theflowof “conflictdiamonds”.Theseare roughdiamondsusedbyrebelmovementstofinanceconflictsaimed at undermining legitimate governments, asdescribed in relevant United Nations Security Councilresolutions.TheKPCSobliges itsmembers toensurethataKimberleyProcessCertificateaccompanieseachshipment of rough diamonds being exported. Thedocument certifies that conflict diamonds are notincludedinashipmentofroughdiamonds.

In2003,theWTOGeneralCouncilapprovedarequestby11membersoftheKPCStowaivetheapplicationofcertainGATTruleswithrespecttomeasurestakentoprevent theexportofconflictdiamonds inaccordancewiththeKPCS.Inparticular,theWTOGeneralCouncilwaived the application of Article I:1, Article XI:1 andArticleXIIIoftheGATTfortheperiod1January2003to 31 December 2006 for 11 WTO members(WT/L/518).39 In December 2006, the Kimberley


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Waiver was extended to 2012, and the members towhichitappliesexpandedto19(WT/L/676).

(v) “Hold-up”

Bilateral investment treaties (BITs) play an importantrole, particularly in relation to minerals and energyresources.Thesetreatiesseektoresolvewhatisknownas the hold-up problem40, by constraining the hostgovernment fromchanging the rules thatapply to theinvestoroncetheinvestmenthasbeenmade(Guzman,1998). It is estimated that there are more than 1,100BITsinforce,withmorethan800havingbeenconcludedsince1987,andmorethan155countriesarepartiestoaBIT.MostBITsarebetweendevelopedanddevelopingcountries,butasubstantialnumberofBITshavebeenconcluded between developing countries (Lowenfeld,2003).

BITsrequirethehoststatetogiveforeigninvestors“fairand equitable treatment” and “full protection andsecurity”(Lowenfeld,2003).Theyalsoprohibitthehoststatefromdiscriminatingagainstforeigninvestorsandfromtakingtheirpropertywithoutcompensation.MostBITs provide that “expropriation is lawful and notinconsistent with the BITs if it (i) is carried out for apublicpurpose; (ii) isnon-discriminatory; (iii) iscarriedout in accordance with due process; and (iv) isaccompaniedbypaymentofcompensation”(Lowenfeld,2003). BITs also provide for recourse to internationalarbitrationwhenaninvestorconsidersthatahoststatehas violated its obligations under the BIT. One of themost frequently used fora for such arbitration is theWorld Bank’s International Centre for Settlement ofInvestmentDisputes.41Investmentprotectionprovisionsalso may be found in other international agreements,includingmultilateralsector-specificagreements,suchastheEnergyCharterTreaty,andinregionalorbilateraltradeagreements,suchasNAFTA.

TheWTOdoesnotregulateinvestment,exceptforservicesprovidedundertheso-calledmode3(seeBox26).AttheMinisterial Conference held in Singapore in 1996, WTOmembersagreedtoestablishaworkinggrouptoexaminetherelationshipbetweentradeandinvestment.

In 2001, at the Doha Ministerial Conference, WTOmembersrecognized“thecaseforamultilateralframeworkto secure transparent, stableandpredictable conditionsforlong-termcross-borderinvestment,particularlyforeigndirectinvestment,thatwillcontributetotheexpansionoftrade”andagreed“thatnegotiationswilltakeplaceafterthe Fifth Session of the Ministerial Conference on thebasisofadecisiontobetaken,byexplicitconsensus,atthatsessiononmodalitiesofnegotiations”.WTOmembersalsoagreedonaworkprogrammefortheWorkingGroupon the Relationship Between Trade and Investment.Nevertheless,ataGeneralCouncilmeetingheldin2004,membersdecidedthattherelationshipbetweentradeandinvestmentwouldnolongerformpartoftheDohaWorkProgramme and that “therefore no work towardsnegotiationsonanyoftheseissueswilltakeplacewithintheWTOduringtheDohaRound”.

3. Trade-relatedissuesaffectingnaturalresources:Challengesahead

As discussed in previous sections, natural resourcesdisplayanumberofcharacteristicsthatmakeacaseforgovernment intervention to improve social welfare, ascompared to the free trade outcome. Much of theanalysis of this report has focused on GATT/WTOaspects of trade in natural resources. Some of theissues raised below are not necessarily within thepurview of the WTO, but they are neverthelessdiscussedhereastheyappearrelevanttointernationalcooperationinthefieldofnaturalresources.

AsfarasourreviewofWTOrulesisconcerned,ithasbeenshownthattheseprovidescopeforgovernmentstoaddressmarketfailuresrelatedtothespecificnatureofnaturalresources.Atthesametime,certainmeasureslimiting access to natural resources are prohibited byWTOrules.Tariffsonmostnaturalresources,withtheexceptionoffish,are relatively lowand thenumberofdisputes involvingnatural resources is notparticularlyhigh.Noneofthismeans,however,thattradeinnaturalresourcesisfreeofcontentionandvaryingviewsonthepreferred nature and content of multilateral tradingrules.DifferencesofviewamongWTOmembersariseinanumberofareas, particularly in relation toexportrestrictions and subsidies. Concerns have also beenraised in regard to possible negative interactionsbetweenWTOrulesandcommitmentsandconservationpolicies.

Issues taken up here, which have emerged in variouscontexts, include export restrictions, subsidies,domestic and international regulation, investment-related challenges in natural resource industries,competition questions, transit and transportation, thedistinction between goods and services in relation tonatural resources, intellectual property rights andnatural resources conservation. This list does notpretendtobeexhaustive,noristhereanysuggestionintheselectionoftheseissuesthattheyallfallwithinthescopeofagreedWTOcompetence.

(a) Exportrestrictions

(i) Export taxes

Asdiscussed in sub-section1,WTO rulesprohibit theuse of quantitative export restrictions with someexceptions but it has been generally recognized thattheydonot prohibit theuseof export taxesor duties.Sub-section 1 also explained that the panel on US – Exports Restraints did not find that certain exportrestraintsweresubsidiesthatwouldallowcountervailingmeasurestobetakenundertheAgreementonSubsidiesandCountervailingMeasures.42

WTOmemberscouldhavemadebindingcommitmentsto reduce their export taxes (as they have done withrespect to import tariffs), but most of them have not.


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However,severalcountriesthathaverecentlyjoinedtheWTO,includingChina,Mongolia,SaudiArabia,UkraineandVietNamhavebeenrequestedbyexistingmemberstonegotiatecommitment“schedules”forexportdutiesin the context of their accession negotiations.45 In anumber of cases, the export duties covered by suchcommitmentsconcernnaturalresources.Theextenttowhich these commitments reduce or remove exporttaxesvariesacrossmembers.

Divergent interests in relation to export taxes havecome to the fore in the context of the Doha Roundnegotiations on market access for non-agriculturalproducts.IntheirinitialsubmissionstotheNegotiatingGroup on Market Access, two members noted thatnegotiations should also address export restrictions,includingexportduties.46Oneofthosememberstabled

a proposal for a WTO Agreement on Export Taxesaimedattheeliminationofallsuchmeasuresovertime,allowingonlyforasmallnumberofgeneralexceptionsand for limited flexibilities for developing countries(Job(07)/43). This proposal, which was motivated byconcerns that export taxes can be used to restrictaccesstocrucialrawmaterialsandinputgoodsandcantherebyimpedegrowthanddevelopmentofotherWTOmembers,metwithcriticalreactionsfromanumberofother members who argued that export duties arelegitimatetoolsofeconomicdevelopment.

Theproposalwassubsequentlyrevisedandtherevisedsubmissionwasincludedinthefourthrevisionofdraftmodalities for non-agricultural market access. Therevised approach represents a shift from a generalprohibition of export taxes, with exceptions based on

Box28:What is the economic rationale for trade agreements?

Economists have identified two main reasons why governments sign a trade agreement: first, to avoid“beggar-thy-neighbour”policiesthatareunilaterallyattractivebutmultilaterallydestructive;second, toavoid“beggar-thyself”policiesthatareattractiveintheshortrunbutdonotservethelongruninterestsofsociety(BagwellandStaiger,2009;WorldTradeOrganization,2007).

Thebeggar-thy-neighbourproblemisbasedontheideathattradepolicydecisionsofonecountryaffectthewelfareofanothercountry.Whileitisbynomeanstheonlybeggar-thy-neighboureffect,theformalliteraturefocusesontheterms-of-tradeeffect(Johnson,1954).ThepurposeofatradeagreementsuchastheWTOis,therefore,tomakesurethatgovernmentsaccountfortheseeffectswhentheymakepolicy.

Consider two largeopeneconomiesable toaffectglobaldemandandsupplyand,hence,worldprices inaspecificsector.Byimposinganimporttariff,acountryincreasesthepriceofimportsforconsumersbutlowersthe price received by foreign exporting firms. This price change constitutes a terms-of-trade gain at theexpenseofthetradingpartner,whichexperiencesaterms-of-tradeloss.Ascountriesinteractstrategicallyintheinternationalarena,thetradingpartnerwillreactbyimposingatariffonitsimportedgood,alsoimprovingitstermsoftradetothedetrimentoftheothereconomy.Eventuallytheeconomyendsupinanequilibriumwithinefficientlyhightariffsandlowtradevolumes,whicheconomistsgenerallyrefertoasaterms-of-tradedriven“Prisoners’Dilemma”.AtradeagreementliketheGATT/WTOcontainsasetofrulesandprinciples,suchasnon-discriminationand reciprocity, that facilitate tradecooperationandallowmembers toescape thisnon-cooperativebehaviourandachievehigherwelfare(BagwellandStaiger,1999;BagwellandStaiger,2002).43

The other reason why countries sign a trade treaty is because governments may also face problems incommittingtofollowawelfare-maximizingtradepolicy.First,anefficienttradepolicymaybetimeinconsistent.Thiscanarisewhenagovernment’spolicypreferenceschangeascircumstanceschangeovertime.Asaresult,anefficientbuttime-inconsistenttradepolicymaynotbecredibleintheeyesofprivateagents(StaigerandTabellini, 1987). Second, an efficient trade policy may not be convenient for a government under politicalpressures,suchaslobbyingfromimport-competingsectors(MaggiandRodriguez-Clare,1998).Underthesescenarios,atradeagreementcanbeawelfare-enhancinginstitutionalreformasitmayprovideaneffectivecommitmentdevicetotiethehandsofmembergovernmentstoanefficientpolicy.TheWTOsystem,inthisview,providesananchortoavoidbeggar-thyselfpolicies.

Thetwoapproachesarecomplementaryinthesensethatonedoesnotexcludetheother,andseveralrecentpapersprovideempiricalsupportforboththeories.Brodaetal.(2008)andBagwellandStaiger(2006a)findevidenceconsistentwith theterms-of-tradeapproach,whileStaigerandTabellini (1999)andTangandWei(2009)substantiatethebeliefthatWTOcommitmentsaddresscredibilityproblems.

A trade agreement, like any other international cooperation agreement, needs to be self-enforcing. In theabsenceofasupranationalauthoritythatcanpunishgovernmentsthatdeviate,membersneedtofinditintheirowninteresttoabidebyinternationalrules.Economictheoryhasformalizedtherequirementofself-enforcementintradeagreementsbyintroducingtheconceptofrepeatedgames.44Tradecooperationarisesascountriesbalance the gains of deviating from the agreement against the ensuing losses from retaliation (i.e. tradesanctions).Forthisreason,theGATT/WTOsystemallowsforretaliatorymeasuresthatcanbeimplementedwhenmembersdonotadheretotheircommitments.


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GATT rules, to the establishment of rules ontransparencyandpredictability,which,intheviewoftheproponents, could be ensured through schedulingcommitmentsandthebindingofmembers’exporttaxes(i.e.settingupperlimits).

Exportpolicyhasalsobeenthesubjectofdiscussioninthe agriculture negotiations. This is reflected in thedraftnegotiatingmodalities47onexportprohibitionsandrestrictions. The proposed text on this topic seeks toimprove transparencyandaccountability. Italsoseekstoshrinkthedurationofquantitativeexportrestrictionson agricultural products, which are permitted underArticleXI.2(a)ofGATT1994astemporarymeasurestorelievecriticalshortages.Severalmembersalsomadeproposals on export taxes in the agricultural sector.Manyoftheproposalsseektorestrictoreliminatetheuse of export taxes. They were made either in thecontext of the post-Uruguay Round discussions onagriculturethatfedintotheDohaRound,ortheyweremadeinthefirsttwoorthreeyearsoftheDohaRound.Theproposalshavereceivedlimitedattentioninrecentyears.

Inthiscontext,anumberofregionalandbilateraltradeagreementsprohibittheapplicationofcustomsduties,taxesandchargeshavingequivalenteffectsonexportsof originating goods traded between parties to theagreements.48

Theeconomic theoryof tradeagreementsshedssomelightonthereasonswhygovernmentsmaybeinterestedinnegotiatingrestrictionsontheiruseofexporttariffs.49Thereasoningisbasedontheideathatfromaneconomicpointofview,exporttaxesarethemirrorimageoftariffs.It is thus not surprising that the same terms-of-tradeargument for international cooperation that applies toimporttariffsalsoappliestoexporttaxes.Alargecountrycan improve its terms of trade at the expense of itstrading partners by imposing export restrictions. Thereductioninsupplywillpushuptheworldprice.Asinthetariffcase,twolargecountriesrestrictingtheirexportstoeach other could end up in a “Prisoners’ Dilemma”situationiftheydidnotcooperate(seeBox28).Ifthisisthe case, a trade agreement that would allow tradingpartners to commit to export tax reductions would bebeneficial. Note that this argument does not apply toexport taxesonnatural resourcesonly. It appliesmoregenerally to export taxes imposed by countries whentheyarelargeenoughtoaffectworldprices.

Commitments to reduce export taxes could beexchanged against commitments to reduce eitherexporttaxesorimporttariffs.Considerthecasewhereanimportingcountryimposesescalatingtariffsalongaproductionchain inanatural resourcesectorwith theresultthathigherlevelsofprocessingofagoodattracthighertariffs.Thecountryexportinganaturalresourcemaydecidetoimposeanexporttaxtooffsettheeffectsoftheimporttariffs.Inthisparticularcase,anagreementinvolvingacommitmentonexporttaxesontheonesideandacommitmentonimporttariffsontheotherwouldbemutuallybeneficial.

In theory, the rationale for allowing governments tonegotiate commitments on export taxes could beextendedtocertaindomesticpolicyinstruments.Thisisbecause basic economic arguments can be used toshow the conceptual equivalence between certaintrade policy instruments and certain domestic policyinstruments.AsexplainedinSectionD,intheabsenceofdomesticconsumption,adomesticproductionquotais equivalent to an export quota. Yet, while an exportquota is prohibited by Article XI of the GATT, mostobservers consider that a production quota is notsubject to thisprohibition. Instead,manyconsider thatdecisionsconcerninghowmuchofanaturalresourceisextracted or harvested fall within the sovereignty ofeachstate(seesub-sections1and2above).Similarly,an export tax is equivalent to a consumption subsidy.Also, in the absence of domestic production, aconsumption tax is equivalent to a tariff. Given thisequivalence, depending on the circumstances,governments may have reasons to prefer using adomestic policy instrument rather than the equivalenttradepolicymeasures.

Consider the market for oil. Exporters typically useproduction restrictions while importers typically useconsumption taxes. Like an import tariff, a consumertaxintheimportingcountrywillreducethedomestic–and,hence,global–demandforoilandloweritsworldprice,shiftingpartoftheresourcerent(i.e.thepremiumthattheproducerorexporterreceivesaboveopportunitycost) from the exporting country to the importingcountry.Similarly,likeanexportrestriction,aproductionquota in the exporting country lowers the supply ininternational markets and increases the world price,thusshiftingtherentfromtheimportingtotheexportingcountry.50

The cross-border impact created by the rent-shiftingeffectsofconsumertaxesandproductionquotasgivesrisetoaPrisoners’Dilemmasituation,similartotheonediscussedearlier.Ifeachcountryactsnon-cooperatively,itwillhaveanincentivetosetitspolicyataninefficientlevel in order to shift the resource rent away from itstradingpartner.Forinstance,whileconsumertaxesonoilcouldbeefficientlysetatapositiveratetooffsettheenvironmental damage created by carbon dioxideemissions,importingcountriesmayhaveanincentivetogobeyondtheefficienttaxrate.Asimilarargumentmayapply to producing countries, which may restrictproduction (and hence export) of oil for both beggar-thy-neighbour and resource conservation purposes.Collier and Venables (2009) argue that attempts toshiftrentsinternationallyintarifforexporttaxwarsarezero-sumgames,wherebyonetradingpartner’sgainorloss is balanced by the losses or gains of the othertrading partner. They show that these policyinterventions create substantial price variation acrossdifferent national markets, which creates inefficiency.For example, high prices in importing countries mayreduce consumption to a greater degree than isnecessary to meet environmental concerns. Also, thelessons that we learn from the theory of tradeagreements apply to this environment. It would in


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principlebepossibletoreachamutuallybeneficialdealbetween importing and exporting countries in whichproduction restrictions and consumption taxes wouldbe reduced, so as to cut efficiency losses while theinternationaldistributionofrentsisunaffected.

Clearly,areductionofproductionrestrictionsintheoilsector may stop short of a complete elimination ofrestrictions. Production may need to be restricted onaccountoftheefficientmanagementofanexhaustibleresource or the adverse effects of carbon dioxideemissions.

(ii) Export licensing

AdiscussionrelatedtothatonexporttaxeshastakenplaceintheframeworkoftheDohaRoundnegotiations,wherefourWTOmembersrecentlycirculatedaproposalforaprotocolontransparencyinexportlicensing.51Thisproposalreflectsaconcernabouttheuseofquantitativeexportrestrictionsonnaturalresourceswhichwasfirstexpressed by one of the four proponents in a papercirculatedin2006.52

The 2006 paper discussed the need for enhanceddisciplines on export restrictions, arguing that theprovisions that regulate the use of quantitativerestrictions on imports and on exports in the GATT/WTO framework are unbalanced. Existing provisionsregardingexportrestrictionsareoftenlessexplicitandless precise than those for import restrictions. Thepaper therefore proposed disciplines to enhance thetransparency of export restrictions, in particular whenapplied to mineral products and other exhaustiblenatural resources.Basedon thispaper,aproposal fornegotiations on Enhanced Transparency on ExportRestrictions was subsequently submitted, including adraft agreement on export licensing procedures. Thisproposal was further revised and evolved into theproposedprotocol,whichwouldnotbelimitedtonaturalresources.

(b) Subsidies

A number of issues relating to subsidies in naturalresource industries have been debated in WTOaccession negotiations and/or are being discussed intheDohaRoundnegotiations.Beforeexaminingthesespecific issues, let us consider what economic theorytells us about the rationale for subsidy disciplines intradeagreements.

AsexplainedinBox28,therearetwomainexplanationsfortheroleoftradeagreementsineconomicsliterature:the commitment approach and the terms-of-tradeapproach.Accordingtotheformer,WTOsubsidyrulesmay provide policy-makers with a commitmentmechanism to credibly eliminate or limit an inefficientpolicy. Brou and Ruta (2009) and Brou, CampanellaandRuta(2010)demonstratethispoint inthecontextof domestic subsidies, but the logic of the argumentappliesalsotoexportsubsidies.

In the terms-of-tradeapproach, thecase for imposingdisciplines on the use of subsidies is more limited(Bagwell and Staiger, 2006b; Bagwell and Staiger,2001b; Janow and Staiger, 2003). The fundamentalinefficiency associated with unilateral trade policychoicesisinsufficienttradevolumesand,totheextentthat a subsidy increases trade volumes, it enhancesefficiency.Consequently,restrictingitsusewouldworkagainst efficiency.53 However, when subsidy rulespreventtheuseofnewsubsidiesthathavetheeffectofundermining negotiated tariff commitments, they helpgovernments negotiate more efficient market accessagreementsandtherebyenhanceefficiency.

Arelatedissueistheroleofdomesticsubsidiesasanefficient(i.e.first-best)policytoolinaddressingmarketfailures (Bhagwati and Ramaswami, 1963; Johnson,1965). This argument suggests that the design ofsubsidy rules within a trade agreement should leavesufficient policy flexibility to member governments toaddress distortions. Failing to do so might inducepolicy-makers to over-use other – less efficient –measures, such as tariffs, as substitutes to domesticsubsidies(Sykes,2005).

(i) Subsidies to fisheries

A well-documented example of subsidization of anaturalresourcessectoristhefisheriesindustry.Manycommentators consider that fishing subsidiesexacerbatetheproblemofexhaustibilitybyencouragingover-exploitation.Inthiscontext,onequestionthathasbeen raised is whether the Agreement on SubsidiesandCountervailingMeasures(SCM)initscurrentformadequately disciplines such subsidies. As noted inSection C, one might expect the supply schedule forfish to bend backwards above a certain price levelbecauseofover-exploitationandfallingproductivityinasituationofpoorlydefinedpropertyrights.Thismeansthat above this threshold price level, a subsidy mightreduce rather than increase the amount of fishharvested.Undersuchcircumstances,neitherimportersof subsidized fish nor exporters to the subsidizingcountrywouldappeartohavegroundsforcomplainttotheWTO.

Asecondissueisthatafishingsubsidyisunlikelytobechallenged as an export subsidy under the SCMAgreement because fishing subsidies are usuallygranted by net importers of fish for domesticconsumption(Young,2009).Fishingsubsidiesaremorelikely tobedeemedtobeactionablesubsidies. In thiscase,foraWTOmembertochallengesuccessfullythesubsidy at the WTO, it would be necessary to showadverseeffectstothemember’sinterests.Accordingtoa number of commentators, this is a difficult task(Young,2009).Thereareanumberofreasonsforthis.First,thedisparatenatureoffishspeciesmakesmarketdisplacement harder to prove. Second, distortions willbe in resourceavailability rather than in theprices forexporters(whichdoesnotgivegroundsforachallengeunder the SCM Agreement). Third, it is difficult toidentifyapricereferencepointagainstwhich the loss


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can be measured because the entire industry isdistorted throughsubsidization (Submission fromNewZealand,2002).

Afinalissuethat,allegedly,makesitdifficulttoenforcetheSCMAgreementinrelationtofisheriessubsidiesisthefailureofWTOmemberstoreportadequatelytheiruseoffishingsubsidies.Consequently,thereisalackofmeaningful data on such subsidies available to othermembers (Submission from Australia, Chile, Ecuador,Iceland, New Zealand, Peru, Philippines and theUnitedStates,2002).

For thesereasons,concertedeffortshavebeenmadeintheDohaRoundtonegotiateasetofrulesthatwoulddealspecificallywithfishingsubsidies.TheDeclarationadopted at the WTO Ministerial Conference held inHongKong,Chinain2005,notedthe“broad”agreementofWTOmembersontheneedto“strengthendisciplineson subsidies in the fisheries sector, including throughthe prohibition of certain forms of fisheries subsidiesthat contribute to overcapacity and over-fishing” andcalled on members “promptly to undertake furtherdetailed work to, inter alia, establish the nature andextentofthosedisciplines, includingtransparencyandenforceability”.

The economics of subsidies sheds some light on theeffect of suchmeasures in thefisheries sector. If thesector suffers from an open access problem thatcausesover-fishing,asubsidythatstimulatesproduction(suchasaproductionoranexportsubsidy)willworsenover-fishing and, possibly, reduce social welfare (seeSectionD).So,whywouldpolicy-makersintroducesuchpolicymeasures?AndwhatcanWTOrulesdoaboutit?Economists see two main reasons why governmentsmaywanttousesubsidiesinthepresenceofanopenaccess problem – political economy motivations (i.e.pressuresfromtheimportorexport-competingsector),and, in the case of subsidies to import-competingindustries, terms-of-trade manipulation (i.e. the desiretoalterworldpricestoobtainaterms-of-tradegain).

Consider thepoliticaleconomyargumentfirst.SupposefisheriesarecontainedwithinasingleExclusiveEconomicZone (EEZ), which gives the country certain exclusiverights.Intheabsenceofothermarketfailures,afisheriessubsidyredistributesincomewithinthecountryfromtax-payers to fishermen, and lowers social welfare throughtheover-exploitationofthecountry’sresource.Apoliticallyorganized sector gains at the expense of the rest ofsociety(includingcurrentandfuturegenerations).Inthissituation,WTOrulesdiscipliningfisheriessubsidieswouldprovidepolicy-makerswithacommitmentmechanismtocrediblyeliminateaninefficientpolicy,muchinthespiritofthecommitmentroleoftradeagreementsdiscussedinBox28.

A subsidy to fisheries aimed at manipulating thecountry’s terms of trade might seem attractive whentariffsareconstrainedbycommitments.Iffisheriesarecontained within a single EEZ, the only impact thatsubsidies would have on other countries would be aterms-of-trade effect. Indeed, a subsidy to import-

competingdomesticfisherieswouldreduceimports. Ifthesubsidizingcountryislargeenough,thisconstitutesabeggar-thy-neighbourpolicy (i.e. imposesanegativeterms-of-trade effect on trading partners). Unilateralattemptstomanipulatetermsoftradethroughsubsidieswill lead to a “Prisoners’ Dilemma” situation (seeBox28), exactly as in the case of a tariff war.54 Anagreementallowingsignatories reciprocally tocommittothereduction/eliminationoffisheriessubsidieswouldeliminateall terms-of-tradeeffectsandwould improveglobalsocialwelfare.

Itshouldbenoted,however,thatinbothcasesdiscussedabove, over-fishing would be mitigated, but noteliminated.AsdiscussedinSectionD,therewouldstillbeaneedtoaddresstheopenaccessproblemthroughappropriateallocationofproperty rightsanddomesticregulationwithineachcountry.Finally, inthepresenceofglobalcommons(i.e.withfugitiveorhighlymigratoryfishstocks),subsidies inducetwotypesofeffects–atypical terms-of-trade manipulation externality and anexternality related to the over-exploitation of a globalresource. A trade agreement would address only theterms-of-trade effect. There would still be a need foranotheragreementtoaddresstheglobalopenaccessproblembecausecountrieswouldnothaveanincentiveto control their harvests if other countries did notsimultaneouslycontroltheirs.

Economics distinguishes “bad” subsidies (thosediscussed above that distort trade and worsen openaccessproblems)from“good”subsidies.Thelatterarethosethataimataddressingamarketfailure.Efficientsubsidyrulesneed,therefore,tostriketherightbalanceand provide some form of flexibility (see Brou,CampanellaandRuta(2010)forthegeneralcase).Forexample, an economic case can be made for adistinction between subsidies that contribute to over-fishing and subsidies that help governments managefisheries and reduce fishing capacity (see Section D).ThispointismadebyCopelandandTaylor(2009),whodiscuss the importance of monitoring for appropriateresource management. In their view, what matters foraddressing the open access problem are effectivepropertyrightsratherthanformalpropertyrights.Thissuggeststhat“good”subsidies,suchasthoseneededto establish monitoring capacity, would need to beexcludedfromanyreductionoreliminationcommitments.

ThenegotiationsonfisheriessubsidiesinthecontextoftheDohaRoundhavemadeprogressevenifanumberof issuesremainhighlycontroversial (Bilsky,2009). InNovember2007,theChairoftheNegotiatingGrouponRules issued a negotiating text including proposedamendments to the SCM Agreement that wouldestablishnewdisciplinesonfisheries subsidies.55 TheChair’s negotiating text lists a number of specificfisheriessubsidiesthatwouldbeprohibitedastheyaremostlikelytoleadtoharmfulexcesscapacityorfishingeffort.56 The text also includes a list of subsidies thatwouldnotbeprohibited.Subject tocertainconditions,all WTO members would, for instance, be able toadminister subsidies for natural disaster relief, for theadoption of techniques to reduce the environmental


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impactoffishing,forimprovedcompliancewithfisheriesmanagementregimes,andforvesseldecommissioning.

TheChair’stextalsorespondstothedemandforspecialand differential treatment for developing countries.Least-developed countries would be allowed toadminister any type of subsidy. As for developingcountriesgenerally,theywouldbeallowedtoadministersubsidies for infrastructure, income support and pricesupport.Theywouldalsobeallowedtoadministeranysubsidytosubsistencefisherieswhilesubsidiestothemost industrial fisheries would be subject to certainconditions.Inadditiontothelistofprohibitedsubsidiesandexceptions, theChair’s textalsocontainsgeneral,across-the-board disciplines on subsidies that areshown to have adverse effects on fugitive or highlymigratory fish stocks or on other stocks in whichanother WTO member has an identifiable fishinginterest.

TheChair’stextwasextensivelydiscussed.Participants’views,however,continuedtodifferandthediscussionsdid not generate the necessary elements that wouldhaveallowedtheChairtoproposearevisionofhistextthat could lead to greater convergence. Instead, theChairdecidedtocirculatearoadmapfordiscussionsonfisheries.Theroadmapraisesaseriesofquestions,allofwhichareaimedatclarifyingparticipants’positionsondifferentaspectsofthemandate.

(ii) Fisheries access agreements

SeveralWTOmembershavesubmittedproposalstotheNegotiating Group on Rules that address accessarrangements. These arrangements generally involvegovernment-to-government payments in return forforeign access to developing countries’ EEZs. Suchaccessarrangementsconstitutesignificantsourcesofincome for some developing countries which haveproposed excluding them from the scope of anyfisheriessubsidydisciplines.Atthesametime,fisheriesaccessarrangementsnowrepresentthemainsourceofsupply for fish species such as tuna, some demersalfish,andmolluscstotheEUandJapan,whicharemajorDistantWatersFishingNations(DWFNs).AccordingtoOrellana (2007), the termsof thearrangementsoftenleavethehostcountrywithonlyafractionoftheactualresource value, and more than a few accessarrangementshaveledtothedepletionofhostcountrystocks.

Onequestionthathasariseniswhetherthetransferofaccess rights acquired by the DWFN through theseaccess arrangements to its distant water fleetrepresents a subsidy. The answer to this questiondepends on whether the DWFN receives sufficientpaymentinexchangefortherighttofishthatitprovidestoitsdistant-waterfishingfleet.ThesubmissionstabledbyWTOmembers typicallyaddressaccesspayments.However, they also reflect different views on the roleand legal status of access arrangements. Proposalsrangefromthe totalexemptionofaccessagreementsfromnewdisciplines to conditioning theexemptionof

accessagreementsonthenon-existenceofasubsidyaswellasenvironmentaland/ortransparencycriteria.

The Chair’s November 2007 text would provide thatgovernment-to-government access payments are notsubsidies.Subsidiesarisingfromthefurthertransfer,byapayingmembergovernment,ofsuchaccessrightstoits fishermen would in principle be prohibited, exceptwheretheaccessrelatestofisherieswithintheEEZofa developing country, the access agreement is madepublic, and it contains provisions designed to preventover-fishing based on internationally recognized bestpractices.

(iii) Dual pricing

Another subsidies-related issue that has arisen in theWTOaccessionnegotiationsofseveralmembers,aswellas in disputes and in the Doha Round negotiations onrules,isthe“dualpricing”issue.Asmentionedpreviously,dual pricing is a system of differentiated prices in thedomesticandtheexportmarket,whichgovernmentscanimplement, for instance, through a regulation that setsthemaximumpriceatwhichanatural resourcecanbesoldonthedomesticmarket.Thispriceislowerthanthepriceprevailingintheexportmarket.

Sub-section1discussedhowdualpricingraisedissuesunder the Subsidies and Countervailing MeasuresAgreement,andpossiblyunderArticlesXIandXVIIofthe GATT. In several accession negotiations, forexample,therehavebeendiscussionsonwhetherdualenergy pricing gives domestic exporters in energy-intensivesectorsanunfaircompetitiveadvantagethatwouldbedeemedillegalundertheSCMAgreement.Intherulesnegotiations,onedelegationtabledaproposalaimedatclarifyingthedisciplinesondualpricingintheSCMAgreement.57

As argued in Section D, a dual-pricing scheme onnatural gas, for example, has an effect similar to anexporttaxongaswhichinturnisequivalenttoasubsidyto domestic users of gas. The measure lowers thedomestic price of the natural resource relative to itsexportprice.Forthisreason,itgivesacostadvantageto downstream industries (i.e. producers of energy-intensive goods), which leads to higher exports andresults–ifthecountryislargeenoughininternationalmarkets – in a reduction of the world price for theproductsof these industries. The similaritiesbetweendual-pricingarrangementsandexporttaxesareworthbearinginmindforpurelyanalyticalpurposes.

Asinthecaseofexporttaxesandsubsidies,economistsargue that a dual-pricing scheme has a beggar-thy-neighbourcomponentwhenitlowerstheworldpriceofresource-intensiveproducts.Thismaytrigger(orbetheresult of) trade policy measures aiming at restrictingimportsof suchproductsoriginating from thecountrythat adopts a dual-price regime (tariff escalation). Anagreement that regulatesdual-pricingpractices in theresource-richcountryandtariffescalationbyresourceimporterswouldbemutuallybeneficial.


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Governments may have a legitimate efficiency reasontooffersubsidieswherethereissomeformofmarketfailure.Inthecaseofadual-priceregime,arguablythemarket failure must involve an inefficient level ofconsumptionofthenaturalresource,ortheexistenceofaninfantindustry.Whileadual-pricingschememaybeaneffectivewaytoprovideasubsidy(ifapricecontrolcan be easily implemented), such a policy measure isnot necessarily first-best. Unless the dual-pricingmechanism can be properly fine-tuned, all consumersof thenatural resourcewouldbenefitfromthe implicitsubsidyprovidedbythesystemofdual-priceregulation.Thiscouldbeaproblemifonlyasubsetofusersistheintended target of the subsidy. In this case, aconsumption subsidy that directly addresses theproblem may be a more appropriate measure as itavoidstheover-consumptionofthenaturalresourceinalltheothersectors.Thisisimportanttokeepinmindas, in the light of the commitment approach (seeBox28),theregulationofdual-pricingmechanismsinatradeagreementcouldbemotivatedbytheneedtolimitabeggar-thyselfpolicy.

(iv) Fossil fuels subsidies

TheleadersoftheG20agreedinSeptember2009tophaseout inefficient fossil fuel subsidies.Specifically,the Pittsburgh communiqué states that “inefficientfossilfuelssubsidiesencouragewastefulconsumption,reduceourenergysecurity,impedeinvestmentincleanenergysourcesandundermineeffortstodealwiththethreatofclimatechange”.58AsdiscussedinsectionC.4,consumptionoffossilfuelshasanegativeeffectontheenvironment,throughtheproductionofCO2emissions,thatisnotfullyreflectedinmarketprices.Certainformsofsubsidies,suchasconsumptionsubsidies,exacerbatethisnegativeenvironmentalexternality.Aninternationalundertaking to limit the use of an inefficient policy isverymuchinthespiritofthecommitmentroleoftradeagreementsdiscussedinBox28.

(v) Exception under the SCM Agreement

Anotherconcernthathasbeenraisedandthat isalsolinkedtotheexistenceofmarketfailuresrelatestothepossibility that WTO rules may prevent governmentsfrompursuingconservationpolicies.UnderArticle8oftheSubsidiesandCountervailingMeasuresAgreement,certain environmental subsidies were deemed to benon-actionable(i.e.notsubjecttochallengeintheWTOor to countervailing measures). However, theseprovisionsexpiredattheendof1999asWTOmembersdid not agree to retain them.59 As noted by Marceau(2010b), numerous commentators have called forreinstatingsuchaprovisiontoprovideasafehavenforcertain environmental subsidies such as those forrenewable energy or for climate change mitigation oradaptation. As of now, however, those calls have notbeen reflected in any proposals or discussions bymembers in the Doha Round negotiations on WTOrules.

(c) Domesticregulation

What are the challenges for the WTO when marketfailuresinthenaturalresourcessectorarepurelylocal– that is, when the “external” effect of an economictransaction (e.g. pollution, depletion of the naturalresource) is contained within national borders and,hence, does not cause any welfare loss to citizens inother countries? Economists have identified two mainchallenges. Some fear that WTO rules will inducecountries to impose sub-optimal regulations, whichmight possibly result in the dissipation of the naturalresource. In thisscenario,with theirhandstiedonthetrade policy side, governments may be reluctant toadopt efficient regulations which favour foreignproducers. Others are concerned that domesticregulationswillbeused to influence tradeflows.Theysee the possibility that governments may offset theeffectoftariffreductionsonmarketaccesswithlooserdomestic regulations thatcreateacostadvantage forimport-competingproducers.

Bagwell and Staiger (2001a) show that tradenegotiationscanaffectagovernment’sincentivetosetan efficient regulation in two different ways, each ofwhichraisesadistinctchallenge. In theirmodel, tradepolicymayhaveanegative impactontradingpartnersthrough a terms-of-trade effect (see Box 28) anddomesticregulationsaresettoaddressalocalmarketfailure.

Asaconcreteexample,consider thecasewherebothgovernments need to regulate fishing in an internallake. In this context, countries affect each other onlythrough their market interactions (i.e. through trade)and no other cross-border external effect arises. Thismeansthatcountriesmaycareabouthowtheirtradingpartners regulate the open access problem, but onlybecause of the trade effects that such choices couldimply.Iftherearenoinstitutionstofacilitateinternationalcooperation,governmentswouldefficientlyregulatetheopenaccessproblembutwouldhaveanincentivetosetinefficientlyhightraderestrictions.Thereasonforthisis that the only inefficiency associated with unilateralpolicychoicesderivesfromthedesiretoobtainaterms-of-tradegainattheexpenseoftradingpartners.Astheopen access is a purely domestic problem, thegovernmenthasnoincentivetounder(orover)-regulatethenaturalresourcesector.

Thesituationisdifferentwhencountriesnegotiateovertariffs, but unilaterally set domestic policies. In thiscase, once tariffs have been committed in a tradeagreement,governmentsmay facean incentive tosetan inefficient domestic regulation. Intuitively, tradeliberalizationmaychangetheoptimallevelofdomesticregulation,butgovernmentsnowunderstandthat–withtheirtariffbound(i.e.withafirmcommitmenttoatariffceiling)–achangeintheregulatorypolicymayaffectthe market access granted to trading partners. Twosituationscanemerge,asexplainedbelow.


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(i) Natural resources regulation as an obstacle to trade?

If domestic regulations affect market access, tradepolicycommitmentsmay induceagovernmenttoalteritsregulatorystancetoreducemarketaccessgrantedto trading partners.60 For example, the removal of arestrictive domestic regulation (e.g. the weakening ofminingregulationsaimedatpreservingtheenvironment,anextensionof thefishingseason inan internal lake)can confer a cost advantage to the import-competingsector over foreign producers, and hence lower thetradingpartner’saccessintothedomesticmarket.

Bagwell and Staiger (2001a) show that, from atheoretical point of view, including a “non-violation”clause(suchastheoneinArticleXXIIIofGATT)inthetradeagreementmayaddressthisproblem.Theabilityof a trading partner to bring a complaint to the WTOeven if the change in domestic regulation does notviolateWTOruleskeepsinchecktheincentivetomaketheregulation lessstringent.This institutionalsolutionallows WTO members to achieve the efficientcombination of trade and domestic policies whenevergovernments have the incentive to use the domesticregulationtoundothemarketaccessgrantedtotradingpartnersthroughatariffreduction.

However,asobservedbyStaigerandSykes(2009),inpractice only three non-violation claims have beensuccessfulinthehistoryoftheGATT/WTOsystemandnoneof those involveddomestic regulation. InStaigerandSykes’view, “thereasoningofboth thepanelandthe Appellate Body in EC – Asbestos casts seriousdoubt on the prospect of successful non-violationclaimsrelatingtodomesticregulationinthefuture”.

(ii) Trade rules as an obstacle to natural resource conservation?

Withtradepolicycommitmentsrestrictingtheirmarginof manoeuvre, policy-makers may face weakerincentives to enact domestic regulations that grantmore(andnotless)marketaccesstotradingpartners.Assume,forinstance,thatthepriceofanaturalresourceattracts increased entry into the natural resourcessector and exacerbates the open access problem. Inthis case, the efficient domestic policy would be torestrictaccesstotheresource(forinstance,moveintoasystemofstricterharvestquotas),butthegovernmentmaybereluctanttodosoasthispolicywouldincreasethemarketaccessofthetradingpartnertothedetrimentoftheimport-competingsector.

A second example of this type of situation is theintroductionofanormforan“environmentally-friendly”extraction or harvesting method (i.e. a method thatreduces damage to the environment). If the normimplied an increase in production costs for domesticfirms, policy-makers are again caught in the dilemmabetweenimprovingnaturalresourcesmanagementandworsening the competitiveness of import-competingproducers.

BagwellandStaiger(2001a)arguethatthis incentiveproblemwouldbesolvediftraderulesgrantedtherightto governments to choose the mix of domestic andtrade policies that stabilizes their market accesscommitments with trading partners. The additionalflexibilityprovidedbythiswouldensuretheadoptionofefficienttradeanddomesticpolicy,asthegovernmentcould change domestic regulations without worryingabout the resulting market access implications.Following the logic of the examples above, thegovernment could introduce a system of stricterharvest quotas or a norm for clean extraction/harvesting methods and increase its tariff so as tomaintain the same level of market access in theresourcessector.

As discussed in sub-section E.1, the ability ofgovernments to combine natural resourcesmanagementandtrademeasuresassuggestedabovemaybelimitedbythenon-discriminationrules(ArticlesI and III of the GATT). Restricting access to thedomestic market for foreign producers employing anenvironmentally unfriendly process and productionmethods (PPMs) could be justified on the basis thatgoods produced with different PPMs are not “likeproducts”,butthisissueisnotsettled.However,evenifaregulationis,onthefaceofit,contrarytoArticlesIorIII of the GATT, WTO rules provide some flexibilitythroughGATTArticleXXtoaddressconservationandenvironmental problems associated with naturalresourcesmanagement.

Aspreviouslynoted,ArticleXXallowsWTOmembersto impose otherwise inconsistent trade measures ifthey are related to the conservation of exhaustiblenatural resources (Article XX(g)) or if they arenecessary to protect human, animal or plant life orhealth(ArticleXX(b)).Somemightarguethatsincethemeasurethatdirectlyrelatestotheconservationoftheresourceisthenewregulation,thetrademeasuremaynotbecoveredbyArticleXX.Othersmightpointtothedecision inBrazil - Retreaded Tyreswhichstated thatthe regulation mix as a whole should be examinedratherthantheregulationalone.61

(d) Internationalregulation

While the management of some natural resources inone country may not directly affect the welfare ofcitizenslivinginothercountries(or,moreprecisely,onlyaffects themthrough its tradeeffects), inmanycasesdomestic regulation – or the lack of it – has spillovereffects that cross national borders. Striking examplesarepoorlydefinedpropertyrightsthatleadtotheover-exploitation of a natural resource shared by differentcountries(e.g.fish)orwhichaggravatesglobalwarming(e.g. forests). When international externalities areinvolved, natural resourcesare “global commons”. It isclearlynotpossible toreachefficientpolicyoutcomeswith internationalnegotiationsover tradepolicyalone.This is because unilateral policy choices createinefficienciesthathavenothingtodowiththoserelatingto terms-of-trademanipulation.Global commonsneed


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efficientregulationand,becauseofthespillovereffectsofnational choices,efficiencycanonlybeachieved ifsuch regulation is entrenched in an internationalagreement.

Water provides an interesting example of possibleinteractions between international agreements onnaturalresourcesandtradeagreements.Openingtradeinwater-intensiveproductsmaysavewaterifproductsareexportedbycountrieswithhighwaterproductivitytocountrieswithlowwaterproductivity.However,tradein“virtual”watermayalsoacceleratedepletionofwaterstocksifthesocialandenvironmentalcostsassociatedwithwaterusearenotaccountedforinthepricepaidbyconsumersinimportingcountries(seeBox4).

Tradeinagriculturalproductsisofparticularrelevance,given that 85 per cent of global water consumptionoccurs in agricultural production and water used inagricultural production is typically under-priced(HoekstraandChapagain,2008a).Economicanalysissuggests that the first-best policy is to ensure thecorrectpricingofwater.Thiscouldbefacilitatedbyaninternational treatyonproperwaterpricing (Hoekstra,2008b).

Global fisheries constitute another illustration of theproblem. Evidence suggests that the vast majority offisheries are either open access or poorly regulated.Assigningpropertyrightsmaynotbeenoughtoreducetheover-exploitationoftheresource:onecountrydoesnothavetheunilateralincentivetocontrolitsharvestifother countries do not enact effective controls at thesametime.Countriesconcernedwithmarinebiodiversityand the global impact of the over-exploitation offisheriesmayenvisagedifferentmeasurestoconserveover-exploited fish species.62 One approach is tonegotiate multilateral agreements regulating fisheries.TheUnitedNationsFishStocksAgreement(1995),forinstance, provides a framework for the conservationand management of highly migratory and fugitive fishstocks in international waters regulated by regionalfisheries management organizations (RFMOs). NineRFMOsareinexistencetoday.

(i) Problem of “issue linkage”

Two main reasons for linking trade with non-tradeinternationalissueshavebeenidentifiedbyeconomists.The first is the “grand bargain” approach, while thesecond is the “enforcement” argument, as explainedbelow.

According to the first approach, “issue linkage” (i.e.making the agreement on one issue dependent onprogress inanother issue)canbeusedasameansofachieving mutually welfare-enhancing cooperation(Abrego et al., 2001; Cesar and de Zewe, 1996).Consider an issue X on which cooperation benefitscountry A but hurts B and an issue Y on whichcooperationbenefitscountryBbuthurtsA.Linkingthetwo issues may facilitate a global deal. For instance,trade concessions can be granted on condition that

thereiscooperationinpreventingover-harvestingofanatural resource such as forestry. Therefore, a grandbargainmaybemoreefficientthantwoseparatedeals.While this argument has its obvious merits, it shouldalso be noted that agreements may become moredifficultas thenumberof issueson the tableand thecomplexityofthebargainincrease.

AsobservedinBox28,enforcementproblemsareakeyissue for some international agreements as asupranationalauthority topunishviolators isgenerallyabsent. For this reason, some economists haveinvestigatedthepossibilityoflinkingdifferentissuesasa means of enforcing cooperation (Spagnolo, 1999;Limao, 2005). For instance, trade sanctions couldreducetheenforcementprobleminagreementsaimedat preserving natural resources. Critics of theenforcement approach raise the concern that linkagemayworkagainsttradeopeningefforts.Forthisreason,it is important to understand under what conditionslinkingdifferentissuesmayresultingreatercooperation,witheachpolicymovinginthedesireddirection.(Limao,2005)arguesthatissuelinkageleadstogainsinboththetradeandthenon-tradeareawhentheinternationalexternalities are substantial. This would be true, forinstance,whenmanagingglobalcommons.Inthiscase,linkingtradeandnaturalresourceissueswouldimprovecooperationintradeandresourcemanagement.

(ii) Problem of coherence

Another issue is consistency among differentinternational agreements. As explained in sub-section2, the WTO is part of a much broader framework ofinternationalcooperationandmanyaspectsofnaturalresources are regulated by international rules outsidethe WTO. This raises the challenge of maintainingcoherencebetweentheseotherinternationalrulesandthe rules of the multilateral trading system. Thechallenge becomes greater as existing internationalregimes continue to develop and new regimes arecreated.

While coordination at the domestic level is crucial toensure consistency among international agreements,actions at the international level can also help reducetheriskof incoherence.63Coherencebetweenregimesis sometimes an explicit objective. Good examples ofthisarethecommitmentstopursuecoherencebetweentradeandenvironmentalmeasuresreflectedinthe1994WTODecisiononTradeandEnvironmentandthose inthe Rio Declaration on Environment and Development(see sub-section 2). Increased cooperation betweeninternational organizations can also help promotecoherence. Trade and environment again provides anexample. As of April 2009, 25 intergovernmentalorganizationshadobserverstatusintheWTOCommitteeonTradeandEnvironment,includingtheUnitedNationsEnvironmentProgramme(UNEP)andseveralmultilateralenvironmentalagreements,suchastheUnitedNationsFrameworkConventiononClimateChange(UNFCCC),CITES and the Convention on Biological Diversity(WT/CTE/INF/6/Rev.5).


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ThereisacooperationarrangementbetweentheWTOandUNEPSecretariats.TheWTOhasobserverstatusin the UNEP Governing Council, and the WTOSecretariat regularly attends the main meetings ofmultilateral environmental agreements which containtrade-related measures. Furthermore, the WTO andUNEP recently produced a joint report on trade andclimatechange,WTO-UNEP(2009).Existingformsofcooperation and information exchanges between theWTO,UNEPandmultilateralenvironmentalagreementsaredescribedindetailinWTOdocumentTN/TE/S/2/Rev.2. This was prepared by the WTO Secretariat forthe negotiations that ministers agreed to launch inDohaon“proceduresforregularinformationexchangebetween MEA Secretariats and the relevant WTOcommittees,andthecriteriaforthegrantingofobserverstatus”.64

The decentralized nature of the international systemand the co-existence of many international regimesmeans that these sometimes overlap. Few todayconsiderthattheWTOisaclosedregimeimpermeableto other international rules, although there is debateabouttheextentofitspermeabilityandthemechanismsoftransmission.WTOadjudicatorshavelookedatotherinternationalagreementsforguidancewheninterpretingprovisionsof theWTOagreements,butwhetherotherinternational rules might prevail over WTO rights andobligationsinsomecircumstancesremainsacontestedissue.

WTOmemberscanjointlywaivetheirobligationsundertheWTOagreementsifthereisthepotentialforconflictwith measures taken under another internationalarrangement, as they did in relation to the Kimberleyprocess,asdescribedabove.TheUNInternationalLawCommission has also described various tools that areavailable in international law to resolve instances ofpotentialconflict.SomeWTOmembers,however,seeaneedtoclarify therelationshipbetweentheWTOandcertainotherinternationalregimes.Asaconsequence,at the 2001 Doha Ministerial Conference, WTOmembers agreed to negotiate on the relationshipbetween WTO rules and multilateral environmentalagreements, particularly those that contain “specifictradeobligations”.Membershaveagreedthatthescopeofthesenegotiationswouldbelimitedtotheapplicabilityof WTO rules to members that have signed themultilateral environmental agreement underconsideration.

(e) Investments:The“hold-up”problem

Tradepolicyinnaturalresourcesectorsisnotjustaboutthemarketfortheresourceitself,butisalsoaboutthemarket for the licences to explore and extract theresource that are granted by the governments ofresource-richcountriestointernationalinvestors.Thesecontracts imply a long-run relationship as explorationand extraction generally entail large initial sunk costs(seesubsectionB.3).Also,thecontractsoftenspecifyaspects of the fiscal regime that determine thedistribution of rent between parties and shape

incentivesforfutureexplorationanddevelopment.Thedesign of these contractual arrangements is complexbecause they have to meet multiple objectives. Thesituationisfurthercomplicatedbythevolatilityofthesesectorsanduncertaintyaboutsuchmattersasgeologyand technological developments as well as by thevarying levels of information available to differentpartiestoacontract.

The host government is not only concerned with theexpected value of the rent, but also with the widerbenefits that the resource exploitation brings to theeconomy. Moreover, where the resource revenuedominates the economy, actions in this sector arecentraltothedevelopmentstrategyofthecountry(seeSectionC.4).Internationalinvestors,ontheotherhand,maybeconcernedthat the largeupfrontcapitalcostshave little or no alternative-use value and can takeyearstoberecovered.

Thistypeofcontractualsituationleavespartiesopentowhateconomistscalla“hold-up”problem(i.e.asituationwherethecontractualagreementbetweentwopartiesisaffectedbyconcernsthatonepartywillgainunduebargaining power once investment by the other partyhasbeencommitted).Specifically,hold-upisacredibilityproblemthatemergesininvestmentrelationshipssuchas the one described above. The government hasdifficulty incommittingcrediblynot to renegotiate theterms of the contract. It might see a need to changepolicies,suchas thetaxregime, thatwouldaffect theprofits of the investing company. Anticipating this,investorsaredeterredbytheriskofrenegotiation.

The hold-up problem has three main effects: hostgovernments may receive a lower initial payment,contractfirmsarelikelytoinvestlessthantheefficientlevel, and the extraction rate may be faster than theoptimum as firms try to recoup the initial investmentmore quickly. The hold-up problem may partly explainthe under-exploration, and possibly the unsustainableextraction,ofoil,gasandminerals insomeregionsoftheworld.

The fundamental issue is one of time inconsistencyfacedbythegovernmentoftheresource-richeconomyabout the course of its future actions. This creates amarketfailure,thecostofwhichispredominantlybornebythehostcountry,asinternationalinvestorsanticipatetheproblemand,hence,discountthecostofthisfailure(e.g.byinvestingless).Therefore,ifthehostgovernmentcould lock in the course of its future actions in anappropriate institutionalmechanism, thiswouldmostlybenefittheresource-richeconomy.

Asthesourceoftheproblemistheunlimitedsovereigntyofthehostcountry,itshouldnotcomeasasurprisethatthe solution to the credibility problem calls forconstraints on governments’ behaviour. Very much inthe spirit of the commitment approach to tradeagreements discussed in Box 28, host countrygovernments often agree in the context of bilateralinvestmenttreaties(BITs)tolimittheirscopeofactionandtofaceconsequencesiftheymodifytheconditions


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ofanagreement.Inrecentyears,BITshavebecomethedominant international mechanism through whichinvestmentsareprotected(seesub-sectionE.2).

BITsaregenerallyperceivedtobeefficiency-enhancing,but two sources of criticism have emerged in therelevantliterature.First,differencesinpoweraremorepronouncedinabilateralthaninamultilateralsystem.Hence, even where developing countries are able tomake credible promises to potential foreign investors,their overall gains may be relatively modest (Guzman,1998).Second, ifthearbitrationmechanismsprovidedintheagreementsarenoteffective,thehold-upproblemwill only be partially resolved (Collier and Venables,2008).

Some authors have proposed using the WTO and itsenforcement mechanism to enable governments tocommit themselves to resource extraction andinvestment agreements in natural resource sectors(Collier and Venables, 2008). Quite apart from thefundamental question as to whether WTO memberswould view such an idea favourably, there are twoimportantlimitationstosuchaproposal.First,theWTOdisputesettlementsystemisonlyopentoWTOmembersandprivatepartiescannotinitiateadispute.Thesecondconcerns the remedy. The WTO dispute settlementsystemonlyprovidesforprospectivereliefanddoesnotprovideanopportunity toobtaincompensation foranydamages. By contrast, foreign investors can obtainmonetary reparation for damages suffered ininternational investment arbitration, which can includelostprofits(DolzerandSchreuer,2008).

Asnotedearlier,theWTOWorkingGrouponTradeandInvestment was established in 1996. Discussions ontradeandinvestmentwereinitiallypartofthemandateoftheDohaRoundbutin2004,WTOmembersdecidedtoexcludetradeandinvestmentfromthenegotiations.65

(f) Competition

ForreasonsdiscussedinSectionC,productionand/orexport of natural resources are often concentratedamong a small number of firms and imperfectcompetition often prevails in those markets. TheeconomicanalysisinSectionCalsoidentifiedanumberofeffectsof imperfectcompetitionontradeinnaturalresources. First, it was shown that a monopolist or aresourcecartelmayleadtoinefficient(i.e.slowerthanoptimal) extraction path of non-renewable naturalresources.66 In thesituationof anexportmonopolyorcartel,thisimpliesaninefficientpathoftradevolumes.A second problem discussed in Section C is thatthrough theallocationofexportorproductionquotas,resourcecartelsmaydeterminetradepatternsinawaythat is unrelated to comparative advantage. A thirdproblem, only briefly touched upon in Section B.3, isthat vertically integrated firms (or cartels) mayunderminemarketaccessforforeignsuppliers.

Governments may face different incentives and adoptdifferentattitudeswithregardtoimperfectcompetition

innaturalresourcesectors.Insomecases,governmentsof resource-rich countries are closely involved incollusiveexportarrangements.Inothercases,theymaysimply allow collusive practices among exporters aslong as they do not affect domestic markets. Thegovernmentsofexportingcountries, forexample,mayhave little incentiveto imposedisciplinesonexportingfirmsexercisingtheirmarketpowerinforeignmarkets.This is because monopoly rents accrue to the homecountrywhileconsumerlossduetohighpricesismostlyfelt in the foreign (importing) countries. As for thegovernmentsofresource-importingcountries,theymayrespondtocollusiveormonopolisticpracticeseitherbyusingtradepolicy,asdiscussed inSectionD,orwhenexport cartels involve private firms, by prosecutingcollusivebehaviour.67

From the perspective of trade cooperation andregulation, certain government behaviour vis-à-viscollusivepracticesmayhavecross-borderexternalities.This would be the case, for example, when thegovernments of exporting countries fail to imposedisciplines on exporting firms exercising their marketpower in foreign markets. As already mentioned, thismaywellleadforeigngovernmentstousetradepolicyinanattempttoshiftrents internationallyand,therefore,constitutes a welfare-reducing non-cooperativesituation. This would be an argument in favour ofnegotiating disciplines on competition, possibly inexchangefor tariffconcessions.Note,however, thatasecond-best argument can be made that slowerextraction may offset negative environmental impact.Moreover, insomecasesmonopolies in thesesectorsmayresultfromnaturalmonopolyconditionsratherthana lack of competition. As with investment, WTOmembersdecided in2004 toexcludenegotiationsoncompetitionfromtheDohaRoundnegotiations.

(g) Transitandtransportation

Inrecentyears,anumberofissuesrelatingtothetransitof natural resources – in particular gas – have beendiscussed in theWTO.ArticleVof theGATTrequiresWTO members to ensure freedom of transit throughtheir territory. Freedom of transit ensures that thirdcountriesdonotimpedetradeandallowsexporterstominimizetransportcosts.However,asexplainedinsub-sectionE.1,viewsdifferregardingthescopeofArticleV.OneissuethathasbeendiscussediswhetherArticleVappliesonly to “moving”modesof transportoralso totransport via fixed infrastructures, such as pipelines.Should the former view prevail, this would mean thatfreedomoftransitwouldnotbeguaranteedfornaturalresourcesbeingtransportedbypipeline.

The importance of transit rules for trade in energygoods,inparticularoilandgas,hascontributedtoraisethe profile of GATT Article V in the WTO. The DohaRound negotiations on trade facilitation provide anopportunity to clarify and strengthen the disciplinescontained in this provision. It has been proposed thatArticle V should be made to apply explicitly to fixedinfrastructure(suchaspipelinesandgrids).Thiswould


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ensure that enterpriseswith special privilegescomplywithtransitdisciplines.Ithasalsobeensuggestedthatageneralnational treatmentobligationbeestablishedfor goods in transit (Cossy, 2009). Other proposalsrelate to disciplines on fees and charges, formalitiesand documentation requirements, and regional transitagreements (Marceau,2010b).ThescopeofArticleVhasalsobeendiscussedinWTOaccessionnegotiations.As a result, several WTO members which recentlyaccededtotheWTOhaveconfirmedacommitment intheirAccessionProtocoltocomplywithWTOobligationsontransitand,inoneinstance,aspecificreferencehasbeenmadetoenergy.

The General Agreement on Trade in Services (GATS)covers energy transportation services, including:i) services incidental to energy distribution, whichincludestransmissionanddistributionservicesonafeeorcontractbasisofelectricity,gaseousfuelsandsteamand hot water; and ii) transportation via pipeline ofcrudeorrefinedpetroleumandpetroleumproductsandof natural gas. While all WTO members must grantmost-favoured-nationtreatmenttoservicesandservicesuppliers operating in these two sectors, few haveundertaken GATS specific commitments. Only 18members’ schedules record commitments on servicesincidental to energy distribution and 12 on pipelinetransportation. These commitments have beenundertakenmainlybycountrieswhichhaveaccededtotheWTOoverthelasttenyears.

Energy transportationservicesareon thesidelinesofthe services market access negotiations in the DohaRound, presumably because they remain a sensitivetopic for most WTO members. The reluctance toundertake GATS commitments in these two sectorscontrasts with the interest expressed by variousmembersinnegotiatingcommitmentsonotherenergy-related services, in particular exploration, mining,engineeringandconsulting.

GATSspecificcommitmentscontributetopredictabilityandstability for foreignservicesuppliesandsuppliersregarding conditions of access to markets. However,with respect to energy transportation networks, theymaynotbesufficienttoguaranteeeffectiveconditionsfor competition and access. The energy sector hastraditionally been characterized by large verticallyintegrated state-owned monopolies which managetransmission and distribution networks. Pipelines inparticular entail high fixed costs and long lead times,whichmakestheirduplicationuneconomical.Theyarethusofteninthehandsofamonopolyprovider,whetherpublicorprivate.68Thisinturncreatesahighbarriertoentryforpotentialparticipants.

GATS Article VIII imposes some disciplines onmonopolies and exclusive suppliers, but these areinsufficient to ensure fair and equitable access toenergy networks. This is the reason why some WTOmembers proposed additional disciplines for energyservices modelled on the Reference Paper fortelecommunication services.69 Such new disciplinescould include provisions such as non-discriminatory

third-party access70 to, and interconnection with,networks, gridsandotheressential infrastructure, theestablishment of a regulator independent of anysupplier, and requirements preventing certain anti-competitivepracticesforenergyservicesingeneral.

It may be noted that a reference paper is not aprerequisite for undertaking additional commitmentsunder Article XVIII of the GATS. One WTO member,Ukraine, has already undertaken an additionalcommitmentregardingpipelinetransportationservices.InitsGATSschedule,Ukraine“commitsitselftoprovidefull transparency in the formulation, adoption andapplicationofmeasuresaffectingaccesstoandtradeinservicesofpipelinetransportation.Ukraineundertakesto ensure adherence to the principles of non-discriminatorytreatmentinaccesstoanduseofpipelinenetworks under its jurisdiction, within the technicalcapacitiesofthesenetworks,withregardtotheorigin,destination or ownership of the product transported,without imposinganyunjustifieddelays, restrictionsorcharges,aswellaswithoutdiscriminatorypricingbasedonthedifferencesinorigin,destinationorownership.”71

(h) Drawingthelinebetweengoodsandservices

Trade in goods and trade in services are subject todifferentdisciplines in theWTO,anddetermining thatan activity amounts to the supply of a service is aprerequisite for the application of the GATS. Thisdistinction isnotalwayseasy tomakewith respect toactivities surrounding the exploitation and processingofnaturalresources.

It is acknowledged in theWTO that theproductionofgoodsonacompany’sownaccount–thatis,performedbyacompanywhichownstherawmaterialitprocesses–isnotaservicecoveredbytheGATS.Thequestionislessclearwithrespecttoproductiononafeeorcontractbasis, when a company produces goods owned byothers. This issue arises in the manufacturing sector(textiles, automotive industry, for example), whereprocessingorassemblingmaterialownedbyothers iscommon. It might also be relevant to certain naturalresource processing activities, such as oil refining,shouldoneconsiderthattheseactivitiesamounttotheproductionofagood(seenextparagraph).Thequestionwhetherproductiononafeeorcontractbasisshouldbetreatedasaservice,andthusfallundertheGATS,wasdiscussed inconclusively by WTO members severalyearsago.

This leadsus to the relatedquestionofdistinguishingbetween production as such and services related toproduction.Asnotedabove, theGATScoversaseriesofservicesrelatedtotheexploitationandprocessingofnatural resources, such as services incidental to thefollowing sectors: forestry, fishing, mining andmanufacturing. These activities do not represent theproductionprocessasawhole,buttheyareanintegralandessentialpartofit.TheyfallundertheGATSwhentheyareperformedonafeeorcontractbasis.


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Incertainsituations,however,itmaybedifficulttodrawthe line between production and activities related toproduction, especially when the production processconsistsofachainof inter-relatedactivities.Considerthe two following examples taken from the energysector. WTO members view drilling, which is animportant contribution to the extraction of petroleum,as a “service incidental to mining”. Thus, drilling isclassifiedasaserviceifperformedonafeeorcontractbasisbyaseparateentity,butconstitutesvalueaddedto the extracted good if it is performed by the entitywhich owns the raw material (the oil). There arediverging views among WTO members regardingactivities suchasoil refining, gas liquefactionand re-gasification.Whilesomeviewthemasservices,othersconsiderthattheyamounttotheproductionofagoodbecause they entail a certain transformation of theproduct.72

In practice, itmaynot alwaysbeeasy to categorize agiven activity as a service or as the production of agood. The GATS offers no guidance on this issuebecauseitdoesnotdefineaservice.Thecategorizationof agivenactivity as a serviceor theproductionof agood can clearly have important consequencesregarding WTO disciplines. For instance, should oilrefiningbeconsideredaservice, itwouldbenefitfrombasic investment protection under the GATS throughmode3.If,ontheotherhand,oilrefiningisconsideredastheproductionofagood, itfallsunderAnnexIAoftheWTOAgreement,whichdoesnotprotectinvestmentper se.73

(i) Intellectual property rights and natural resources conservation

Section C emphasized that technology can have anambiguous effect on natural resources conservation.Innovation can lead to resource-saving inventions,facilitate the discovery of alternative resources andintroduce new technologies that reduce negativeenvironmental externalities. Such innovations can beclassified as resource-friendly, as they play a positiveroleinpreventingtheexhaustionoftheresourcestockormitigatingpossiblenegativeeffectsassociatedwithtradeinnaturalresources.However,inothersituations,technological innovations can represent a curse forresource conservation. This is clearly the case wheninventionsincreasetheharvestingcapacityofanover-exploitedresource.

The development and diffusion of resource-friendlytechnologies is one of the issues addressed in thedebateregardingtheefficientprotectionofintellectualpropertyrights(IPRs).StrongIPRsencourageresearchanddevelopment(R&D)activities,enablingcompaniesto recoup their investments through the protection ofthe rightsofuseof their inventions.However, throughthe protection they afford the innovating companies,they may restrict access to key technologies forresource-richdevelopingcountries, as IPRsmay raisethecostofadoptionanddiffusionofresource-friendlytechnologies.

The efficient design of international rules on theprotectionofintellectualpropertyrightsshouldstrikeabalancebetweentheneedtoencourageinventionandinnovation and the need to disseminate usefultechnologiesasbroadlyaspossible.74NotethatstrongIPRs do not necessarily limit technological diffusion.Acemoglu and Zilibotti (2001) show that a weak IPRregime prevents technological diffusion around theworld as ill-defined IPRs in developing countriesencouragefirms inadvancedeconomies to target theneeds of their own markets, producing technologiesinappropriatefordevelopingcountries.75

Two examples may clarify how access to resource-friendly technologies by resource-rich developingcountriesmaybeimportantforconservationpurposes.Section C.3 extensively discusses the open accessproblem in renewable natural resources, such as fishandforestry,andthenegativewelfareeffectsthattradeopenness may have in the presence of this marketfailure. One important lesson that emerges from thatdiscussionisontheroleofde factopropertyrightsonthe natural resource. Recent work by Copeland andTaylor (2009) finds that the introduction of formalpropertyrightsmaynotbesufficientinaddressingopenaccess problems when governments lack adequatemonitoringcapacity.Thereasonispreciselythat,inthiscase,de facto property rightson thenatural resourceare weak because detecting potential property rightviolationsisdifficult(and,hence,formalpropertyrightsareoflittlevalue).Thediffusionofsatellitetechnologiesmayfacilitatethemonitoringofforests,thuslimitingtheopportunitiesforfraudandillegallogging,whichwouldreinforceaneffectivepropertyrightsregime.

Asecondexamplewhichhasemergedinrecentstudies,such as in Brock, Kinzig and Perrings (2007), is theproblem of invasive plant species that leads tointernational trade creating a negative environmentalexternality. In this case, scientific innovations such as“barcoding”ofDNAplantspecies(amethodforplantidentification)mighteventuallypavethewaytoaplant“scanner” that could be used by customs officers toeasily identify potentially invasive species. While thegrant and enforcement of intellectual property rightscreates a legal environment that contributes to thesetechnologicalbreakthroughs,theinternationaldiffusionofthesetechnologiesrepresentsanimportantelementin reconciling international trade and the properconservationofnaturalresources.

Theessentialobjectiveofthegrantandenforcementofintellectualpropertyrights,assetoutintheAgreementon Trade-Related Aspects of Intellectual PropertyRights(TRIPS),isbothtopromotenecessaryinnovationand facilitate the diffusion of technology, balancinglegitimate interests in a socially beneficial manner.Article7oftheTRIPSAgreementstatesthatintellectualpropertyprotectionshould“contributetothepromotionof technological innovation and to the transfer anddisseminationoftechnology,tothemutualadvantageofproducersandusersoftechnologicalknowledgeandina manner conducive to social and economic welfare,and to a balance of rights and obligations”. While the


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TRIPS Agreement sets out general standards for theprotectionof intellectualpropertyundernational laws,achieving this “balance” in practice is a matter fordomesticpolicy-makersandlegislators.

4. Conclusions

This section of the Report has focused on variousaspectsofinternationalcooperationtomanagetradeinnaturalresources.Muchbutnotalloftheemphasishasbeenon theWTO’s role in thisarea.Somespacehasalsobeendevotedtoadiscussionofotherinternationalagreementsandinitiativesrelatingtonaturalresources.

The WTO’s legal and institutional framework hascontributedtotheexpansionofglobal trade innaturalresources. The relevance of WTO rules has beendiscussedinconsiderabledetail,focusingonanumberofdistinctive features thathavebeenusedas themesthroughout the report. These are the unevengeographical distribution of natural resources, theirexhaustibility, the environmental externalitiesassociated with their use, their dominance withinnational economies, and the volatility of markets fortheseproducts.

An important conclusion regarding the reach of therules is that the WTO generally does not regulatenatural resources before they are extracted orharvested.However,incertaininstancestherulesmayhave implications for an unextracted or unharvestednatural resource. Standing timber provided by agovernment for less than adequate remuneration wasconsideredasubsidyundertheAgreementonSubsidiesandCountervailingMeasures.Moreover,theexploration,extraction and distribution of natural resources mayinvolve services activities that fall within the ambit ofthe General Agreement on Trade in Services (GATS).TheAgreementonTrade-RelatedAspectsofIntellectualProperty Rights provides a legal basis to promoteinnovationandthetransferoftechnology,bothofwhichare particularly relevant to natural resources as newtechnologiesopenfrontiersforexplorationandpromotemoreefficientuseofnaturalresources.

WTO rules were not drafted specifically to regulateinternational trade in natural resources. This hasarguablyledinsomecasestoregulatorygaps,oratthevery least to a lack of clarity about the preciseapplicabilityoftherulesintheparticularcircumstancesthatcharacterizenatural resources trade.Thissectionhashighlightedanumberofthesechallenges.

One challenge is to manage the regulatory failuresimplicit in beggar-thy-neighbour policies. A keyeconomic rationale of WTO rules is to inducegovernmentstotakeintoaccountthenegativeeffectsthat their unilateral actions may have on tradingpartners,asuncooperativebehaviourleadstoawelfarelossfromthepointofviewofworldwelfare.Taxesandquantitativerestrictionsontradecanhavebeggar-thy-neighbourcharacteristics.AnagreementamongWTOmembers to make binding commitments on export

taxes could be mutually beneficial, although from theperspectiveofindividualgovernmentsthismaydependonwhytheyareusingsuchmeasures.Aswithalltradenegotiations, trade-offs would be possible on a widercanvas,andnotonlyamongmembers thatapplysuchmeasures. Even within the confines of trade taxes, apotential trade-off would be export taxes on naturalresourcesagainstimporttariffsonhighervalue-addedproducts, where these are effectively offsettingbecauseoftariffescalationinmanufacturingprocesses.

Another challenge arises from the need to ensure thesustainability of natural resources. This may require anexpansionofsomeoftheflexibilitiesprovidedunderthecurrentrules.Forinstance,certainsubsidiescansecurebetter management of a resource or of environmentalexternalitiesassociatedwithitsextractionanduse.OtherareaswhereexistingWTOrulesinteractwithconservationpoliciesincludedomesticregulationsandthedesignandimplementationofintellectualpropertyrights.

A further issue identified in the study arises whencertain domestic and trade measures are subject todifferent disciplines, even though they have the sameeconomicimpact.Giventhegeographicalconcentrationofnaturalresources–andhencethefactthatresource-scarcecountriesdependon imports formuchof theirsupplyofnaturalresourcesandresource-richcountriesexportnearlyall theirproduction–casesarisewheretrade measures are close substitutes for domesticregulatory measures. In these cases, regulating thetrademeasureisanecessarybutinsufficientconditionto achieve undistorted trade in natural resources. Forinstance, a consumption tax in an importing countrymay be equivalent to an import tariff. A productionrestriction in a resource-rich country may have theequivalent effect to anexport restriction.Similarly, anexport tax has effects comparable to a domesticsubsidyintermsoftheconsumptionoftheresource.Inthepresenceofsuchequivalence,thereisnoeconomicbasisforregulatingthesepoliciesdifferently.

Improving the regulation of beggar-thy-self policies isanotherchallenge.Ameasuremightbebeneficialintheshort-run, possibly for political economy reasons, butcarrysignificantlong-runcosts.Thiswouldbethecase,forexample,withasubsidyprovidedinconnectionwiththeexploitationofaresourcethathasanopenaccessproblem. Another example is that in the absence ofinternational rules on investment, resource-richcountries may be exposed to the “hold-up” problem.Improved investment disciplines could help thesecountriesimprovethecredibilityoftheirpoliciestowardsinvestments as they underwrite a commitment toagreed-uponrules.

Althoughtradeinmostofthenaturalresourcescoveredbythisreportfacelimitedtradebarriers,tradeflowsinsome sectors still face some obstacles. Freedom oftransitmaybeacaseinpoint.AnarrowunderstandingofWTOobligationsinthisareacouldexcludefromtheirscope transport via fixed infrastructure, such aspipelines, and create regulatory uncertainty. Thisuncertainty can have consequences for access to


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suppliesofresources.AccessiontotheWTOofseveralsuppliers of traditional energy products – currentlyundernegotiation–willreduceuncertaintybyprovidingaregulatoryframeworkforasignificantshareofnaturalresourcestrade.

Finally,twomainissueshavebeendiscussedinrelationto the clarity and coherence of arrangements forinternational cooperation. The first of these relates tothe border or overlap between different agreementswithin the WTO system. With respect to activitiessurroundingtheexploitationandprocessingofnatural

resourcesitisnotalwaysclearwhethertheGATTortheGATSisapplicable.Thelackofclarityreducescertainty.The second issue concerns the relationship betweenthe WTO and other international agreements. Manyaspects of natural resources are regulated byinternational rulesoutside theWTO.Acontinuingandgrowing reliance on natural resources in the worldeconomy,theexhaustibilityofthoseresources,andtheneed to mitigate the negative externalities relating totheirexploitationandconsumptionarechallengesthatcanonlybeeffectivelyconfrontedthroughinternationalcooperationandbetterglobalgovernance.

Endnotes1 NotethatbeforetheSecondWorldWar,primary

commoditiesconsistedmainlyofagriculturalproductsandproblemsrelatingtocommoditypricedeclinesandvolatilityaffectedbothdevelopedanddevelopingcountries(manyofthemstillcolonies).Atthattime,therewasnospecificdeveloping-countryproblem.

2 DuringtheUruguayRoundnegotiations,attemptsweremadebysomeparticipantstotightenmultilateralrulestodealwithcertainpoliciesrelatingtopetroleumandpetroleumproducts.TheseinitiativesweretakenlargelyinthecontextoftheNegotiatingGrouponNaturalResource-BasedProducts(Stewart,1993).

3 ArticleXXVIIIoftheGATTprovidesamechanismforaWTOmembertomodifyitsscheduleofcommitmentsandraiseatariffabovetheboundlevel.Suchmembermayberequiredtooffercompensationtoothermembers.ArticleXIXoftheGATTandtheAgreementonSafeguardsprovideamechanismtoraisetariffstemporarilywhereanincreaseinimportscausesorthreatenstocauseseriousinjurytoadomesticindustry.

4 SeetheUnderstandingontheInterpretationofArticleII:1(b)oftheGATT1994.Thisprohibitionexcludeschangesequivalenttoaninternaltax,anti-dumpingandcountervailingduties,andcustomsfeescommensuratewiththecostofservicesrendered.

5 Anotherexception,inArticleXI:2(c)ofGATT,allowstheapplicationofimportrestrictionsonanyagriculturalorfisheriesproductnecessarytoenforcegovernmentalmeasureswhichoperate,inter alia,torestrictquantitiesofthe“like”domesticproductthatmaybemarketed,ortoremovetemporarysurplusesofthelikedomesticproducts.AgriculturalproductsarenowsubjecttothedisciplinesoftheAgreementonAgriculture.FishandfishproductsareexcludedfromtheAgreementonAgricultureandthusthisprovisionmaybeofcontinuedrelevanceforsuchproducts.

6 ThisobligationdoesnotextendtomorefavourabletreatmentthatisgrantedunderafreetradeareaorcustomsunionthatisconsistentwithArticleXXIVoftheGATT,orunderapreferentialtradearrangementadoptedpursuanttotheEnablingClause.

7 SeeG/STR/N/3/BRAandG/STR/N/7/VEN.

8 ArticleXX(i)isdiscussedbelow inthecontextoftheproblemofvolatility.

9 Thislanguagecamefromthe1987PanelReportinHerring and Salmon.AlthoughtheAppellateBodyproceededinitsanalysisonthebasisofthisinterpretation,itcautionedthatthephrase“isnotitselftreatylanguageandwasnotdesignedasasimplelitmustestforinclusionorexclusionfromArticleXX(g)”(AppellateBodyReport,US – Gasoline,pp.18-19).

10 GATT,3dSupp.BISD230(1955).

11 Decisionof20February1970,L/3361,17S/18.

12 PassagecitedfromEPCT/A/PV/30p.22;reportatEPCT/W/245.

13 Decision on Trade in Services and the Environment,adoptedbytheCouncilforTradeinServiceson1March1995,S/L/4.

14 Report (1996) of the Committee on Trade and Environment,WT/CTE/1,paras153-158and210-211.

15 SeealsoTrade and Environment at the WTO(2004),WTO.

16 ItseemsthatthelocalshortsupplyexceptionwasalsorarelyusedundertheGATT.Whentheneedforsub-paragraph(j)wasreviewedattheSixteenthSessionin1960,theContractingPartiesnoted“thatthecontractingpartieshaveresortedtotheprovisionsofthissub-paragraphinarelativelylimitednumberofcases...”(SeeGATT Analytical Index, p.594).

17 BriefingNotes,HongKong,ChinaWTOMinisterial2005,availableathttp://www.wto.org/english/thewto_e/min05_e/brief_e/brief00_e.htm.

18 Thisapproachwasfirstarticulatedbythe1970WorkingPartyonBorderTaxAdjustments.AnumberofAppellateBodyandpanelreportshavealsofollowedthisapproach:see,forexample,AppellateBodyReport,Japan – Alcoholic Beverages,113andfootnote46.

19 ForausefuldiscussionofArticleXX(b),(d)and(g)oftheGATT,seeNotebyWTOSecretariat,GATTDisputeSettlementPracticerelatingtoGATTArticleXX(b),(d)and(g)(WT/CTE/W/203)(availableathttp://docsonline.wto.org/DDFDocuments/t/wt/cte/w203.doc).

20 SeeGATTPanelReport, Thailand – Cigarettes,para.73(“(S)mokingconstitutedaseriousrisktohumanhealthandthatconsequentlymeasuresdesignedtoreducetheconsumptionofcigarettesfellwithinthescopeofArticleXX(b)”).SeealsoPanelReport,US – Gasoline,para.6.21:“(t)hepolicytoreduceairpollutionresultingfromtheconsumptionofgasolinewasapolicywithintherangeofthoseconcerningtheprotectionofhuman,animalandplantlifeorhealthmentionedinArticleXX(b)”.

21 MarceauandWyatt(2009)notethatArticleXIVoftheGATSdoesnothaveanexceptionthatisequivalenttosub-paragraph(g)ofArticleXXoftheGATT.TheysubmitthattheAppellateBodymayhavehadthisinmindwheninterpretingsub-paragraph(b)ofArticleXXandthat“itmayhavebeeninfluencedbythepotentialforanabsurdincoherencepursuanttowhichoneenvironmentalprotectionmeasuremayendupbeingpermissibleinsofarasitimpingedontradeingoods,butnotpermissibleinsofarasitaffectedtradeinservices”.


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22 TheAppellateBodyaddedthatwhenaninvestigatingauthorityproceedsinthismanneritmustensurethatthealternativebenchmarkitusesrelatesorrefersto,orisconnectedwith,prevailingmarketconditionsinthecountryofprovision(includingprice,quality,availability,marketability,transportationandotherconditionsofpurchaseorsale),withaviewtodetermining,ultimately,whetherthegoodsatissuewereprovidedbythegovernmentforlessthanadequateremuneration(AppellateBodyReport,US – Softwood Lumber IV,para.120).

23 Protocol Amending the General Agreement on Tariffs and Trade to Introduce a Part IV on Trade and Development,BISD13S/2(1965).

24 SeveralWTOmembershaveproposedtheadoptionofatransparencymechanismforpreferentialtradearrangementssimilartothatadoptedprovisionallybytheGeneralCouncilforregionaltradeagreements(seeJob(08)103/Rev.1).

25 Jus cogensisaprincipleofinternationallawfromwhichnoderogationispermitted.Theprohibitionofgenocide,maritimepiracyandslaveryareexamplesofwhatwouldbeconsideredbytheinternationalcommunityasfallingunderthisprinciple.

26 Trade&EnvironmentReport,36;WT/CTE/W160/Rev.4.

27 Inaccordancewiththeprincipleofeffectiveness,theinterpretationofatreatyshouldnotdepriveatreatytermofmeaning.Marceau(2006)explainshowtheAppellateBodyhasusedthisprincipletoensuretheinternalcoherenceoftheWTOagreements.

28 ThereisalsoaGasExportingCountriesForum,whichhas11membersandtwoobservers.Together,theycontrolnearly70percentoftheworld’sprovenreservesofnaturalgas.

29 VictorandYueh(2010)notethedifficultiesinexpandingthemembershipoftheIEAbecauseoftherequirementthatitsmembersalsobelongtotheOECD.Theythussubmitthatthe“28-strongIEAincludesmanycountrieswithsmallandshrinkingenergyneedsbutexcludesgiantenergyconsumers,suchasChinaandIndia.”

30 PreferentialtreatmentprovidedunderregionaltradeagreementsneednotbeextendedtootherWTOmembersprovidedthattheconditionsinArticleXXIVoftheGATT(forgoods)andArticleVoftheGATS(forservices)aremet.TheEnablingClausemaybeapplicabletoagreementsbetweendevelopingcountrymembers.

31 Annex314providescertainexceptionsforMexicoinrelationtofoodstuffs.Inthecaseofenergyandbasicpetrochemicals,therelevantprovisionisArticle604.

32 ArticlesXI:2(a)andXX(g),(i)and(j)oftheGATTarediscussedaboveinsection1.

33 Article7(7)oftheECT.

34 Article13providescertainconditionsforexpropriation.Expropriationneedstobeinthepublicinterest,non-discriminatory,carriedoutunderdueprocessoflawandprompt,andadequateandeffectivecompensationneedstobepaid.Suchcompensationhastobecalculatedatthefullmarketvalueatthetimeimmediatelyprecedingtheannouncementoftheexpropriation.

35 ThebreachofindividualinvestmentcontractsbythehostcountryisconsideredaviolationoftheTreaty.TheinvestorcanbringadisputeagainstthehoststateunderArticle26oftheECT.

36 Consideringtheimportanceofnon-discriminationinthepre-investmentstage,negotiationsofaSupplementaryTreatywerelaunchedin1995buthavenotbeenconcluded.

37 Forfurtherdetails,seetheWTOSecretariatnotecontainingamatrixontrade-relatedmeasurespursuanttoselectedMEAs(WT/CTE/W/160/Rev.4).

38 ForadiscussionofwhetherenvironmentalmeasuresmaybejustifiedunderArticleXIVoftheGATS,seeBox27.

39 SomeWTOmembersconsideredthatmeasurestakenpursuanttotheKimberleyprocessarecompatiblewithWTOrules.Thus,theDecisionnotesthatthewaiver“doesnotprejudgetheconsistencyofdomesticmeasurestakenconsistentwiththeKimberleyProcessCertificationSchemewithprovisionsoftheWTOAgreement,includinganyrelevantWTOexceptions,andthatthewaiverisgrantedforreasonsoflegalcertainty”.

40 Asituationwherethecontractualagreementbetweentwopartiesisaffectedbyconcernsthatonepartywillgainunduebargainingpoweronceinvestmentbytheotherpartyhasbeencommitted.

41 Sometimesstateshavesetupadhocarbitrationarrangementstosettlecertaininvestmentdisputesbetweenthem,suchastheIran–UnitedStatesClaimsTribunal.

42 JanowandStaiger(2003)suggestaneconomicinterpretationoftheviewthatanexporttaxcanconferasubsidytoproductioninothersectorsoftheeconomy.Thisprovidesthebasisforanalternativelineofreasoningbywhichthepanelmighthavearguedthatexportrestraintscouldneverconstitutespecificsubsidies.

43 Thisliteratureisbasedontheassumptionofperfectlycompetitivemarkets.Ossa(2008)explorestheroleoftradeagreementsinanimperfectlycompetitiveenvironment.Whilecross-borderspilloversdifferentfromtheterms-of-tradeeffectemergeinthissetting,theroleofatradeagreementremainsthatofneutralizinganinternationalexternality.

44 BagwellandStaiger(2002),Chapter6,provideanintroductiontotheformalmodelsofenforcementintradeagreements.

45 Inaccessionnegotiations,theuseofexportdutieshassometimesbeenregulatedthroughcommitmentsundertakeninWorkingPartyReportsratherthanthroughschedulesofbindings.

46 SeeWTOdocumentsTN/MA/W/1andTN/MA/W/5.

47 SeeWTOdocumentTN/AG/W/4/Rev.4,6December2008.

48 Seethediscussioninsub-sectionE.2.(b)(iii).

49 ThisargumentisanapplicationoftheBagwellandStaiger(2002)casefortradecooperationbasedonmutuallybeneficialtariffreductions.

50 AsseeninSectionC,adynamicmodelshowsthattheseeffectonthetermsoftradeareshort-runandinthelong-runmeasuresmayhavetheoppositeeffect.However,ananalysisthathighlightstheimmediateconsequencesofthesepoliciesisstillusefulasgovernmentsoftenvaluetheshort-runeffectsoftheirchoiceforpoliticaleconomyreasons.

51 SeeTN/MA/W/15/Add.4/Rev.3.

52 SeeJob(06)/14.

53 Thisisthecasewhennomarketfailuresarepresent.However,whenpropertyrightsarepoorlydefinedandthenaturalresourcessectorsuffersfromanopenaccessproblem,tradevolumesmaywellbesub-optimallyhigh.Thissituationwillbefurtherdiscussedbelowinthecaseoffisherysubsidies.

54 SeeBagwellandStaiger(2002),chapter10.

55 WTOdocumentTN/RL/W/213.

56 Subsidiesthatincreaseormaintaincapacity(suchascapitalsubsidiesforboat-building)aredistinguishedfromthosethatkeepboatsonthewater(variablecostsubsidiessuchasforfuel).

57 SeeTN/RL/GEN/135.

58 Thefulltextofthecommuniquécanbeaccessedat:http://www.g20.org/Documents/pittsburgh_summit_leaders_statement_250909.pdf

59 SeethediscussionontheapplicabilityofArticleXXoftheGATTtotheSCMAgreementinsubsectionE.1.


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60 StaigerandSykes(2009)provideaninterestingextensionofthismodel.AsinBagwellandStaiger(2001a),theexternalityispurelylocal,butStaigerandSykes(2009)allowforadomesticregulation,sayaproductstandard,whichimpliesacompliancecostforproducers.Thismodelshowsthat,intheabsenceofrulesonnon-discrimination,governmentshaveanincentivetoimposediscriminatoryproductstandardsoncetariffshavebeencommitted.Thereasonforthisistoshiftpartoftheregulatorycostontoforeignproducers.AsinBagwellandStaiger(2001a),whenregulatorydiscriminationisprohibitedbythetreaty,governmentsstillfaceanincentivetousedomesticstandardstoerodemarketaccesscommitmentsagreedinpreviousnegotiations.

61 InBrazil - Retreaded Tyres,theAppellateBodyhadtoexaminewhetheranimportbanonretreatedtyrescouldbejustifiedunderArticleXX(b)oftheGATTasameasurenecessarytoprotect,human,animalorplantlifeorhealth.Initsanalysisofthisissue,theAppellateBodyunderscoredthattheimportbanhadto“beviewedinthebroadercontextofthecomprehensivestrategydesignedandimplementedbyBraziltodealwithwastetyres”.Thiscomprehensivestrategyincludedacollectionanddisposalscheme,whichmadeitmandatoryfordomesticmanufacturersofnewtyresandtyreimporterstoprovideforthesafedisposalofwastetyresinspecifiedproportions,aswellasanimportbanonusedtyres(AppellateBodyReport,Brazil – Tyres,para.154).

62 SeethediscussionofArticleXXoftheGATT,insub-sectionE.1.

63 Oftendifferentgovernmentdepartmentswillrepresentthesamestateinthevariousforawhereinternationalrulesaffectingnaturalresourcesarenegotiated,raisingtheriskofincoherence.Internalcoordinationisessentialtoreducetheriskthatastateassumesobligationsinoneforumthatconflictwiththoseithasassumedinotherfora.Itisalsonecessarytoensurethatimplementingmeasuresareconsistentwithobligationsunderotherinternationalagreementstowhichastateisaparty.

64 TheWTOagreementsincludeprovisionsonIMF/WorldBank/WTOcoherence.TheWTOalsocooperateswiththeFoodandAgricultureOrganization,WorldHealthOrganization,WorldOrganizationforAnimalHealth,andtheWorldBankintheStandardsandTradeDevelopmentFacility.TheWTOSecretariathasworkingrelationswithalmost200internationalorganizations(Lamy,2007).

65 ForanoverviewoftheacademicandpolicydebateonthecostsandbenefitsoftheregulationofinvestmentpolicieswithintheWTO,seeHoekmanandSaggi(2000)andtheliteraturequotedtherein.

66 Asexplained,theoligopolycasehasnotbeenanalysedbytheliterature.

67 TheEuropeanCommission,forexample,hasrecentlyopenedaformalanti-trustinvestigationofironoreproductionjointventuresbetweentwoAnglo-Australianminingcompanies.TheCommissionwillinparticularexaminetheeffectsoftheproposedjointventureontheworldwidemarketforironoretransportedbysea.OpeningoftheproceedingsdoesnotimplythattheCommissionhasconclusiveevidenceofaninfringement,butmerelythatitwillinvestigatethecaseasamatterofpriority(seehttp://thegovmonitor.com/world_news/europe/ec-opens-formal-antitrust-investigation-2-into-anglo-australian-mining-companies-22177.html).Similarly,DeBeershasfacedanti-trustprosecutionbytheUnitedStatesDepartmentofJusticein1945,1957,1974and1994.The1994indictmentresultedinDeBeerspleadingguilty,in2004,toaviolationoftheShermanActforconspiringwithGeneralElectrictofixpricesofindustrialdiamonds(“DeBeersAgreestoGuiltyPleatoRe-entertheU.S.Market”,New York Times,10.07.04,availableat:http://www.nytimes.com/2004/07/10/business/worldbusiness/10diamond.html).

68 Gordonetal.(2003)empiricallyinvestigatethecoststructureassociatedwithtransportingnaturalgasbyaCanadiancarrierandconcludethatthiscarrierisindeedanaturalmonopoly.

69 TheReferencePaperhasbeenincorporatedintotheschedulesofsome60membersandincludescertaincompetitionandregulatorydisciplinesforthetelecommunicationssector.Onthis,seealsotheproposalsbytheUnitedStates(S/CSS/W/24)andNorway(S/CSS/W/59).

70 Third-partyaccess(TPA)referstothepossibilityforathirdpartytoaccessanduseenergynetworkfacilities(suchaspipelines,grids,storagefacilities)againstthepaymentofafeetotheowneroroperatorofsuchfacility.

71 SeeUkraine,ScheduleofSpecificCommitments,GATS/SC/144.

72 Energy Services,BackgroundNotebytheSecretariat,S/C/W/311,12January2010.

73 Anadditionaldifficultyarisesinrelationtogovernmentprocurement.TheprocurementofgoodsandservicesbygovernmentalagenciesfortheirownuseisnotcoveredbythemainWTOdisciplines.TheGATTexplicitlyexcludesgovernmentprocurementfromthenationaltreatmentobligationand,undertheGATS,themost-favoured-nationtreatmentobligationaswellasspecificcommitmentsdonotapplytoservicespurchasedbygovernmentagencies.ProcurementofgoodsandservicesissubjecttoaseparateplurilateralAgreementonGovernmentProcurement(GPA),whichhasbeensignedby41governments,mostlydevelopedmembers.Inpractice,activitiesinrelationtonaturalresources(forinstance,exploration,exploitation,consulting,decontamination,environmentalimpactassessment,waterdistribution)maybesubjecttodifferenttypesofcontractualrelationshipbetweenapublicauthorityandaprivatesupplier,including,inter alia,concession,build-operate-transferandmanagementcontracts.Thesetransactionswillescaperelevantdisciplineswhenevertheycanbeconsideredaformofgovernmentprocurement,althoughtheymaybesubjecttotheGPAinthecaseofsignatories.Uncertaintyexists,however,concerningthescopeofthedefinitionofgovernmentprocurement.Formoreonthisissue,seeCossy(2005)andMusselliandZarrilli(2005).

74 Whileanexhaustivediscussiononhowtopromoteinnovationinresource-friendlytechnologiesisbeyondthescopeofthepresentreport,itisclearthatthedesignoftheIPRregimeisonlyoneelementofthisdebate.ArecentstudybyLee,IlievandPreston(2009)suggeststhatotherformsofpublicinterventionareessential.Forinstance,governmentscouldcreatepublicfunds,suchastechnologyprizes,topromoteinnovationandstimulateinternationalcollaborationintheR&Dprocess.

75 Foramoreextensivediscussionofthispoint,seeWorld Trade Report(2008).


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This report has addressed four fundamental issues relating to natural resources trade. The first is how key economic features of natural resources and the manner of their exchange influence patterns of trade for this class of goods. Second, we have examined how far the absence of trade barriers provides an efficient mechanism for ensuring access to natural resources and their long-run sustainability. The third issue concerns the incentives that governments face in setting trade policy in natural resource sectors and the consequences of this incentive structure. Finally, the report has considered how international cooperation affects the management of trade in natural resources, with particular emphasis on the role of the WTO.

F. Conclusions


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Contents Economicfeaturesofnaturalresourcesandpatternsoftrade 202

Tradeopenness,accessandsustainability 202

Tradepoliciesandtheirconsequences 202

Rulestofosterinternationalcooperation 203

Concludingremarks 203


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Economicfeaturesofnaturalresourcesandpatternsoftrade

Naturalresourceshaveanumberofdistinctivefeaturesthathaveservedasorganizingthemesthroughoutthereport–theskewedgeographicaldistributionofnaturalresources, their exhaustibility, the widespreadoccurrence of economic effects of natural resourcesexploitation disregarded by the market (externalities),highnaturalresourcedependencyinsomeeconomies,and tendencies towards high price volatility in naturalresource markets. Keeping these characteristics inmind is essential for recognizing the effects ofinternational trade, therationaleandconsequencesoftradepolicymeasures,andtheefficientdesignofrulesgoverningresourcestrade.

Thereporthasdocumentedthesharpriseintheshare(invalueterms)ofnaturalresourcesinworldtradeinrecentyears,mostlyduetorisingcommodityprices,particularlyfor oil. Modes of trade in natural resources differsubstantially from trade in manufactured goods in anumberofimportantrespects.First,naturalresourcesareamenabletocentralizedtradingastheytendtobequitehomogeneous. This mode of trading has contributed totheestablishmentofinternationalexchangesfornaturalresources, as well as to the stability of trade flows.Second,theunequalgeographicaldistributionandothercharacteristicsspecifictocertainresourceshaveresultedintheadoptionofspecialmodesoftrade,suchaslong-termintergovernmentalcontractsandverticalintegrationofvariousstagesoftheproductionprocess.Thedetailsofthesearrangementshave important implications for thepatterns of international trade and the formation ofresourceprices.

Tradeopenness,accessandsustainability

Due to the geographical concentration of naturalresources,tradehasthepotentialtoimproveefficiencyandincreasewelfarebyshiftingresourcesfromregionsof relative abundance to regions of relative scarcity.However, welfare comparisons are complicated byfactorssuchas theexhaustibilityofnatural resourcesand pervasive market failures. The latter includeimperfectly competitive markets and open access toresources when property rights are poorly defined.Under some circumstances, cartels in non-renewablesectorsmayleadtoaslowerthanoptimalextractionofaresourceinexportingcountries,whiletheopposite–that is,fasterdepletion–canresultfromfreetradeinrenewable resources thatsuffer fromanopenaccessproblem. The latter leads to a situation where thestandardresultofwelfaregainsfromopentradebreaksdown,atleastforonecountry.

Fourothermajorissuesarecommonlyassociatedwithnaturalresourcestrade–thepresenceofenvironmentalexternalities, the impact that technology has on thesustainabilityofresources,theso-called“curse”facedbyresource-richeconomies,andthehighvolatilitythat

characterizes some resource sectors. Internationaltradeinteractswithallthesefactorsincomplexways,insome cases exacerbating existing problems and attimes providing solutions. A negative impact on theenvironment can be intensified by an increase in therate of extraction driven by exports, but the moreefficientinternationalallocationofresourcespromotedbytradehastheeffectofreducingthisnegativeimpact.Technological innovations – diffused internationallythroughtrade–mayacceleratethedepletionofscarceresources, but they also improve the ability ofgovernments tomonitor remainingstocksandprovideefficient substitutes to exhaustible resources. Finally,international trade may encourage over-specializationinnaturalresourcesbutitcanalsoprovideopportunitiesfor diversification that reduce the problems of highdependencyoncommoditiesandpricevolatility.

Tradepoliciesandtheirconsequences

Thereporthasdocumentedgovernmentinterventioninnaturalresourcesectors,notingthattradepolicyinthisarea is very nearly the reverse of what we observe inother traded goods sectors. Resource-rich countriesoftenrestrictexportsthroughavarietyofmeans,suchas export taxes and quantitative restrictions, whereastariffsandotherimportrestrictionsinresource-scarcecountries are low. There are, however, two importantqualifications to this general rule. First, domesticpolicies that are likely to affect trade flows, includingsubsidies,technicalregulationsandconsumptiontaxes,arefrequentlyused.Second,thestructureofprotectionthat resource exporters face tends to rise with thestageofprocessing(tariffescalation).

Policy interventions in natural resource sectors arejustifiedonwelfaregroundsby thespecific featuresofnaturalresources.Governmentsemploytradepoliciesasinstruments to achieve several objectives: to improveresource conservation, to reduce environmentalexternalities associated with the harvesting orconsumptionofresources,tostimulatediversificationofexports away from dominant resource sectors, and tostabilizeincomeinresponsetosupplyordemandshocks.

However, three significant caveats need to be kept inmind. First, restrictions on trade have beggar-thy-neighboureffects,astheyshiftrentsacrosscountriesoralterthetermsoftrade.Theyalsohavebeggar-thy-selfconsequences,astheymaybepoliticallyexpedientin the short run but welfare-reducing in the long run.Second,whileinsomecasestheyaretheonlyavailablepolicy option, trade measures are typically a second-bestpolicytoaddressproblemsassociatedwithnaturalresources.Thefirst-bestinterventionisoftenadomesticpolicy that addresses the distortion at the source.Finally, trade measures and domestic measures innatural resource sectors tend to be close substitutes.When resources are unevenly distributed acrosscountries,thereissometimeslittledifferencebetweenthe trade impact of domestic measures, such asconsumptiontaxesandproductionrestrictions,andtheeffectsoftraditionaltrademeasures.


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Rulestofosterinternationalcooperation

Thegeneralprinciplesofthemultilateraltradingsystemprovidea framework for limitingbeggar-thy-neighbourand beggar-thyself trade policies, including withinresourcesectors.SeveralWTOruleshaverelevanceinrelation to the main features of natural resources. Inparticular, rules on non-discrimination, freedom oftransit, tariff bindings and export restrictions arerelevanttotheunequaldistributionofresourcesacrosscountries and facilitate WTO members’ access tosuppliesofscarceresources.Theinstrumentsofpolicyflexibility contained in the WTO agreements, such asArticle XX, allow issues of resource exhaustibility,environmental externalities, dominance and pricevolatilitytobeaddressed.Inaddition,otherinternationalagreements establish mechanisms for internationalcooperation in natural resource sectors. Theseagreements are often aimed at addressing relatedmarketorgovernmentfailures,suchasthoseassociatedwiththeprotectionoftheenvironmentorwithcorruption.

WTO rules were not specifically drafted to regulatenatural resources trade and may not always respondadequatelytothespecificfeaturesofthissector.Inthisrespect, the report has identified several areas whereconsiderationcouldbegiventointensifiedcooperationon the basis of mutual gain. One such area involvestrade policies, such as export taxes, where bargainsmight ameliorate uncooperative trade outcomes. Thescope for such bargains will depend in part on whatobjectivesarebeingpursuedbysuchpoliciesandhowtheseobjectivesmightinfluencewelfareatthenationallevel.Asecondissueconcernsthescopeforconservationpolicies, such as the treatment of subsidies aimed atimprovingtheconservationofnaturalresources.

Athirdissuerelatestothefacilitationoftradeflowsofnaturalresources,specificallythescopeoffreedomoftransit covered under Article V of the GATT. A fourthareaconcerns theclarityofcurrent rules,suchas theapplicability of the rules of the GATT or the GeneralAgreementonTradeinServices(GATS)toexplorationand processing of natural resources. A further areawhere coherence matters is the relationship betweenthe WTO and rules of international law in differentagreementsandarrangementsthatmayberelevanttonaturalresources.

Other issues thathavebeentouchedupon,butwhereno WTO mandate nor ongoing negotiations exist,include increased international cooperation oninvestment,competitionanddomesticpoliciessuchasconsumptiontaxes.Theseissueshavebeenincludedinthe discussion on account of the analytical case thatcanbemade,underspecifiedcircumstances,forfurthercooperation. This is distinct from advocating a newWTOnegotiatingagenda,whichwouldbeoutside thecompetenceofareportofthisnature.

Concludingremarks

The tension between rising demand for naturalresourcesduetopopulationandincomegrowthontheone hand, and their scarcity and exhaustibility on theother,isachallengefacingmodernsociety.Thistensionseems likely to increase, especially as the globaleconomy recovers from recession and the circle ofdevelopment and industrialization continues to widen.Fears of inadequate access to supplies in resource-scarce countries and of inappropriate exploitation inresource-rich regions could lead to trade conflict orworse. Adequately defined rules for internationalcooperation, built on a shared perception of gain, willcontributetotheavoidanceofsuchanoutcome.

In sum, the analysis in this report argues strongly forcooperation. The importance of natural resources tovirtually every aspect of human activity, and theparticular characteristics of these products, make itvital that governments work together to find commonground and appropriate trade-offs. Such cooperationshould aim to ensure sound resource management,equityandmutualgain.Thetradeaspectsofcooperationhavebeenaparticularfocusofthereport,andthecasehas been made for seeking accommodation througheffective multilateral trade rules. Well-designed rulesontradearenotonlyaboutsecuringthestandardgainsfromtrade;theyarealsoakeycomponentofcooperationin domains such as environmental protection anddomesticpoliciestomanagescarceresources.


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Statistical appendixThedefinitionofnaturalresources insub-section1ofSection B is sufficient for many analyses, but a moreprecisestatisticaldefinitionisrequiredinordertodealconsistentlywithdataontradeflows,whichissurveyedin sub-section 2 of Section B. An even broaderconception of natural resources is needed whenexamining non-traded goods. This appendix providesdetails on alternative definitions of natural resources,followed by summary tables of trade by individualcountries,aswellasmaps illustratingvariousaspectsofnaturalresourcesuppliesandtrade.

TheUnitedNationsSystemofNationalAccounts(SNA)proposes a classification of natural resources thatincludesthefollowingcomponentsnaturalland,subsoilassets, non-cultivated biological resources, waterresources,andothernaturalresources(UnitedNations,2006). The comprehensiveness of this definition isappealing, but its application to international trade isproblematic.Naturalland,forinstance,isimmobileandcannot be traded. In principle, water could be tradedinternationallywiththeaidofpipelines,but inpracticethisneveroccurs.Internationaltradeinwaterislimitedtobottledwater,thetotalvalueofwhichrepresentsjust0.02percentofworldmerchandisetradeaccordingtoSecretariat estimates.1 Furthermore, this definitiondoes not consider refined petroleum products to benatural resources,even thoughmanycountries importsignificant quantities of them. For example, althoughVietNamisanexporterofcrudeoil,thecountryimportsallofitsrefinedpetroleumproducts.

The product classification used in the WTO’sInternational Trade Statistics is better suited to theanalysis of natural resources trade, since it includesaggregates that cover most international trade in thisclass of goods (WTO, 2009). Product groups aredefined in terms of revision 3 of the StandardInternationalTradeClassification(SITC)andaredividedintoprimaryproducts (SITCsections0,1,2,3,4plusdivision68)andmanufactures(SITCsections5,6,7,8minusdivision68andgroup891),withremainingcodes(SITCsection9andgroup891)comprisingunspecifiedproducts. The category “primary products” is broaderthannaturalresourcessinceitincludesfoodandothercultivatedgoodsthatwouldnotnormallybeconsiderednaturalresources.However,ifweexcludefoodproductsotherthanfish,wearriveatausablestatisticaldefinitionforwhichdataonglobaltradeflowsarereadilyavailable.Therelevantproductgroupsareasfollows:

1 Basedon2008datafromtheUNComtradedatabase.

1. Fish (sItc division 03)

2. Raw materials (sItc divisions 21, 23, 24, 25, 26, 29)

ofwhich:

Rawhides,skinsandfurskins(21)

Cruderubber(23)

Corkandwood(24)

Woodpulp(25)

Textilefibres(26)

Crudeanimalandvegetablematerials,notelsewherespecified(29)

3. Fuels and mining products (sItc section 3 and divisions 27, 28, 68)

ofwhich:

Oresandotherminerals(SITCdivisions27,28)

Fuels(SITCsection3)

Non-ferrousmetals(SITCdivision68)

Thesumoftheabovethreeproductgroupsprovidesuswith a basic, usable statistical definition of naturalresources.Unfortunately,thecategoryofrawmaterialsis overly broad as it contains a number of cultivatedagricultural products. However, we may still use it incases where no further breakdown of the data ispossible. This is not usually a problem, since forestryproducts make up the majority of raw materials tradefor most countries and regions. This definition is alsousefulinthatitcoversproductsthatmaybeconsiderednatural resources in some circumstances but not inothers – for example, crude rubber (which may benaturalorsynthetic)andfurskins(eitherwildorfarmed).Itmayalsobeseenasanupperbounddefinition.

Where sufficiently detailed data are available, it ispreferable to use the following definition of forestryproductsinplaceofrawmaterials:


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4. Forestry products (sItc divisions 24 and 25)

ofwhich:

Corkandwood(24)

Woodpulp(25)

“Natural resources narrowly defined” is equal to thesumofgroups1,3and4andisourpreferreddefinitionsince the products it covers are all unambiguouslynatural resources. For an even broader view ofresources,onemightalsoconsideraddingthecategory“Other semi-manufactures”, which includes lightlyprocessedmanufacturesmadefromnaturalresources.

5. other semi-manufactures (sItc divisions 61, 62, 63, 64, 66, 69)

ofwhich:

Leather,leathermanufactures,notelsewherespecified(61)

Rubbermanufactures,notelsewherespecified(62)

Corkandwoodmanufactures,excludingfurniture(63)

Paper,paperboardandarticlesthereof(64)

Non-metallicmineralmanufactures,notelsewherespecified(66)

Manufacturesofmetals,notelsewherespecified(69)

Twonoteworthydetailsare1)thefactthatscrapmetalis included in “Ores and other minerals”, and 2) thatnon-monetarygold isexcludedfromnaturalresourcesaltogether. The inclusion of scrap metal in ores is aresultoftheunderlyingSITCclassificationratherthanaconsciousdecisiononthepartoftheWTO,butitmakessensesincebothoresandscrapareusedasinputsinnewmetalproduction.Asfornon-monetarygold(SITC97),thisisrecordedunder“commoditiesnotelsewherespecified”intheSITCclassificationbutisnotrecordedsystematicallybyallcountries.Itsinclusioninstatisticson natural resources would distort aggregate figuresfornaturalresourcesforcertaincountries.

Unlessotherwisenoted, this reportuses thestandardWTO geographical regions from International Trade Statistics 2009.


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AppendixTable1:World proved oil reserves by country and region, 2008(Billionbarrelsandpercentage)

Proved reserves(Billion barrels)

share in world(Percentage)

World a 1,258.0 100.0

Regions

MiddleEast 754.1 59.9

CommonwealthofIndependentStates(CIS) 128.4 10.2

Africa 125.6 10.0

SouthandCentralAmerica 123.2 9.8

NorthAmerica 70.9 5.6

AsiaPacific 42.0 3.3

Europe 13.8 1.1

countries

SaudiArabia 264.1 21.0

Iran 137.6 10.9

Iraq 115.0 9.1

Kuwait 101.5 8.1

BolivarianRep.ofVenezuela 99.4 7.9

UnitedArabEmirates 97.8 7.8

RussianFederation 79.0 6.3

Libya 43.7 3.5

Kazakhstan 39.8 3.2

Nigeria 36.2 2.9

UnitedStates 30.5 2.4

Canada 28.6 2.3

Qatar 27.3 2.2

China 15.5 1.2

Angola 13.5 1.1

Above 15 1,129.4 89.8

Brazil 12.6 1.0

Algeria 12.2 1.0

Mexico 11.9 0.9

Norway 7.5 0.6

Azerbaijan 7.0 0.6

Sudan 6.7 0.5

India 5.8 0.5

Oman 5.6 0.4

Malaysia 5.5 0.4

VietNam 4.7 0.4

Egypt 4.3 0.3

Australia 4.2 0.3

Ecuador 3.8 0.3

Indonesia 3.7 0.3

UnitedKingdom 3.4 0.3

Gabon 3.2 0.3

Yemen 2.7 0.2

Argentina 2.6 0.2

Syria 2.5 0.2

Congo,Dem.Rep.of 1.9 0.2

EquatorialGuinea 1.7 0.1

Colombia 1.4 0.1

Peru 1.1 0.1

BruneiDarussalam 1.1 0.1

Chad 0.9 0.1

Above 40 1,247.4 99.2

memo items:

OPEC 955.8 76.0

EuropeanUnion 6.3 0.5

aExcludesCanadianoilsands.Source:BPStatisticalReviewofWorldEnergy.


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AppendixTable2:Leading exporters and importers of natural resources including intra-eu trade, 2008(Billiondollarsandpercentage)

value share in world

share in total merchandise

Annual percentage change

2000-08 2007 2008

exporters

World 3,734.2 100.0 23.8 18.3 14.9 31.1

RussianFederation 341.2 9.1 72.9 23.1 16.2 34.1

SaudiArabia 282.0 7.6 90.0 18.8 9.9 35.7

Canada 177.7 4.8 39.0 13.0 13.6 24.9

UnitedStates 142.5 3.8 11.0 17.3 17.5 42.4

Norway 130.6 3.5 77.8 14.0 8.4 23.7

Australia 114.3 3.1 61.1 19.3 13.6 54.3

UnitedArabEmirates 109.4 2.9 52.1 17.6 8.9 33.5

Iran 95.5 2.6 84.2 18.0 38.4 27.1

Germany 89.9 2.4 6.1 17.9 14.6 11.1

UnitedKingdom 83.5 2.2 18.3 12.9 12.8 24.1

Kuwait 82.9 2.2 95.2 20.9 11.5 39.7

BolivarianRep.ofVenezuela 79.8 2.1 95.8 14.1 7.4 27.8

Algeria 78.4 2.1 98.8 17.4 10.3 31.7

Netherlands 75.8 2.0 13.9 15.6 -10.6 25.3

Nigeria 75.4 2.0 92.2 13.7 -12.5 48.2

Above15 1,958.7 52.5 - - - -

Importers

World 3,832.6 100.0 23.8 17.8 14.0 31.2

UnitedStates 583.4 15.2 27.0 15.0 6.9 27.9

Japan 350.2 9.1 45.9 13.9 9.2 40.6

China 330.3 8.6 29.2 30.0 32.5 43.0

Germany 231.5 6.0 19.2 16.7 6.4 29.2

Korea,Rep.of 182.0 4.7 41.8 17.3 13.4 37.0

France 148.5 3.9 21.4 16.2 7.5 32.2

India 135.4 3.5 42.9 25.1 20.8 52.5

Italy 117.3 3.1 21.2 14.2 14.3 15.8

UnitedKingdom 111.8 2.9 17.7 18.4 12.8 24.5

Spain 106.3 2.8 26.5 18.0 14.3 25.0

Netherlands 96.4 2.5 19.5 16.8 0.4 24.0

Belgium 96.3 2.5 20.5 19.1 5.4 33.5

Singapore 95.1 2.5 29.7 22.3 16.0 60.0

Taipei,Chinese 83.1 2.2 34.5 18.6 18.1 29.3

Canada 67.3 1.8 16.5 15.2 10.1 30.1

Above15 2,735.0 71.4 - - - -

Source:UNComtradedatabaseandWTOSecretariatestimates.


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AppendixTable3:Leading exporters and importers of natural resources excluding intra-eu trade, 2008(Billiondollarsandpercentage)




2000-08 2007 2008

exporters

World excl. eu-Intra 3,247.3 100.0 27.7 18.5 15.3 32.8


SaudiArabia 282.0 8.7 90.0 18.8 9.9 35.7

Canada 177.7 5.5 39.0 13.0 13.6 24.9

EuropeanUnion(27) 176.6 5.4 9.2 18.5 16.8 28.2

UnitedStates 142.5 4.4 11.0 17.3 17.5 42.4

Norway 130.6 4.0 77.8 14.0 8.4 23.7

Australia 114.3 3.5 61.1 19.3 13.6 54.3


Iran 95.5 2.9 84.2 18.0 38.4 27.1

Kuwait 82.9 2.6 95.2 20.9 11.5 39.7


Algeria 78.4 2.4 98.8 17.4 10.3 31.7

Nigeria 75.4 2.3 92.2 13.7 -12.5 48.2

Singapore 67.7 2.1 20.0 23.8 17.6 44.2

Angola 67.1 2.1 100.0 .. .. . .

Above15 2,021.0 62.2 - - - -

Importers


EuropeanUnion(27) 766.6 22.9 33.6 18.1 11.0 31.9

UnitedStates 583.4 17.4 27.0 15.0 6.9 27.9

Japan 350.2 10.5 45.9 13.9 9.2 40.6

China 330.3 9.9 29.2 30.0 32.5 43.0

Korea,Rep.of 182.0 5.4 41.8 17.3 13.4 37.0

India 135.4 4.0 42.9 25.1 20.8 52.5

Singapore 95.1 2.8 29.7 22.3 16.0 60.0

Taipei,Chinese 83.1 2.5 34.5 18.6 18.1 29.3

Canada 67.3 2.0 16.5 15.2 10.1 30.1

Turkey 50.7 1.5 25.1 22.3 22.5 33.4

Thailand 49.9 1.5 27.9 20.9 5.1 37.4

Brazil 42.8 1.3 24.7 19.1 29.3 47.5

Mexico 40.5 1.2 13.1 19.4 22.7 35.1

Indonesia 37.7 1.1 29.1 20.5 16.3 44.6

Australia 34.8 1.0 18.2 20.5 17.1 43.8

Above15 2,849.8 85.2 - - - -



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AppendixTable4:Leading exporters and importers of fish including intra-eu trade, 2008(Billiondollarsandpercentage)




2000-08 2007 2008

exporters

World 97.6 100.0 0.6 7.9 7.7 9.1

China 10.1 10.3 0.7 13.6 3.1 9.4

Norway 6.8 7.0 4.0 8.9 13.2 11.6

Thailand 6.5 6.6 3.7 5.1 8.1 15.5

UnitedStates 4.3 4.4 0.3 4.8 0.8 -0.3

VietNam 4.1 4.2 6.5 13.6 12.1 8.5

Canada 3.7 3.8 0.8 3.4 0.8 0.4

Spain 3.4 3.5 1.3 9.6 15.7 4.8

Chile 3.3 3.4 4.8 10.1 3.3 8.2

Denmark 3.3 3.4 2.9 7.4 6.6 7.7

Netherlands 2.8 2.9 0.5 9.8 13.8 5.5

Indonesia 2.5 2.5 1.8 5.7 7.3 17.4

Germany 2.1 2.1 0.1 11.3 9.3 11.0

France 1.9 2.0 0.3 8.0 16.0 4.7

Sweden 1.9 1.9 1.0 19.3 5.5 15.1

UnitedKingdom 1.8 1.9 0.4 7.4 15.1 -5.8

Above15 58.5 59.9 - - - -

Importers

World 102.6 100.0 0.6 7.7 7.2 9.2

UnitedStates 14.8 14.4 0.7 4.5 2.7 3.3

Japan 14.0 13.7 1.8 -1.1 -5.6 9.9

Spain 6.4 6.2 1.6 8.3 10.1 -9.7

France 5.7 5.6 0.8 8.9 6.0 8.4

Italy 5.4 5.2 1.0 9.9 10.8 3.6

Germany 4.3 4.2 0.4 9.5 8.9 6.3

UnitedKingdom 4.1 4.0 0.6 9.2 13.1 1.8

China 3.7 3.6 0.3 15.0 9.8 6.7

Korea,Rep.of 3.2 3.1 0.7 11.4 10.9 7.5

Sweden 2.7 2.6 1.6 18.4 22.9 9.7

Thailand 2.4 2.3 1.3 16.0 11.2 41.6

Netherlands 2.3 2.2 0.5 10.6 15.3 16.6

Belgium 2.2 2.2 0.5 10.6 10.2 7.2


Denmark 2.0 2.0 1.8 7.3 6.1 7.1

Above15 75.4 73.5 - - - -



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2000-08 2007 2008

exporters

World excl. eu-Intra 77.2 100.0 0.7 7.4 6.5 10.9

China 10.1 13.1 0.7 13.6 3.1 9.4

Norway 6.8 8.8 4.0 8.9 13.2 11.6

Thailand 6.5 8.4 3.7 5.1 8.1 15.5

UnitedStates 4.3 5.6 0.3 4.8 0.8 -0.3

VietNam 4.1 5.3 6.5 13.6 12.1 8.5

EuropeanUnion(27) 4.1 5.3 0.2 11.8 13.7 18.6

Canada 3.7 4.8 0.8 3.4 0.8 0.4

Chile 3.3 4.3 4.8 10.1 3.3 8.2

Indonesia 2.5 3.2 1.8 5.7 7.3 17.4

Iceland 1.7 2.3 32.5 6.1 11.0 -3.4

Ecuador 1.7 2.2 9.1 14.5 3.0 26.8

Japan 1.6 2.1 0.2 9.5 18.4 -1.5

India 1.6 2.0 0.9 1.7 3.6 -9.9

Taipei,Chinese 1.5 1.9 0.6 2.9 -0.4 24.6

Korea,Rep.of 1.3 1.7 0.3 -0.3 15.6 25.9

Above15 54.7 70.9 - - - -

Importers


EuropeanUnion(27) 23.7 28.9 1.0 10.7 11.1 7.4

UnitedStates 14.8 18.0 0.7 4.5 2.7 3.3

Japan 14.0 17.1 1.8 -1.1 -5.6 9.9

China 3.7 4.5 0.3 15.0 9.8 6.7

Korea,Rep.of 3.2 3.9 0.7 11.4 10.9 7.5

Thailand 2.4 2.9 1.3 16.0 11.2 41.6


Canada 1.9 2.3 0.5 4.6 10.1 0.6

Australia 1.0 1.3 0.5 9.8 12.0 7.7

Singapore 0.9 1.1 0.3 6.3 8.1 13.5

Ukraine 0.7 0.9 0.9 30.2 19.8 36.4

Brazil 0.7 0.8 0.4 10.9 26.1 21.6

Nigeria 0.6 0.8 2.3 12.5 59.0 -46.8

Switzerland 0.6 0.8 0.3 7.4 12.5 9.0

Taipei,Chinese 0.6 0.7 0.2 5.0 19.6 40.3

Above15 71.1 86.6 - - - -

Source: UNComtradedatabaseandWTOSecretariatestimates.


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2000-08 2007 2008

exporters

World 106.36 100.0 0.7 6.7 17.1 0.3

Canada 12.7 12.0 2.8 -2.7 -2.4 -14.2

UnitedStates 12.3 11.6 0.9 3.8 13.1 6.0

RussianFederation 7.7 7.3 1.6 14.0 31.2 -10.3

Sweden 6.7 6.3 3.6 6.7 21.4 -2.7

Brazil 5.3 5.0 2.7 11.0 16.5 12.5

Germany 5.0 4.7 0.3 13.0 21.1 -1.4

Chile 3.9 3.7 5.7 10.5 38.3 8.0

Finland 3.6 3.3 3.7 4.3 16.1 -14.9

Austria 2.7 2.5 1.5 8.3 32.1 -7.0

Belgium 2.4 2.2 0.5 10.0 31.8 2.6

Indonesia 2.0 1.9 1.4 7.7 0.8 20.2

France 1.9 1.8 0.3 5.7 26.6 0.4

Malaysia 1.8 1.7 0.9 0.5 0.8 -1.9

Netherlands 1.7 1.6 0.3 12.9 26.0 16.1

NewZealand 1.6 1.5 5.3 5.5 15.8 -0.3

Above15 71.2 66.9 - - - -

Importers

World 112.45 100.0 0.7 6.4 16.3 0.1

China 19.7 17.5 1.7 17.7 30.9 16.5

UnitedStates 10.3 9.2 0.5 -2.1 -13.1 -19.5

Japan 8.6 7.7 1.1 -1.6 2.0 -1.1

Germany 6.9 6.1 0.6 6.0 14.1 1.9

Italy 5.8 5.2 1.1 3.3 13.4 -7.8

France 4.1 3.7 0.6 4.6 28.4 -1.0

UnitedKingdom 3.8 3.4 0.6 2.6 26.6 -21.4

Korea,Rep.of 3.6 3.2 0.8 4.0 20.9 8.0

Netherlands 3.2 2.8 0.6 7.8 22.8 3.0

Belgium 2.8 2.5 0.6 6.9 32.9 -5.4

Austria 2.4 2.1 1.4 8.6 12.2 2.2

India 2.2 2.0 0.7 14.3 30.3 15.9

Finland 2.2 1.9 2.3 18.3 39.7 23.3

Spain 2.1 1.9 0.5 3.4 21.7 -21.1

Canada 2.0 1.7 0.5 1.5 4.1 -4.0

Above15 79.7 70.9 - - - -



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2000-08 2007 2008

exporters


Canada 12.7 16.7 2.8 -2.7 -2.4 -14.2

UnitedStates 12.3 16.2 0.9 3.8 13.1 6.0

EuropeanUnion(27) 9.1 12.0 0.5 10.9 20.5 4.5


Brazil 5.3 7.0 2.7 11.0 16.5 12.5

Chile 3.9 5.2 5.7 10.5 38.3 8.0

Indonesia 2.0 2.6 1.4 7.7 0.8 20.2

Malaysia 1.8 2.4 0.9 0.5 0.8 -1.9

NewZealand 1.6 2.1 5.3 5.5 15.8 -0.3

Australia 1.4 1.9 0.8 12.9 25.0 14.7

China 1.3 1.8 0.1 14.0 6.8 0.2

SouthAfrica 0.9 1.2 1.3 3.5 5.7 13.6

Japan 0.9 1.2 0.1 26.1 28.8 15.1

Norway 0.6 0.7 0.3 7.5 14.9 14.4

Thailand 0.6 0.7 0.3 6.6 17.3 -3.2

Above15 62.1 81.7 - - - -

Importers


China 19.7 24.0 1.7 17.7 30.9 16.5

EuropeanUnion(27) 16.0 19.5 0.7 4.2 19.3 -4.9

UnitedStates 10.3 12.6 0.5 -2.1 -13.1 -19.5

Japan 8.6 10.5 1.1 -1.6 2.0 -1.1

Korea,Rep.of 3.6 4.4 0.8 4.0 20.9 8.0

India 2.2 2.7 0.7 14.3 30.3 15.9

Canada 2.0 2.4 0.5 1.5 4.1 -4.0

Mexico 1.7 2.1 0.6 7.8 11.5 3.9

Taipei,Chinese 1.7 2.0 0.7 1.8 15.4 4.0

Indonesia 1.6 2.0 1.3 4.3 18.3 41.6

Thailand 1.2 1.4 0.6 4.8 7.9 14.6

Turkey 1.0 1.2 0.5 11.8 15.8 7.4

Egypt 1.0 1.2 2.1 8.2 30.6 27.9

Norway 0.9 1.0 1.0 5.7 40.9 -10.9

Switzerland 0.9 1.0 0.5 5.4 17.7 9.6

Above15 72.4 88.1 - - - -



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2000-08 2007 2008

exporters

World 2,861.89 100.0 18.2 20.0 13.4 41.0


SaudiArabia 281.0 9.8 89.7 18.8 9.9 35.8

Canada 125.9 4.4 27.6 16.8 13.0 43.9

Norway 113.7 4.0 67.7 14.6 5.8 29.7


Iran 93.0 3.2 82.0 17.7 38.4 27.6

Kuwait 82.8 2.9 95.0 20.9 11.4 39.8


Algeria 77.8 2.7 98.1 17.4 10.5 31.5

UnitedStates 76.5 2.7 5.9 24.4 20.3 82.4

Nigeria 75.1 2.6 91.7 13.6 -13.1 48.5

Angola 66.4 2.3 98.9 .. .. . .

Singapore 62.5 2.2 18.5 25.5 15.9 51.2

UnitedKingdom 60.3 2.1 13.2 12.2 7.2 31.1

Australia 59.6 2.1 31.9 20.6 6.8 88.3

Above15 1,663.3 58.1 - - - -

Importers

World 2,921.96 100.0 18.1 19.5 12.2 41.3

UnitedStates 501.9 17.2 23.2 17.3 7.9 34.8

Japan 267.8 9.2 35.1 16.8 6.9 55.0

China 168.8 5.8 14.9 30.0 17.9 60.8

Germany 163.7 5.6 13.6 18.1 0.3 46.6

Korea,Rep.of 142.5 4.9 32.7 17.9 11.3 47.7

France 117.4 4.0 16.9 18.6 4.6 43.5

India 115.8 4.0 36.7 25.1 19.2 58.2

Singapore 87.3 3.0 27.3 23.4 17.5 66.0

UnitedKingdom 81.7 2.8 12.9 23.9 8.8 38.5

Spain 81.4 2.8 20.3 20.3 12.7 39.3

Italy 78.8 2.7 14.2 16.6 12.7 30.0

Netherlands 77.1 2.6 15.6 18.4 -2.6 34.4

Belgium 72.7 2.5 15.5 21.8 -0.8 53.6

Taipei,Chinese 61.9 2.1 25.7 21.5 18.8 42.2

Canada 50.6 1.7 12.4 19.1 10.7 43.0

Above15 2,069.5 70.8 - - - -

Source: UNComtradeDatabaseandWTOSecretariatestimates.


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2000-08 2007 2008

exporters



SaudiArabia 281.0 11.0 89.7 18.8 9.9 35.8

Canada 125.9 4.9 27.6 16.8 13.0 43.9

EuropeanUnion(27) 114.0 4.4 5.9 20.3 13.8 39.4

Norway 113.7 4.4 67.7 14.6 5.8 29.7


Iran 93.0 3.6 82.0 17.7 38.4 27.6

Kuwait 82.8 3.2 95.0 20.9 11.4 39.8


Algeria 77.8 3.0 98.1 17.4 10.5 31.5

UnitedStates 76.5 3.0 5.9 24.4 20.3 82.4

Nigeria 75.1 2.9 91.7 13.6 -13.1 48.5

Angola 66.4 2.6 98.9 .. .. . .

Singapore 62.5 2.4 18.5 25.5 15.9 51.2

Australia 59.6 2.3 31.9 20.6 6.8 88.3

Above15 1,717.0 66.9 - - - -

Importers


EuropeanUnion(27) 619.0 23.6 27.1 20.1 8.2 42.4

UnitedStates 501.9 19.1 23.2 17.3 7.9 34.8

Japan 267.8 10.2 35.1 16.8 6.9 55.0

China 168.8 6.4 14.9 30.0 17.9 60.8

Korea,Rep.of 142.5 5.4 32.7 17.9 11.3 47.7

India 115.8 4.4 36.7 25.1 19.2 58.2

Singapore 87.3 3.3 27.3 23.4 17.5 66.0

Taipei,Chinese 61.9 2.4 25.7 21.5 18.8 42.2

Canada 50.6 1.9 12.4 19.1 10.7 43.0

Thailand 37.2 1.4 20.8 22.1 1.1 43.7

Brazil 34.3 1.3 19.8 19.4 30.2 53.6

Turkey 32.8 1.2 16.2 20.2 17.4 37.4

Indonesia 30.7 1.2 23.7 22.4 15.6 39.4

Australia 30.0 1.1 15.7 22.6 15.2 48.8

Mexico 29.2 1.1 9.5 23.8 34.1 50.4

Above15 2,209.7 84.2 - - - -



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2000-08 2007 2008

exporters

World 668.3 100.0 4.3 16.9 20.9 7.2

Australia 52.4 7.8 28.0 19.0 19.6 29.9

UnitedStates 49.4 7.4 3.8 16.6 18.0 17.0

Germany 45.3 6.8 3.1 16.3 20.0 3.8

Chile 41.5 6.2 60.1 22.7 19.5 -2.5

Canada 35.4 5.3 7.8 14.5 25.4 -2.3


Brazil 25.3 3.8 12.8 20.8 19.0 34.1

China 23.5 3.5 1.6 22.7 5.3 7.1

SouthAfrica 21.5 3.2 29.0 29.0 25.4 14.4

UnitedKingdom 20.2 3.0 4.4 15.3 28.8 11.0

Japan 18.9 2.8 2.4 15.6 19.8 9.1

Belgium 15.9 2.4 3.3 15.0 21.0 0.6

France 15.5 2.3 2.6 13.4 15.2 -0.4

Peru 13.4 2.0 43.0 25.0 21.0 -1.8

Netherlands 12.8 1.9 2.3 15.7 0.7 -8.1

Above15 416.6 62.3 - - - -

Imports

World 695.5 100.0 4.3 16.5 20.5 7.7

China 138.1 19.9 12.2 34.0 52.6 30.7

Japan 59.8 8.6 7.8 14.0 23.6 9.0

Germany 56.6 8.1 4.7 15.7 19.5 -0.1

UnitedStates 56.4 8.1 2.6 9.2 7.1 -0.8

Korea,Rep.of 32.7 4.7 7.5 17.8 20.2 8.8

Italy 27.3 3.9 4.9 12.8 18.7 -6.3

UnitedKingdom 22.2 3.2 3.5 11.7 21.8 1.2

France 21.2 3.0 3.0 11.5 16.4 0.7

Taipei,Chinese 18.9 2.7 7.9 14.7 16.7 1.4

Belgium 18.5 2.7 3.9 14.8 18.8 -6.3

India 17.3 2.5 5.5 27.9 28.7 26.7

Turkey 16.7 2.4 8.3 29.3 33.9 28.2

Spain 16.4 2.4 4.1 16.6 20.7 -2.8

Netherlands 13.8 2.0 2.8 13.3 7.3 -9.9

Canada 12.9 1.9 3.2 9.8 9.5 3.7

Above15 528.9 76.0 - - - -



216

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2000-08 2007 2008

exporters


Australia 52.4 9.9 28.0 19.0 19.6 29.9

EuropeanUnion(27) 49.5 9.4 2.6 17.1 22.5 12.7

UnitedStates 49.4 9.3 3.8 16.6 18.0 17.0

Chile 41.5 7.9 60.1 22.7 19.5 -2.5

Canada 35.4 6.7 7.8 14.5 25.4 -2.3


Brazil 25.3 4.8 12.8 20.8 19.0 34.1

China 23.5 4.4 1.6 22.7 5.3 7.1

SouthAfrica 21.5 4.1 29.0 29.0 25.4 14.4

Japan 18.9 3.6 2.4 15.6 19.8 9.1

Peru 13.4 2.5 43.0 25.0 21.0 -1.8

India 11.7 2.2 6.4 32.9 16.2 3.4

Indonesia 10.8 2.1 7.9 17.2 21.6 -10.8

Norway 9.6 1.8 5.7 12.9 30.1 -15.5

Korea,Rep.of 9.3 1.8 2.2 20.3 14.0 1.6

Above15 397.8 75.3 - - - -

Importers


China 138.1 24.8 12.2 34.0 52.6 30.7

EuropeanUnion(27) 107.9 19.4 4.7 14.1 22.6 0.3

Japan 59.8 10.8 7.8 14.0 23.6 9.0

UnitedStates 56.4 10.2 2.6 9.2 7.1 -0.8

Korea,Rep.of 32.7 5.9 7.5 17.8 20.2 8.8

Taipei,Chinese 18.9 3.4 7.9 14.7 16.7 1.4

India 17.3 3.1 5.5 27.9 28.7 26.7

Turkey 16.7 3.0 8.3 29.3 33.9 28.2

Canada 12.9 2.3 3.2 9.8 9.5 3.7

Thailand 9.1 1.6 5.1 21.8 19.3 18.3

Mexico 9.1 1.6 2.9 12.8 4.6 7.5


Switzerland 8.1 1.5 4.4 6.9 -14.8 24.2

Malaysia 8.1 1.5 5.2 16.1 32.7 3.3

SaudiArabia 7.5 1.4 6.5 30.2 19.5 82.0

Above15 511.7 92.1 - - - -



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european union (27) united states

value share Annual percentage change


2008 2008 2000-08 2008 2008 2008 2000-08 2008

World 1,093.04 100.00 16 16 World 583.43 100.00 15 28

Europe 510.90 46.74 15 15 NorthAmerica 188.99 32.39 14 26

CIS 224.39 20.53 21 25 Africa 104.58 17.92 20 23

Africa 119.13 10.90 14 13 SouthandCentralAmerica 102.59 17.58 14 26

MiddleEast 65.73 6.01 10 6 MiddleEast 88.16 15.11 17 62

SouthandCentralAmerica 44.79 4.10 17 -1 Europe 45.40 7.78 11 13

NorthAmerica 37.99 3.48 12 15 CIS 28.25 4.84 23 44

Asia 37.36 3.42 18 11 Asia 25.47 4.37 9 -1

suppliers suppliers

EuropeanUnion(27) 399.48 36.55 16 12 Canada 141.99 24.34 13 29

RussianFederation 174.22 15.94 20 23 SaudiArabia 56.28 9.65 19 54

Norway 92.83 8.49 14 30 BolivarianRep.ofVenezuela 50.89 8.72 14 29

Libya 42.02 3.84 18 24 Mexico 46.99 8.05 15 20

UnitedStates 26.02 2.38 15 37 EuropeanUnion(27) 40.27 6.90 14 16

Above 5 734.57 67.20 - - Above 5 336.42 57.66 - -

Kazakhstan 23.38 2.14 29 37 Nigeria 38.99 6.68 17 16

SaudiArabia 21.47 1.96 8 7 Iraq 22.71 3.89 17 100

Algeria 20.66 1.89 8 -2 RussianFederation 21.40 3.67 19 37

Brazil 15.91 1.46 19 16 Algeria 19.98 3.42 27 9

Nigeria 14.71 1.35 13 23 Angola 19.46 3.34 23 51

Azerbaijan 14.50 1.33 42 46 Brazil 11.95 2.05 21 56

Iran 13.19 1.21 9 -13 Colombia 8.91 1.53 9 58

Iraq 11.15 1.02 9 23 Ecuador 8.30 1.42 22 54

SouthAfrica 10.78 0.99 14 5 China 7.52 1.29 17 33

Canada 10.54 0.96 9 12 Kuwait 6.96 1.19 11 71

Chile 9.84 0.90 14 -25 Congo 5.18 0.89 33 63

Angola 8.82 0.81 36 108 Chile 4.97 0.85 14 -17

Australia 8.60 0.79 13 -2 TrinidadandTobago 4.96 0.85 16 -18

China 8.08 0.74 21 9 Azerbaijan 4.46 0.76 128 132

Switzerland 7.74 0.71 14 9 Norway 4.43 0.76 -0 -7

Kuwait 7.07 0.65 13 30 Libya 4.16 0.71 .. 23

BolivarianRep.ofVenezuela 6.31 0.58 15 5 SouthAfrica 3.84 0.66 7 -23

Ukraine 5.88 0.54 17 39 Peru 3.66 0.63 16 19

Egypt 5.03 0.46 14 -3 Chad 3.45 0.59 .. 55

Syria 4.62 0.42 6 12 EquatorialGuinea 3.27 0.56 46 102

India 4.52 0.41 29 16 Aruba 3.24 0.56 10 6

Colombia 3.98 0.36 21 41 Australia 2.85 0.49 5 59

Belarus 3.70 0.34 33 -3 Thailand 2.74 0.47 4 15

Turkey 3.48 0.32 19 -1 Argentina 2.68 0.46 9 15

UnitedArabEmirates 3.06 0.28 20 -15 Korea,Rep.of 2.60 0.45 13 -42

Above 30 981.62 89.81 - - Above 30 559.08 95.83 - -

Source:UNComtradedatabase.


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Japan china



2008 2008 2000-08 2008 2008 2008 2000-08 2008

World 350.20 100.00 14 41 World 331.27 100.00 30 43

MiddleEast 165.57 47.28 17 48 Asia 109.33 33.00 27 38

Asia 115.05 32.85 12 40 MiddleEast 72.14 21.78 30 75

Africa 18.14 5.18 22 47 Africa 50.59 15.27 35 57

SouthandCentralAmerica 15.98 4.56 15 11 SouthandCentralAmerica 42.52 12.84 45 39

NorthAmerica 15.68 4.48 4 26 CIS 27.52 8.31 29 23

CIS 12.75 3.64 14 23 NorthAmerica 15.92 4.81 24 15

Europe 6.99 2.00 8 24 Europe 13.24 4.00 24 17

suppliers suppliers

SaudiArabia 50.49 14.42 17 45 Australia 32.88 9.93 39 53

UnitedArabEmirates 46.99 13.42 16 46 SaudiArabia 27.26 8.23 43 96

Australia 41.83 11.95 19 60 Angola 22.36 6.75 37 74

Qatar 26.53 7.58 21 57 RussianFederation 19.60 5.92 27 21

Indonesia 24.59 7.02 10 26 Brazil 18.64 5.63 51 61

Above 5 190.43 54.38 - - Above 5 120.75 36.45 - -

Iran 18.09 5.17 17 45 Iran 18.45 5.57 35 44

Kuwait 15.30 4.37 15 54 India 15.54 4.69 49 54

RussianFederation 12.61 3.60 14 26 Korea,Rep.of 13.68 4.13 22 33

Malaysia 11.38 3.25 13 58 Japan 12.99 3.92 30 40

China 10.19 2.91 7 20 Oman 11.49 3.47 17 72

UnitedStates 8.28 2.36 3 30 EuropeanUnion(27) 10.97 3.31 24 16

Chile 7.12 2.03 14 -3 Chile 10.45 3.15 30 7

SouthAfrica 6.98 1.99 15 18 UnitedStates 9.20 2.78 22 13

Canada 6.49 1.85 5 23 Taipei,Chinese 6.75 2.04 23 33

Korea,Rep.of 5.87 1.68 3 21 Kazakhstan 6.75 2.04 36 24

Oman 5.57 1.59 13 56 Indonesia 6.75 2.04 16 17

Brazil 5.56 1.59 17 58 BolivarianRep.ofVenezuela 6.41 1.93 73 117

EuropeanUnion(27) 4.83 1.38 9 21 Sudan 6.31 1.90 31 52

BruneiDarussalam 4.54 1.30 13 81 Canada 5.72 1.73 26 12

Sudan 4.23 1.21 41 58 SouthAfrica 5.48 1.66 41 40

VietNam 3.85 1.10 16 88 Kuwait 4.84 1.46 51 130

Thailand 2.81 0.80 9 32 Singapore 4.53 1.37 22 129

India 2.53 0.72 9 24 UnitedArabEmirates 4.34 1.31 34 55

Peru 1.88 0.54 29 -5 Congo 3.73 1.13 36 32

Nigeria 1.69 0.48 31 166 Peru 3.55 1.07 52 -5

Singapore 1.67 0.48 12 22 Yemen 3.19 0.96 20 84

Egypt 1.56 0.44 36 94 Malaysia 2.81 0.85 15 15

Iraq 1.51 0.43 11 48 Thailand 2.65 0.80 21 27

Taipei,Chinese 1.46 0.42 3 8 Libya 2.59 0.78 79 67

Norway 1.38 0.39 6 33 VietNam 2.28 0.69 15 32

Above 30 337.79 96.46 - - Above 30 302.18 91.22 - -

Source: UNComtradedatabase.


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Net

exp

orte

r

No

data

ava

ilabl

e

Not

e: C

olou

rsa

ndb

ound

arie

sdo

not

impl

yan

yju

dgem

ento

nth

epa

rto

fth

eW

TOa

sto

the

lega

lsta

tus

ofa

nyf

ront

ier

ort

erri

tory

.

Sou

rce:

UN

Com

trad

eda

taba

se.


220

App

endi

xM

ap2

:net

exp

ort

ers

of

fore

stry

pro

du

cts,

20

08

or

late

st y

ear

App

endi

x M

ap 2

Net

exp

orte

rs o

f for

estr

y pr

oduc

ts, 2

008

or la

test

yea

r

Note

: C

olou

rs a

nd b

ound

arie

s do

not

impl

y an

y ju

dgem

ent o

n th

e pa

rt of

the

WTO

as

to th

e le

gal s

tatu

s of

any

fron

tier o

r ter

ritor

y.Source

: UN

Com

trade

dat

abas

e.

Fore

stry

Net

impo

rter

Net

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r

No

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ava

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e

Not

e: C

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ound

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ier

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.

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rce:

UN

Com

trad

eda

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221

stA

tIstIc

AL A

PP

en

DIx

App

endi

xM

ap3

:net

exp

ort

ers

of

fuel

s, 2

00

8 o

r la

test

ye

ar

App

endi

x M

ap 3

Net

exp

orte

rs o

f fue

ls, 2

008

or la

test

yea

r

Note

: C

olou

rs a

nd b

ound

arie

s do

not

impl

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y ju

dgem

ent o

n th

e pa

rt of

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WTO

as

to th

e le

gal s

tatu

s of

any

fron

tier o

r ter

ritor

y.Source

: UN

Com

trade

dat

abas

e.

Fuel

s

Net

impo

rter

Net

exp

orte

r

No

data

ava

ilabl

e

Not

e: C

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rsa

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ound

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sdo

not

impl

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ento

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rto

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eW

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ort

erri

tory

.

Sou

rce:

UN

Com

trad

eda

taba

se.


222

App

endi

xM

ap4

:net

exp

ort

ers

of

non

-fer

rou

s m

etal

s, 2

00

8 o

r la

test

ye

ar

App

endi

x M

ap 4

Net

exp

orte

rs o

f non

-ferr

ous

met

als,

200

8 or

late

st y

ear

Note

: C

olou

rs a

nd b

ound

arie

s do

not

impl

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y ju

dgem

ent o

n th

e pa

rt of

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WTO

as

to th

e le

gal s

tatu

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fron

tier o

r ter

ritor

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: UN

Com

trade

dat

abas

e.

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-fer

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als

Net

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Net

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orte

r

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e

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e: C

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rsa

ndb

ound

arie

sdo

not

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epa

rto

fth

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sto

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lega

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ofa

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ront

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ort

erri

tory

.

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rce:

UN

Com

trad

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se.


223

stA

tIstIc

AL A

PP

en

DIx

App

endi

xM

ap5

:net

exp

ort

ers

of

ore

s an

d o

ther

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eral

s, 2

00

8 o

r la

test

ye

ar

App

endi

x M

ap 5

Net

exp

orte

rs o

f ore

s an

d ot

her m

iner

als,

200

8 or

late

st y

ear

Note

: C

olou

rs a

nd b

ound

arie

s do

not

impl

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y ju

dgem

ent o

n th

e pa

rt of

the

WTO

as

to th

e le

gal s

tatu

s of

any

fron

tier o

r ter

ritor

y.Source

: UN

Com

trade

dat

abas

e.

Ore

s an

d ot

her m

iner

als

Net

impo

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Net

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r

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e: C

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ound

arie

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ier

ort

erri

tory

.

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rce:

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Com

trad

eda

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se.


224

App

endi

xM

ap6

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tal r

enew

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fre

sh w

ater

res

ou

rces

per

cap

ita,

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08

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habi

tant

per

yea

r)

App

endi

x M

ap 6

Tota

l ren

ewab

le fr

esh

wat

er re

sour

ces

per c

apita

, 200

8(m

3 per

inha

bita

nt p

er y

ear)

Note

: Col

ours

and

bou

ndar

ies

do n

ot im

ply

any

judg

emen

t on

the

part

of th

e W

TO a

s to

the

lega

l sta

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of a

ny fr

ontie

r or t

errit

ory.

Source

: UN

Foo

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d A

gric

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rgan

izat

ion,

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e

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ater

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0

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00

to 1

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00

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0

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than

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00

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e

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e: C

olou

rsa

ndb

ound

arie

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not

impl

yan

yju

dgem

ento

nth

epa

rto

fth

eW

TOa

sto

the

lega

lsta

tus

ofa

nyf

ront

ier

ort

erri

tory

.

Sou

rce:

UN

Foo

dan

dA

gric

ultu

reO

rgan

izat

ion

(FA

O),

Aqu

asta

tdat

abas

e.


225

stA

tIstIc

AL A

PP

en

DIx

App

endi

xM

ap7

:ene

rgy

pro

du

ctio

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tota

l pri

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y en

erg

y su

pp

ly (

ener

gy

self

-su

ffici

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), 20

07 (

Rat

io)

App

endi

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ap 7

Ener

gy p

rodu

ctio

n / t

otal

prim

ary

ener

gy s

uppl

y (e

nerg

y se

lf-su

ffici

ency

), 20

07(R

atio

)

Note

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ours

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bou

ndar

ies

do n

ot im

ply

any

judg

emen

t on

the

part

of th

e W

TO a

s to

the

lega

l sta

tus

of a

ny fr

ontie

r or t

errit

ory.

Source

: Int

erna

tiona

l Ene

rgy

Ane

ncy,

Wor

ld E

nerg

y S

tatis

tics

and

Bal

ance

s (2

009)

.

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ater

than

2.5

1.0

to 2

.5

0.5

to 1

.0

Less

than

0.5

No

data

ava

ilabl

e

Not

e: C

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ndb

ound

arie

sdo

not

impl

yan

yju

dgem

ento

nth

epa

rto

fth

eW

TOa

sto

the

lega

lsta

tus

ofa

nyf

ront

ier

ort

erri

tory

.

Sou

rce:

Inte

rnat

iona

lEne

rgy

Ane

ncy,

Wor

ldE

nerg

yS

tatis

tics

and

Bal

ance

s(2

00

9).


226

App

endi

xM

ap8

:oil

pro

du

ctio

n /

tota

l pri

mar

y en

erg

y su

pp

ly o

f o

il (o

il se

lf-s

uffi

cien

cy),

2007

(R

atio

)

App

endi

x M

ap 8

Oil

prod

uctio

n / t

otal

prim

ary

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gy s

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(oil

self-

suffi

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cy),

2007

(Rat

io)

Note

: Col

ours

and

bou

ndar

ies

do n

ot im

ply

any

judg

emen

t on

the

part

of th

e W

TO a

s to

the

lega

l sta

tus

of a

ny fr

ontie

r or t

errit

ory.

Source

: Int

erna

tiona

l Ene

rgy

Ane

ncy,

Wor

ld E

nerg

y S

tatis

tics

and

Bal

ance

s (2

009)

.

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ater

than

2

1.0

to 2

.0

0.2

5 to

1.0

0 to

0.2

5

No

data

ava

ilabl

e

Not

e: C

olou

rsa

ndb

ound

arie

sdo

not

impl

yan

yju

dgem

ento

nth

epa

rto

fth

eW

TOa

sto

the

lega

lsta

tus

ofa

nyf

ront

ier

ort

erri

tory

.

Sou

rce:

Inte

rnat

iona

lEne

rgy

Ane

ncy,

Wor

ldE

nerg

yS

tatis

tics

and

Bal

ance

s(2

00

9).


227

stA

tIstIc

AL A

PP

en

DIx

App

endi

xM

ap9

:to

tal p

rim

ary

ener

gy

sup

ply

/ G

DP

(en

erg

y in

tens

ity

of

GD

P),

2007

(to

epe

rth

ousa

nd2

00

0U

Sd

olla

rs)

App

endi

x M

ap 9

Tota

l prim

ary

ener

gy s

uppl

y / G

DP

(ene

rgy

inte

nsity

of G

DP)

, 200

7(to

e pe

r tho

usan

d 20

00 U

S d

olla

rs)

Note

: Col

ours

and

bou

ndar

ies

do n

ot im

ply

any

judg

emen

t on

the

part

of th

e W

TO a

s to

the

lega

l sta

tus

of a

ny fr

ontie

r or t

errit

ory.

Source

: Int

erna

tiona

l Ene

rgy

Ane

ncy,

Wor

ld E

nerg

y S

tatis

tics

and

Bal

ance

s (2

009)

.

Gre

ater

than

1

0.5

to 1

.0

0.3

to 0

.5

Less

than

0.3

No

data

ava

ilabl

e

Not

e: C

olou

rsa

ndb

ound

arie

sdo

not

impl

yan

yju

dgem

ento

nth

epa

rto

fth

eW

TOa

sto

the

lega

lsta

tus

ofa

nyf

ront

ier

ort

erri

tory

.

Sou

rce:

Inte

rnat

iona

lEne

rgy

Ane

ncy,

Wor

ldE

nerg

yS

tatis

tics

and

Bal

ance

s(2

00

9).


228

App

endi

xM

ap1

0:t

ota

l pri

mar

y en

erg

y su

pp

ly /

po

pu

lati

on

(per

cap

ita

ener

gy

sup

ply

), 20

07 (

toe

per

capi

ta)

App

endi

x M

ap 1

0To

tal p

rimar

y en

ergy

sup

ply

/ pop

ulat

ion

(per

cap

ita e

nerg

y su

pply

), 20

07(to

e pe

r cap

ita)

Note

: Col

ours

and

bou

ndar

ies

do n

ot im

ply

any

judg

emen

t on

the

part

of th

e W

TO a

s to

the

lega

l sta

tus

of a

ny fr

ontie

r or t

errit

ory.

Source

: Int

erna

tiona

l Ene

rgy

Ane

ncy,

Wor

ld E

nerg

y S

tatis

tics

and

Bal

ance

s (2

009)

.

Gre

ater

than

3.0

1.5

to 3

.0

0.7

5 to

1.5

Less

than

0.7

5

No

data

ava

ilabl

e

Not

e: C

olou

rsa

ndb

ound

arie

sdo

not

impl

yan

yju

dgem

ento

nth

epa

rto

fth

eW

TOa

sto

the

lega

lsta

tus

ofa

nyf

ront

ier

ort

erri

tory

.

Sou

rce:

Inte

rnat

iona

lEne

rgy

Ane

ncy,

Wor

ldE

nerg

yS

tatis

tics

and

Bal

ance

s(2

00

9).

BIBLIoGRAPHy

229

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240

Technical notescomposition of regions and other economic groupingsRegionsnorth America Bermuda Canada* Mexico* UnitedStatesof

America*

Otherterritoriesintheregionnotelsewherespecified(n.e.s.)

south and central America and the caribbean AntiguaandBarbuda* Brazil* Ecuador* Jamaica* SaintLucia*

Argentina* Chile* ElSalvador* NetherlandsAntilles SaintVincentandtheGrenadines*

Bahamas** Colombia* Grenada* Nicaragua* Suriname*

Barbados* CostaRica* Guatemala* Panama* TrinidadandTobago*

Belize* Cuba* Guyana* Paraguay* Uruguay*

Bolivia* Dominica* Haiti* Peru*

BolivarianRep.ofVenezuela*

DominicanRepublic* Honduras* SaintKittsandNevis*

Otherterritoriesintheregionn.e.s.

europe Andorra** Denmark* Iceland* Montenegro** Slovenia*

Austria* Estonia* Ireland* Netherlands* Spain*

Belgium* Finland* Italy* Norway* Sweden*

BosniaandHerzegovina**

France* Latvia* Poland* Switzerland*

Bulgaria* FYRMacedonia* Liechtenstein* Portugal* Turkey*

Croatia* Germany* Lithuania* Romania* UnitedKingdom*

Cyprus* Greece* Luxembourg* Serbia**

CzechRepublic* Hungary* Malta* SlovakRepublic*


commonwealth of Independent states (cIs) a Armenia* Georgiaa Moldova* Turkmenistan

Azerbaijan** Kazakhstan** RussianFederation** Ukraine*

Belarus** KyrgyzRepublic* Tajikistan** Uzbekistan**


Africa

Algeria** Congo* Guinea* Morocco* SouthAfrica*

Angola* Congo,Dem.Rep.of* Guinea-Bissau* Mozambique* Sudan**

Benin* Côted’Ivoire* Kenya* Namibia* Swaziland*

Botswana* Djibouti* Lesotho* Niger* Tanzania*

BurkinaFaso* Egypt* Liberia** Nigeria* Togo*

Burundi* EquatorialGuinea** LibyanArabJamahiriya** Rwanda* Tunisia*

Cameroon* Eritrea Madagascar* SãoToméandPríncipe** Uganda*

CapeVerde* Ethiopia** Malawi* Senegal* Zambia*

CentralAfricanRepublic* Gabon* Mali* Seychelles** Zimbabwe*

Chad* Gambia* Mauritania* SierraLeone*

Comoros** Ghana* Mauritius* Somalia


middle east Bahrain* Israel* Lebanon** SaudiArabia* Yemen**

Iran,IslamicRep.of** Jordan* Oman* SyrianArabRepublic**

Iraq** Kuwait* Qatar* UnitedArabEmirates*


Asia Afghanistan** HongKong,China* Malaysia* PapuaNewGuinea* Tonga*

Australia* India* Maldives* Philippines* Tuvalu

Bangladesh* Indonesia* Mongolia* Samoa** Vanuatu**

Bhutan** Japan* Myanmar* Singapore* VietNam*

*WTOmembers

**ObservergovernmentsaGeorgiaisnotamemberoftheCommonwealthofIndependentStatesbutisincludedinthisgroupforreasonsofgeographyandsimilaritiesineconomicstructure.

tecHnIcAL notes

241

composition of regions and other economic groupings (cont’d)RegionsAsia(cont’d)BruneiDarussalam* Kiribati Nepal* SolomonIslands*

Cambodia* Korea,Republicof* NewZealand* SriLanka*

China* LaoPeople’sDem.Rep.** Pakistan* Taipei,Chinese*

Fiji* Macao,China* Palau Thailand*


OtherGroupsAcP (African, caribbean and Pacific countries) Angola Côted’Ivoire Haiti Niger SouthAfrica

AntiguaandBarbuda Cuba Jamaica Nigeria Sudan

Bahamas Djibouti Kenya Niue Suriname

Barbados Dominica Kiribati Palau Swaziland

Belize DominicanRepublic Lesotho PapuaNewGuinea TimorLeste

Benin EquatorialGuinea Liberia Rwanda Togo

Botswana Eritrea Madagascar SaintKittsandNevis Tonga

BurkinaFaso Ethiopia Malawi SaintLucia TrinidadandTobago

Burundi Fiji Mali SaintVincentandtheGrenadines

Tuvalu

Cameroon Gabon MarshallIslands Samoa Uganda

CentralAfricanRepublic

Gambia Mauritania SãoToméandPríncipe UnitedRepublicofTanzania

Chad Ghana Mauritius Senegal Vanuatu

Comoros Grenada Micronesia Seychelles Zambia

Congo Guinea Mozambique SierraLeone Zimbabwe

Congo,Dem.Rep.of Guinea-Bissau Namibia SolomonIslands

CookIslands Guyana Nauru Somalia

Africa North Africa

Algeria Egypt LibyanArabJamahiriya Morocco Tunisia

Sub-Saharan Africa

Western Africa

Benin Gambia Guinea-Bissau Mauritania Senegal

BurkinaFaso Ghana Liberia Niger SierraLeone

CapeVerde Guinea Mali Nigeria Togo

Côted’Ivoire

Central Africa

Burundi CentralAfricanRepublic Congo EquatorialGuinea Rwanda

Cameroon Chad Congo,Dem.Rep.of Gabon SãoToméandPríncipe

Eastern Africa

Comoros Ethiopia Mauritius Somalia Tanzania

Djibouti Kenya Seychelles Sudan Uganda

Eritrea Madagascar

Southern Africa

Angola Lesotho Mozambique SouthAfrica Zambia

Botswana Malawi Namibia Swaziland Zimbabwe

TerritoriesinAfricanotelsewherespecified

Asia East Asia (including Oceania):

Australia Indonesia Malaysia Samoa Tuvalu

BruneiDarussalam Japan Mongolia Singapore Vanuatu

Cambodia Kiribati Myanmar SolomonIslands VietNam

China Korea,Rep.of NewZealand Taipei,Chinese

Fiji LaoPeople’sDem.Rep. PapuaNewGuinea Thailand

HongKong,China Macao,China Philippines Tonga

West Asia:

Afghanistan Bhutan Maldives Pakistan SriLanka

Bangladesh India Nepal

OthercountriesandterritoriesinAsiaandthePacificnotelsewherespecified

*WTOmembers


242

composition of regions and other economic groupings (cont’d)OtherGroupsLDcs (Least-developed countries) Afghanistan Comoros Kiribati Myanmar Sudan

Angola Congo,Dem.Rep.of LaoPeople’sDem.Rep. Nepal TimorLeste

Bangladesh Djibouti Lesotho Niger Togo

Benin EquatorialGuinea Liberia Rwanda Tuvalu

Bhutan Eritrea Madagascar Samoa Uganda

BurkinaFaso Ethiopia Malawi SãoToméandPríncipe UnitedRepublicofTanzania

Burundi Gambia Maldives Senegal Vanuatu

Cambodia Guinea Mali SierraLeone Yemen

CentralAfricanRepublic Guinea-Bissau Mauritania SolomonIslands Zambia

Chad Haiti Mozambique Somalia

RegionalIntegrationAgreementsAndean community (cAn) Bolivia Colombia Ecuador Peru

AseAn (Association of south east Asian nations) / AFtA (AseAn Free trade Area) BruneiDarussalam Indonesia Malaysia Philippines Thailand

Cambodia LaoPeople’sDem.Rep. Myanmar Singapore VietNam

cAcm (central American common market) CostaRica ElSalvador Guatemala Honduras Nicaragua

cARIcom (caribbean community and common market) AntiguaandBarbuda Belize Guyana Montserrat SaintVincentandthe

Grenadines

Bahamas Dominica Haiti SaintKittsandNevis Suriname

Barbados Grenada Jamaica SaintLucia TrinidadandTobago

cemAc (economic and monetary community of central Africa) Cameroon Chad Congo EquatorialGuinea Gabon

CentralAfricanRepublic

comesA (common market for eastern and southern Africa) Burundi Egypt LibyanArabJamahiriya Rwanda Uganda

Comoros Eritrea Madagascar Seychelles Zambia

Congo,Dem.Rep.of Ethiopia Malawi Sudan Zimbabwe

Djibouti Kenya Mauritius Swaziland

eccAs (economic community of central African states) Angola CentralAfricanRepublic Congo,Dem.Rep.of Gabon SãoToméandPríncipe

Burundi Chad EquatorialGuinea Rwanda

Cameroon Congo

ecoWAs (economic community of West African states) Benin Côted’Ivoire Guinea Mali Senegal

BurkinaFaso Gambia Guinea-Bissau Niger SierraLeone

CapeVerde Ghana Liberia Nigeria Togo

eFtA (european Free trade Association) Iceland Liechtenstein Norway Switzerland

european union (27) Austria Estonia Ireland Netherlands Spain

Belgium Finland Italy Poland Sweden

Bulgaria France Latvia Portugal UnitedKingdom

Cyprus Germany Lithuania Romania

CzechRepublic Greece Luxembourg SlovakRepublic

Denmark Hungary Malta Slovenia

Gcc (Gulf cooperation council) Bahrain Oman Qatar SaudiArabia UnitedArabEmirates

Kuwait

meRcosuR (southern common market) Argentina Brazil Paraguay Uruguay

nAFtA (north American Free trade Agreement) Canada Mexico UnitedStates

sAPtA (south Asian Preferential trade Arrangement) Bangladesh India Nepal Pakistan SriLanka

Bhutan Maldives

tecHnIcAL notes

243

composition of regions and other economic groupings (cont’d)RegionalIntegrationAgreementssADc (southern African Development community) Angola Lesotho Mauritius SouthAfrica Zambia

Botswana Madagascar Mozambique Swaziland Zimbabwe

Congo,Dem.Rep.of Malawi Namibia UnitedRepublicofTanzania

WAemu (West African economic and monetary union) Benin Côted’Ivoire Mali Senegal Togo

BurkinaFaso Guinea-Bissau Niger

WTOmembersarefrequentlyreferredtoas“countries”,althoughsomemembersarenotcountriesintheusualsenseofthewordbutareofficially“customsterritories”.The definition of geographical and other groupings inthis reportdoesnot implyanexpressionofopinionbytheSecretariatconcerningthestatusofanycountryorterritory, thedelimitationof its frontiers,nor therightsandobligationsofanyWTOmemberinrespectofWTOagreements. The colours, boundaries, denominationsandclassificationsinthemapsofthepublicationdonotimply, on the part of the WTO, any judgement on thelegalorotherstatusofanyterritory,oranyendorsementoracceptanceofanyboundary.

Throughoutthisreport,SouthandCentralAmericaandthe Caribbean is referred to as South and CentralAmerica. The Bolivarian Republic of Venezuela; HongKong Special Administrative Region of China; theRepublicofKorea;andtheSeparateCustomsTerritoryofTaiwan,Penghu,KinmenandMatsuare referencedas Bolivarian Rep. of Venezuela; Hong Kong, China;Korea,Republicof;andTaipei,Chineserespectively.


244

Glossary 1

Autarky:Thesituationofnotengagingininternationaltrade;self-sufficiency.

Comparative advantage:Theabilitytoproduceagoodatlowercost,relativetoothergoods,comparedtoanothercountry.InaRicardianmodel,comparisonisofunitlabourrequirements;moregenerallyitisofrelativeautarkyprices.

Correlation:Ameasureoftheextenttowhichtwoeconomicorstatisticalvariablesmovetogether,normalizedsothattheirvaluesrangefrom-1to+1.Thecorrelationisusedintradetheorytoexpressweakrelationshipsamongeconomicvariables.

Demand Shock:Ashockonthedemandsideofamarket.Thusanunexpectedshift,upordown,inthedemandcurve.

Economies of scale:Seeincreasingreturnstoscale.

Elasticity:Ameasureofresponsivenessofoneeconomicvariabletoanother–usuallytheresponsivenessofquantitytopricealongasupplyordemandcurve.

Exchange rate:Thepriceatwhichonecountry’scurrencytradesforanother,typicallyontheexchangemarket.

Externality:Aneffectofoneeconomicagent’sactionsonanotherwhichisnottransmittedthroughprices,suchthatoneagent’sdecisionsmakeanotherbetterorworseoffbychangingtheirutilityorcost.Beneficialeffectsarepositiveexternalities;harmfulonesarenegativeexternalities.Inthepresenceofexternalities,marketpricesdonotreflectthefullcostorbenefitofproducingorconsumingagood.

Factor of production:Aninputthatexistsasastockprovidingservicesthatcontributetoproduction.Thestockisnotusedupinproduction,althoughitmaydeterioratewithuse,providingasmallerflowofserviceslater.Themajorprimaryfactorsarelabor,capital,humancapital(orskilledlabour),land,andsometimesnaturalresources.

Expectation(orexpectedvalue):Anticipationofthevalueofarandomvariableinfuturetimeperiods.Themathematicalexpectedvalueofarandomvariableequalsthesumofthevaluesthatarepossibleforit,eachmultipliedbyitsprobability.

Hedge:Tooffsetrisk.

Increasing/decreasing returns to scale:Apropertyofaproductionfunctionsuchthatchangingallinputsbythesameproportionchangesoutputmore/lessthaninproportion.Underincreasingreturnstoscale(alsocalledeconomiesofscale)averagecostsdecreaseasoutputincreases.Economiesofscaletendtooccurinindustrieswithhighcapitalcostsinwhichthosecostscanbedistributedacrossalargenumberofunitsofproduction.

Inter-industry trade:Tradeinwhichacountry’sexportsandimportsareindifferentindustries.

Intra-industry trade:Tradeinwhichacountryexportsandimportsinthesameindustry,incontrasttointer-industrytrade.

Learning by doing:Referstotheimprovementintechnologyorknow-howthattakesplaceinsomeindustries,earlyintheirhistory,astheylearnbyexperience,sothataveragecostfallsasaccumulatedoutputrises.

Marginal cost:Theincreaseincostthataccompaniesaunitincreaseinoutput;thepartialderivativeofthecostfunctionwithrespecttooutput.

Marginal revenue:Theamountbywhichafirm’srevenueincreaseswhenitexpandsoutputbyoneunit,takingintoaccountthattosellonemoreunititmayneedtoreducepriceonallunits.

Monopoly:Amarketstructureinwhichthereisasingleseller.

Monopsony:Amarketstructureinwhichthereisasinglebuyer.

Oligopoly:Amarketstructureinwhichthereareasmallnumberofsellers,atleastsomeofwhoseindividualdecisionsaboutpriceorquantitymattertotheothers.

Perfect competition:Anidealizedmarketstructureinwhichtherearelargenumbersofbothbuyersandsellers,allofthemsmall,sothattheyactaspricetakers.Perfectcompetitionalsoassumeshomogeneousproducts,freeentryandexit,andcompleteinformation.

Property rights:Thelegallydefinedandenforcedrulesofownership,specifyingwhohastherighttobuy,sell,anduseanything.

Rate of return:Thepercentageofanasset’svaluethattheowneroftheassetearns,usuallyperyear.

Real exchange rate:1.Thenominalexchangerateadjustedforinflation.2.Therealpriceofforeigngoods;i.e.,thequantityofdomesticgoodsneededtopurchaseaunitofforeigngoods.Equalsthereciprocalofthetermsoftrade.3.Therelativepriceoftradedgoodsintermsofnon-tradedgoods.

Relative price:Thepriceofonegoodintermsofanother;i.e.,theratiooftwoprices.

Rent:Thepremiumthattheownerofaresourcereceivesoverandaboveitsopportunitycost.

Rent-seeking:Theusingupofrealresourcesinanefforttosecuretherightstorentsthatarisefromgovernmentpolicies.

Speculation:Thepurchaseorsaleofanasset(oracquisitionotherwiseofanopenposition)inhopesthatitspricewillriseorfallrespectively,inordertomakeaprofit.

Supply chain:Thesequenceofsteps,oftendoneindifferentfirmsand/orlocations,neededtoproduceafinalgoodfromprimaryfactors,startingwithprocessingofrawmaterials,continuingwithproductionofperhapsaseriesofintermediateinputs,andendingwithfinalassemblyanddistribution.

Supply shock:Ashockonthesupplysideofamarket.Thusanunexpectedshift,upordown,inthesupplycurve.

Terms of trade:Therelativeprice,onworldmarkets,ofacountry’sexportscomparedtoitsimports.

Vertical integration:Productionofdifferentstagesofprocessingofaproductwithinthesamefirm.

1. TheglossarydefinitionsarelargelyattributedtoDeardorff’sGlossaryofInternationalEconomics,availableonlineathttp://www-personal.umich.edu/~alandear/glossary/.

ABBRevIAtIons AnD symBoLs

245

abbreviations and symbolsAC alternatingcurrentASEAN AssociationofSoutheastAsianNationsBITs bilateralinvestmenttreatiesBTU BritishthermalunitCAREC CentralAsianRegionalEconomicCooperationCECA ComprehensiveEconomicCooperationAgreementCEQ CouncilonEnvironmentalQualityCFP CommonFisheriesPolicyCIS CommonwealthofIndependentStatesCITES ConventiononInternationalTradeinEndangeredSpeciesofWildFaunaandFloraCO2 carbondioxideCPI ConsumerPriceIndexCRRA constantrelativeriskaversionCTS CouncilforTradeinServicesDC directcurrentDWFN distantwatersfishingnationdwt deadweighttonneEAEC EurasianEconomicCommunityECT EnergyCharterTreatyEEZ ExclusiveEconomicZoneEITI ExtractiveIndustriesTransparencyInitiativeEKC environmentalKuznetscurveEMH EfficientMarketHypothesisEU EuropeanUnionFAO FoodandAgricultureOrganizationFDI foreigndirectinvestmentFTAs freetradeagreementsGATS GeneralAgreementonTradeinServicesGATT GeneralAgreementonTariffsandTradeGDP grossdomesticproductGEF GlobalEnvironmentFundGFTs governmentfinancialtransfersGLindex Grubel-LloydindexGPA AgreementonGovernmentProcurementHS HarmonizedSystemICA internationalcommodityagreementIDB IntegratedDatabaseIEA InternationalEnergyAgencyIMF InternationalMonetaryFundITQs individualtransferablequotasITTA InternationalTropicalTimberAgreementkt kilotonneLNG liquifiednaturalgasLPG liquifiedpetroleumgasm³ cubicmetreMEA multilateralenvironmentalagreementMERCOSUR SouthernCommonMarketMFN most-favourednationMoU MemorandumofUnderstandingNAFTA NorthAmericanFreeTradeAgreementNRBPs naturalresource-basedproductsNTM non-tariffmeasureNYMEX NewYorkMercantileExchangeOECD OrganizationforEconomicCo-operationandDevelopmentOPEC OrganizationofthePetroleumExportingCountriesOTC over-the-counterPPMs processandproductionmethodsPTAs PreferentialtradeagreementsR&D researchanddevelopmentRFMOs RegionalFisheriesManagementOrganisationsSAFEX SouthAfricanFuturesExchangeSCMs SubsidiesandCountervailingMeasuresTAC totalallowablecatchTBT TechnicalBarrierstoTradeTIFA TradeandInvestmentFrameworkAgreementTJ terajouleToP take-or-pay


246

TPR TradePolicyReviewTRIPS Trade-RelatedAspectsofIntellectualPropertyRightsUK UnitedKingdomUN UnitedNationsUNCLOS UnitedNationsConventionontheLawoftheSeaUNCTAD UnitedNationsConferenceonTradeandDevelopmentUNEP UnitedNationsEnvironmentProgrammeUNFCC UnitedNationsFrameworkConventiononClimateChangeVMS vesselmonitoringsystems

Thefollowingsymbolsareusedinthispublication:... notavailable0 figureiszeroorbecamezeroduetorounding- notapplicable$ UnitedStatesdollars€ euro£ UKpound

LIst oF FIGuRes, tABLes, Boxes AnD mAPs

247

list of figures, tables, boxes and maps

I The trade situation in 2009-10

Figures

Fig.1 Volumeofworldmerchandiseexports,1965-2009 20

Fig.2 RatioofworldexportsofgoodsandcommercialservicestoGDP,1981-2009 21

Fig.3 Worldmerchandiseexportsbyregion,2007Q1-2009Q4 21

Fig.4 RealGDPandtradegrowthofOECDcountries,2008-09 22

Fig.5 Exportpricesofselectedprimaryproducts,January2000-January2010 23

Fig.6 Exportpricesofselectedprimaryproducts,2007-09 23

Fig.7 Dollarexchangeratesofselectedcurrencies,January2000-January2010 23

Fig.8 GrowthinthevolumeofworldmerchandisetradeandGDP,1999-2009 24

Fig.9 Realmerchandisetradegrowthbyregion,2009 25

Tables

Table1 Worldtradeinmanufacturedgoodsbyproduct,2008Q1-09Q4 21

Table2 GDPandmerchandisetradebyregion,2007-09 24

Table3 Worldexportsofmerchandiseandcommercialservices,2005-09 26

Table4 Worldexportsofcommercialservicesbymajorcategory,2009 27

Appendixtables

App.Table1 Worldmerchandisetradebyregionandselectedcountry,2009 28

App.Table2 Worldexportsofcommercialservicesbyregionandselectedcountry,2009 29

App.Table3 Merchandisetrade:Leadingexportersandimporters,2009 30

App.Table4 Merchandisetrade:Leadingexportersandimportersexcludingintra-EU(27)trade,2009 31

App.Table5 Leadingexportersandimportersinworldtradeincommercialservices,2009 32

Appendixfigures

App.Fig.1 Monthlymerchandiseexportsandimportsofselectedeconomies,January2006-January2010 33


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II Trade in natural resources

B. Naturalresources:Definitions,specificitiesandtradepatterns

Figures

Fig.1 MonthlyUnitedStatesoilproduction,Jan.1920-Jan.2010 48

Fig.2 Worldfisheriesproduction,1990-2007 48

Fig.3 TotalworldCO2emissionsbylevelofdevelopment,1971-2007 50

Fig.4 WorldCO2/GDPandCO2percapita,1971-2007 50

Fig.5 Nominalandrealcrudeoilprices,Jan.1970-Oct.2009 54

Fig.6 Worldnaturalresourcesexportsbyproduct,1990-2008 55

Fig.7 Worldmerchandiseexportsbyproduct,1990-2008 56

Fig.8 Worldproductionoffossilfuelsbyproduct,1970-2008 56

Fig.9 Sharesofproductgroupsinworldmerchandisetradesince1900 57

Fig.10 Naturalresourcesexportsofregionsbydestination,2008 58

Fig.11 Naturalresourcesexportsofregionsbyproduct,2008 58

tables

Table1 Countrieswiththelargestdeclinesinforestedland,1990-2005 51

Table2 Exportconcentrationandshareofnaturalresourcesinmerchandiseexports,2006 52

Table3 Grubel-Lloyd(GL)indicesforselectedeconomies,2008 53

Table4 AverageGLindicesformanufacturesandnaturalresources,2008 53

Table5 Naturalresourcesexportsbyregion,2008 57

Boxes

Box1 Iselectricityanaturalresource? 55

Box2 Theevolutionofthemarketforcrudeoiltradefromlong-termcontractstoexchangetrading 62

Box3 Chevron–acaseofverticalintegration 63

C. Tradetheoryandnaturalresources

Figures

Figure12 PerfectcompetitionandtheHotellingrule 76

Figure13 Outputandpricepathsinperfectcompetitionandmonopoly 78

Figure14 Openaccessandoptimalharvestofnaturalresources 84

Figure15 Biodiversity,ecologicalproductivityandtrade 90

Figure16 ApermanentreductioninGDPfollowingaresourceboom 93

Figure17 Realpricesofselectedcommodities,Jan.2000-Aug.09 97

Figure18 Realpricesofenergycommodities:oil,naturalgasandcoal,Jan.2000-Aug.09 98

Figure19 Realpricesofnickel,plywoodandfish,Jan.2000-July09 98

Figure20 NotionalamountsoutstandingofOTCcommodityderivatives,June1998-June2009 101

Figure21 Naturalgas–long-shortpositionsbyclassofinvestor,June2006-July09 101

Figure22 Copper–long-shortpositionsbyclassofinvestor,June2006-Aug.09 102

Figure23 UnitedStatesmonthlyoilstocksandoilprice,Jan.1986-Aug.2009 102

Figure24 Worldoilconsumptionandconsumption-to-provedreservesratio,1980-2008 103

Figure25 Worldoilrefinerycapacities,consumptionandconsumption-to-refinerycapacitiesratio,1980-2008 104


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tables

Table6 Theeffectsoftradeonthecommonaccessproblem(smallcountrycase) 91

Boxes

Box4 Virtualtradeinwater 74

Box5 Whatisarent? 77

Box6 Whyarenaturalresourcespronetocartelization? 79

Box7 Whatarepropertyrights? 82

Box8 Rentsandopenaccess 83

Box9 Theroleofdemand 85

Box10 Krugman’smodelofDutchdiseasewithlearning-by-doing 92

Box11 HowBotswanaescapedtheresourcecurse 96

Box12 Economicimplicationsofthechangingnatureofoilpriceshocks 97

Box13 Investmentincommodityfutures:providinginsurance 99

D Tradepolicyandnaturalresources

Figures

Figure26 Structureoftariffprotection,bystageofprocessing 115

Figure27 Structureoftariffprotectionindevelopedcountries,bystageofprocessing 115

Figure28 Exporttaxesbynaturalresource-upperboundestimates 116

Figure29 Exporttaxesonminingproductsbysubheading-upperboundestimates 118

Figure30 Naturalresourcesexportscoveredbyexporttaxes-upperboundestimatesforselectedcountries 119

Figure31 Theeffectofatariffonnaturalresources(staticmodel) 124

Figure32 Theeffectofatariffonnaturalresources(two-periodmodel) 125

Figure33 Theeffectofaquotainperiod1 129

Figure34 Effectofaproductiontax 133

Figure35 Effectofasubsidyontrade 135

Figure36 Overallincomegainfromregionalintegration 143

tables

Table7 Simpleaverageappliedtariffratesinnaturalresourcesectors,2007 114

Table8 Boundratesinnaturalresourcesectors,2007 115

Table9 Numberoftarifflinesaffectedbynon-tariffmeasures,bytype 116

Table10 ExportrestrictionsonnaturalresourcesnotifiedtotheWTO 119

Table11 TaxesonfuelsinOECDcountries,2008 120

Table12 Fueltaxesinnon-OECDcountries,1991 120

Table13 GovernmentfinancialtransfersbyOECDcountriestofisheries,2006 121

Table14 Fisheriessubsidiesinyear2003:developingcountriesandcustomsterritories 122

Table15 Effectoftradeliberalizationonpollutiontaxes 140

Boxes

Box14 Datalimitations–non-tariffmeasures 116

Box15 Datalimitations–exporttaxesandquantitativerestrictions 117

Box16 Investmentsinnaturalresources–acaseof“exportrestriction-jumping”FDI? 117

Box17 Datalimitations–subsidies 121

Box18 Welfareeffectsofanexporttax:thecaseofalargecountry 126

Box19 Exporttaxesasatooltoaddressresourcevolatility,dominanceandtariffescalationproblems 127


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Box20 Exportrestrictionsinthetropicallumberindustry 131

Box21 Alpinemeadows 132

Box22 Aretheregoodsubsidies?Thecaseofvesselbuy-backschemes 135

Box23 TheCaseofCentralAsiaandtheGreatLakesRegioninAfrica 144

Box24 TheEuropeanUnion’sCommonFisheriesPolicy 146

Annex tables

AnnexTable1 Averageappliedandboundtariffratesinnaturalresourcesectors,2007 151

AnnexTable2 AppliedMFNtariffratesofprocessedproducts,2007 156

AnnexTable3 OECDgovernmentfinancialtransferstofishing 158

E Naturalresources,internationalcooperationandtraderegulation

Boxes

Box25 HistoricaloverviewofnaturalresourcesintheGATT/WTO 163

Box26 “Commercialpresence”modeofsupplyundertheGATS:Rulesrelevantforinvestmentinservices 165

Box27 GeneralexceptionsintheGATSandtheprotectionoftheenvironment 169

Box28 Whatistheeconomicrationalefortradeagreements? 184

Statisticalappendix

App.Table1 Worldprovedoilreservesbycountryandregion,2008 206

App.Table2 Leadingexportersandimportersofnaturalresourcesincludingintra-EUtrade,2008 207

App.Table3 Leadingexportersandimportersofnaturalresourcesexcludingintra-EUtrade,2008 208

App.Table4 Leadingexportersandimportersoffishincludingintra-EUtrade,2008 209

App.Table5 Leadingexportersandimportersoffishexcludingintra-EUtrade,2008 210

App.Table6 Leadingexportersandimportersofforestryproductsincludingintra-EUtrade,2008 211

App.Table7 Leadingexportersandimportersofforestryproductsexcludingintra-EUtrade,2008 212

App.Table8 Leadingexportersandimportersoffuelsincludingintra-EUtrade,2008 213

App.Table9 Leadingexportersandimportersoffuelsexcludingintra-EUtrade,2008 214

App.Table10 Leadingexportersandimportersofminingproductsincludingintra-EUtrade,2008 215

App.Table11 Leadingexportersandimportersofminingproductsexcludingintra-EUtrade,2008 216

App.Table12 Importsofnaturalresourcesbypartnerregionandsupplierformajoreconomies,2008 217

App.Map1 Netexportersoffishandfishproducts,2008orlatestyear 219

App.Map2 Netexportersofforestryproducts,2008orlatestyear 220

App.Map3 Netexportersoffuels,2008orlatestyear 221

App.Map4 Netexportersofnon-ferrousmetals,2008orlatestyear 222

App.Map5 Netexportersoforesandotherminerals,2008orlatestyear 223

App.Map6 Totalrenewablefreshwaterresourcespercapita,2008 224

App.Map7 Energyproduction/totalprimaryenergysupply(energyself-sufficiency),2007 225

App.Map8 Oilproduction/totalprimaryenergysupplyofoil(oilself-sufficiency),2007 226

App.Map9 Totalprimaryenergysupply/GDP(energyintensityofGDP),2007 227

App.Map10 Totalprimaryenergysupply/population(percapitaenergysupply),2007 228


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wTo members(AsofendJune2010)

AlbaniaAngolaAntiguaandBarbudaArgentinaArmeniaAustraliaAustriaBahrain,KingdomofBangladeshBarbadosBelgiumBelizeBeninBoliviaBotswanaBrazilBruneiDarussalamBulgariaBurkinaFasoBurundiCambodiaCameroonCanadaCapeVerdeCentralAfricanRepublicChadChileChinaColombiaCongoCostaRicaCôted’IvoireCroatiaCubaCyprusCzechRepublicDemocraticRepublicoftheCongoDenmarkDjiboutiDominicaDominicanRepublicEcuadorEgyptElSalvadorEstoniaEuropeanUnionFijiFinlandFormerYugoslavRepublicof

MacedoniaFranceGabonTheGambiaGeorgiaGermanyGhanaGreeceGrenadaGuatemala

GuineaGuineaBissauGuyanaHaitiHondurasHongKong,ChinaHungaryIcelandIndiaIndonesiaIrelandIsraelItalyJamaicaJapanJordanKenyaKorea,RepublicofKuwaitKyrgyzRepublicLatviaLesothoLiechtensteinLithuaniaLuxembourgMacao,ChinaMadagascarMalawiMalaysiaMaldivesMaliMaltaMauritaniaMauritiusMexicoMoldovaMongoliaMoroccoMozambiqueMyanmarNamibiaNepalNetherlandsNewZealandNicaraguaNigerNigeriaNorwayOmanPakistanPanamaPapuaNewGuineaParaguayPeruPhilippinesPolandPortugalQatarRomania

RwandaSaintKittsandNevisSaintLuciaSaintVincent&theGrenadinesSaudiArabiaSenegalSierraLeoneSingaporeSlovakRepublicSloveniaSolomonIslandsSouthAfricaSpainSriLankaSurinameSwazilandSwedenSwitzerlandChineseTaipeiTanzaniaThailandTogoTongaTrinidadandTobagoTunisiaTurkeyUgandaUkraineUnitedArabEmiratesUnitedKingdomUnitedStatesofAmericaUruguayVenezuela(BolivarianRepublicof)VietNamZambiaZimbabwe


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Previous World Trade Reportstrade Policy commitments and contingency measures

2009

WORLD TRADE REPORT 2009

World Trade Report The World Trade Report is an annual publication that aims to deepen understanding about trends in trade, trade policy issues and the multilateral trading system. The theme of this year’s Report is “Trade policy commitments and contingency measures”. The Report examines the range of contingency measures available in trade agreements and the role that these measures play. Also referred to as escape clauses or safety valves, these measures allow governments a certain degree of flexibility within their trade commitments and can be used to address circumstances that could not have been foreseen when a trade commitment was made. Contingency measures seek to strike a balance between commitments and flexibility. Too much flexibility may undermine the value of commitments, but too little may render the rules unsustainable. The tension between credible commitments and flexibility is often close to the surface during trade negotiations. For example, in the July 2008 mini-ministerial meeting, which sought to agree negotiating modalities – or a final blueprint – for agriculture and non-agricultural market access (NAMA), the question of a “special safeguard mechanism” (the extent to which developing countries would be allowed to protect farmers from import surges) was crucial to the discussions. One of the main objectives of this Report is to analyze whether WTO provisions provide a balance between supplying governments with necessary flexibility to face difficult economic situations and adequately defining them in a way that limits their use for protectionist purposes. In analyzing this question, the Report focuses primarily on contingency measures available to WTO members when importing and exporting goods. These measures include the use of safeguards, such as tariffs and quotas, in specified circumstances, anti-dumping duties on goods that are deemed to be “dumped”, and countervailing duties imposed to offset subsidies. The Report also discusses alternative policy options, including the renegotiation of tariff commitments, the use of export taxes, and increases in tariffs up to their legal maximum ceiling or binding. The analysis includes consideration of legal, economic and political economy factors that influence the use of these measures and their associated benefits and costs.

9 789287 035134

ISBN 978-92-870-3513-4

WORLD TRADE REPORT 2009 - Trade Policy Com

mitm

ents and Contingency Measures

Trade Policy Commitments and Contingency Measures

Cover photos (from left to right): Image copyright Quayside, 2009; Image copyright Christian Lagerek, 2009; Image copyright Guido Vrola, 2009;

The2009Reportexaminestherangeandroleofcontingencymeasuresavailableintradeagreements.Oneof theReport’smainobjectives is toanalysewhetherWTOprovisions provide a balance between supplying governments with the necessaryflexibilitytofacedifficulteconomicsituationsandadequatelydefiningtheseinawaythatlimitstheiruseforprotectionistpurposes.

trade in a Globalizing World

2008

Trade in a Globalizing World

WORLD TRADE REPORT 2008

World Trade Report The World Trade Report is an annual publication that aims to deepen understanding about trends in trade, trade policy issues and the multilateral trading system.

International trade is integral to the process of globalization. Over many years, governments in most countries have increasingly opened their economies to inter-national trade, whether through the multilateral trading system, increased regional cooperation or as part of domestic reform programmes. Trade and globalization more generally have brought enormous benefits to many countries and citizens. Trade has allowed nations to benefit from specialization and to produce more efficiently. It has raised productivity, supported the spread of knowledge and new technologies, and enriched the range of choices available to consumers. But deeper integration into the world economy has not always proved to be popular, nor have the benefits of trade and globalization necessarily reached all sections of society. As a result, trade scepticism is on the rise in certain quarters.

The purpose of this year’s Report, whose main theme is “Trade in a Globalizing World”, is to remind ourselves of what we know about the gains from international trade and the challenges arising from higher levels of integration. The Report addresses a range of interlinking questions, starting with a consideration of what constitutes globalization, what drives it, what benefits does it bring, what challenges does it pose and what role does trade play in this world of ever-growing inter-dependency. The Report asks why some countries have managed to take advantage of falling trade costs and greater policy-driven trading opportunities while others have remained largely outside international commercial relations. It also considers who the winners and losers are from trade and what complementary action is needed from policy-makers to secure the benefits of trade for society at large. In examining these complex and multi-faceted questions, the Report reviews both the theoretical gains from trade and empirical evidence that can help to answer these questions.

ISBN 978-92-870-3454-0

WORLD TRADE REPORT 2008 - Trade in a Globalizing W

orld

The 2008 Report provides a reminder of what we know about the gains frominternational trade and highlights the challenges arising from higher levels ofintegration.Itaddressesthequestionofwhatconstitutesglobalization,whatdrivesit,whatbenefitsitbrings,whatchallengesitposesandwhatroletradeplaysinthisworldofever-growinginter-dependency.

sixty years of the multilateral trading system : Achievements and challenges

2007

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2007WORLD TRADE REPORT

On1January2008themultilateral tradingsystemcelebrated its60thanniversary.TheWorldTradeReport2007celebratesthislandmarkanniversarywithanin-depthlookat theGeneralAgreementonTariffs andTrade (GATT) and its successor theWorld Trade Organization — their origins, achievements, the challenges they havefacedandwhatthefutureholds.

exploring the Links between subsidies, trade and the Wto

2006


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TheWorldTradeReport2006focusesonhowsubsidiesaredefined,whateconomictheorycantellusaboutsubsidies,whygovernmentsusesubsidies,themostprominentsectorsinwhichsubsidiesareappliedandtheroleoftheWTOAgreementinregulatingsubsidiesininternationaltrade.TheReportalsoprovidesbriefanalyticalcommentariesoncertaintopicaltradeissues.

trade, standards and the Wto

2005


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The World Trade Report 2005 seeks to shed light on the various functions andconsequencesofstandards,focusingontheeconomicsofstandardsininternationaltrade, the institutionalsetting forstandard-settingandconformityassessment,andthe roleofWTOagreements in reconciling the legitimatepolicyusesof standardswithanopen,non-discriminatorytradingsystem.

coherence

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TheWorldTradeReport2004focusesonthenotionofcoherenceintheanalysisofinterdependentpolicies:theinteractionbetweentradeandmacroeconomicpolicy,theroleofinfrastructureintradeandeconomicdevelopment,domesticmarketstructures,governance and institutions, and the role of international cooperation in promotingpolicycoherence.

trade and Development

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TheWorldTradeReport2003focusesondevelopment.Itexplainstheoriginofthisissueandoffersaframeworkwithinwhichtoaddressthequestionoftherelationshipbetweentradeanddevelopment,therebycontributingtomoreinformeddiscussion.

This report is also available inFrench and Spanish.

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© World Trade Organization 2010

Photo creditsCover and page 41: Souda Tandara-Stenier

Cover and page 45: Karolina Szufnara - iStockphotoCover and page 73: Montferney - Fotolia

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The World Trade Report is an annual publication that aims to deepen understanding about trends in trade, trade policy issues and the multilateral trading system.

The 2010 World Trade Report is split into two main parts. The first is a brief summary of the trade situation in 2009-2010. The second part focuses on the special theme of natural resources.

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What is the World Trade Report?

Using this report

Find out more

9 789287 037084

World Trade Report  

The World Trade Report 2010  focuses on  trade  in natural  resources, such as fuels, forestry, mining and fisheries. The Report examines the characteristics  of  trade  in  natural  resources,  the  policy  choices available  to governments and  the  role of  international cooperation, particularly of the WTO, in the proper management of trade in this sector.  

A  key  question  is  to  what  extent  countries  gain  from  open  trade  in natural resources. Some of the issues examined in the Report include the role of trade in providing access to natural resources, the effects  of  international  trade  on  the  sustainability  of  natural  resources,  the environmental  impact of resources trade,  the so-called natural resources curse, and resource price volatility. 

The  Report  examines  a  range  of  key  measures  employed  in  natural resource  sectors,  such  as  export  taxes,  tariffs  and  subsidies,  and provides  information on  their current use.  It analyses  in detail  the effects of these policy tools on an economy and on its trading partners.  

Finally, the Report provides an overview of how natural resources fit within the legal framework of the WTO and discusses other international agreements  that  regulate  trade  in  natural  resources.  A  number  of challenges are addressed, including the regulation of export policy, the treatment of subsidies, trade facilitation, and the relationship between WTO rules and other international agreements.  

“I believe not only that there is room for mutually beneficial negotiating trade-offs that encompass

natural resources trade, but also that a failure to address these issues could be a recipe for

growing tension in international trade relations. Well designed trade rules are key to ensuring

that trade is advantageous, but they are also necessary for the attainment of objectives such as

environmental protection and the proper management of natural resources in a domestic setting.”

Pascal Lamy, WTO Director-General

World

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World Trade Report 2010Trade in natural resources