Markey’s Ban on Petroleum Exports Not Legal under Trade Treaties (Updated Feb. 15, 2012)

by Marlo Lewis on February 10, 2012

in Blog, Features

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Earlier this week, the House Energy and Commerce Committee marked up and approved the North America Energy Access Act (H.R. 3548), sponsored by Rep. Lee Terry (R-Neb.). The bill authorizes construction of the Keystone XL pipeline, the $7 billion shovel-ready project to deliver up to 830,000 barrels per day of Canadian crude oil to Midwest and Gulf Coast refineries.

Democrats offered five amendments to ‘improve’ (that is, sabotage) the bill. The GOP majority easily defeated the killer amendments, including Rep. Ed Markey’s (D-Mass.) amendment to ban exports of petroleum products made from Canadian oil shipped via the pipeline. Markey claims consumers would benefit because refiners would be forced to sell more gasoline in U.S. domestic markets, lowering prices.

Earlier on this site, National Journal’s energy blog, and MasterResource.Org, I opined that Markey’s proposal would violate U.S. treaty obligations under the General Agreement on Tariffs and Trade (GATT) and the North American Free Trade Agreement (NAFTA). I also argued that an export ban could backfire. It could drive refining-related investment, production, and jobs out of the USA, increasing pain at the pump by curbing production at home while making higher-priced foreign imports more competitive.

In “Proposed Keystone Export Ban Fraught With Pitfalls,” National Journal reporter Amy Harder quotes two independent experts who offer similar assessments of Markey’s proposal.

One expert is none other than James Bacchus, former Member of the House of Representatives, former Special Assistant to the U.S. Trade Representative, former Chairman of the Appelate Body of the World Trade Organization (the highest international tribunal of world trade), and current Chair of GreenbergTaurig’s Global Practice Group. The man knows whereof he speaks. From the National Journal article:

“All forms of protectionism are politically appealing, especially in an election year,” said former Rep. James Bacchus, D-Fla., who was a chairman of the WTO’s appellate body. “But that doesn’t mean they make economic sense, and it doesn’t mean they’re legal under international law.”

Bacchus added that recent action taken by the United States against China for similar export restrictions makes any legislation banning exports of oil or refined products a bit hypocritical. Last week, the appeals board of the WTO ruled that China broke free-trade laws with its system of export taxes and quotas for raw materials.

“Why would we impose export restrictions on a basic commodity such as oil when we are opposing export restrictions of basic commodities so vigorously in the WTO?” asked Bacchus.

On Jan. 30, 2012, the WTO ruled against China’s restrictions on exports of bauxite, coke, magnesium, manganese, zinc, and other materials. The ruling responds to legal challenges launched in 2009 by the USA, European Union, and Mexico. GATT rules generally prohibit a WTO Member country from restricting exports. China tried but failed to justify its export restraints as measures essential to conservation, environmental protection, or alleviation of critical supply shortages. Attempts to justify a Keystone crude export ban on those grounds would be laughed out of court.

But here’s the kicker. “Although rare earth metals were not part of Monday’s ruling,” Reuters reports, “a number of U.S. lawmakers urged the United States to use the decision to launch a new case to force Beijing to lift its rare earth export restriction.” Reuters does not identify any of those lawmakers by name, but Markey is a leading critic of Beijing’s export restrictions on rare earth metals. Such metals are used to manufacture the ‘clean tech’ products of which he is so fond, including hybrid and electric vehicles, solar panels and wind turbines. Somebody please tell Mr. Markey: Dissing the same law to which you appeal for redress is neither honorable nor smart.

On the potential consumer impact of Markey’s amendment, Ms. Harder quotes Michael Levi of the Council on Foreign Relations:

But an export ban on refined products derived from the pipeline’s oil would have more complicated repercussions, since products such as gasoline are already being exported from the Gulf Coast in growing quantities. A ban on exporting some refined products could hurt oil companies’ bottom lines because refineries might run at less than full capacity. And that could subsequently raise U.S. gasoline prices, experts say.

“If this was somehow effective at trapping product in the United States that otherwise would be exported, the ultimate impact on gasoline prices could very well be bad rather than good,” said Michael Levi, energy-security expert at the Council on Foreign Relations.

Since writing my MasterResource column, I have given further thought to these issues and conclude that Markey’s amendment traduces the two most basic principles of modern trade law.

The national treatment principle (treating foreigners and locals equally) prohibits importing nations from discriminating against a foreign commodity, service, or item of intellectual property once it has entered into domestic commerce. The moment any Canadian crude crosses the border, whether via Keystone XL or any other mode of transport, it enters into U.S. domestic commerce. Thus, under both GATT and NAFTA (Articles 301, 606), it must be accorded national (equal) treatment. Only if Congress were to ban all petroleum product exports, including those made from oil produced in the USA, would Markey’s amendment not flout the national treatment requirement. Even then it would still conflict with the WTO’s general prohibition of export restrictions.

Markey’s amendment also conflicts with the most favored nation principle, which holds that if you grant a privilege to one trade partner, you must grant it to all. Markey’s amendment would not require OPEC crude and products made from it to “stay here.” The restriction would apply only to Canadian crude and products made from it. Under Markey’s proposal, Congress would grant most favored nation status to OPEC but deny it to Canada. Brilliant!

Scott Lincicome February 10, 2012 at 5:28 pm

“Only if Congress were to ban all petroleum product exports, including those made from oil produced in the USA, would Markey’s amendment not flout U.S. treaty obligations.”

Actually, no, that export ban would violate GATT Article XI (http://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htm#articleXI), which prohibits “prohibitions or restrictions other than duties, taxes or other charges, whether made effective through quotas, import or export licences or other measures…” on imports or exports. The US could theoretically impose a really high export duty to discourage exportation, but it could not impose an outright ban without running afoul of Article XI. That’s not what Markey’s amendment does, of course.

I seriously doubt, however, that Markey has considered – or cares about – any of this. Political hacks rarely do.

Marlo Lewis February 11, 2012 at 4:14 pm

Scott, thank you for this information. It means that Markey’s proposal — which is a targeted export ban — would violate GATT even if it were expanded so as not violate the national treatment principle.

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