WTO Rules against China’s Export Restrictions: Implications for U.S. NatGas Export Debate

by Marlo Lewis on March 27, 2014

in Blog

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The World Trade Organization (WTO) confirmed Wednesday that China’s policies restricting exports of rare-earth minerals violate global trade rules. According to the Wall Street Journal:

The WTO said China’s export duties on rare-earth metals, molybdenum and tungsten are inconsistent with its obligations in the organization. It also ruled against Beijing’s export quotas on the materials and its move to restrict their trade.

China has said the restrictions are in place for reasons of environmental protection. The WTO ruling says those aren’t valid reasons for limiting exports.

The WTO ruling casts doubt on the legality of the current process for approving exports of liquefied natural gas (LNG). By compelling aspiring exporters to run a long and unpredictable bureaucratic and political gauntlet, the existing process informally but effectively constrains gas exports.

More importantly, in light of the WTO ruling, the quantitative restrictions on LNG exports advocated by Dow Chemical, America’s Energy Advantage (AEA), and the American Public Gas Association (APGA) are plainly illegal.

On Tuesday, the House Energy & Commerce Committee heard testimony on trade law and LNG exports from former congressman James Bacchus (D-Fla.), who now chairs the Global Practice at GreenbergTraurig.

The hearing was on H.R. 6, the Domestic Prosperity and Global Freedom Act, introduced by Rep. Cory Gardner (R-Colo.). H.R. 6 would amend the 1938 Natural Gas Act to provide that applications to export LNG to any WTO-member country be “granted without modification or delay.”

Witnesses debated whether H.R. 6 would help or harm U.S. manufacturers and consumers, and whether the legislation would undermine Russia’s monopoly power to coerce Ukraine and other countries dependent on Russia for most or all of their gas.

A future post may examine the back-and-forth on those issues. Here I’m going to excerpt passages from Bacchus’s testimony and offer some brief comments. Bacchus’s remarks are indented in blue.

Largely overlooked so far in the emerging Congressional debate about restricting exports of natural gas is the possibility that such restrictions are inconsistent with the obligations of the United States to other WTO Members under the WTO treaty. If our restrictive energy measures are inconsistent with our treaty obligations, the United States risks losing a case in the WTO. Such a loss could cause the WTO to authorize expensive economic sanctions against us through the loss of previously granted concessions in other sectors of our international trade.

Comment: It’s not surprising proponents of LNG export restrictions ignore the incompatibility of their agenda with global trade rules. They also ignore the incompatibility of their agenda with property rights and the constitutional principle of equality under law. Even though Dow, AEA, and APGA didn’t invest a dime to find and produce the gas, they fancy themselves entitled to determine who gets to buy the gas and at what price.

WTO rules apply to trade in natural gas and other energy products in the same way they apply to other traded products. Some have suggested that energy products are somehow separate and apart from other traded products in how WTO rules apply to them. There is no legal basis for this view. The United States has taken no reservations from our obligations under WTO rules for exports of natural gas or other energy products.

WTO rules prohibit bans, quotas, and other forms of quantitative restrictions on exports unless those restrictions take the form of export taxes. Taxes on exports are prohibited by our Constitution, so energy export taxes are not an option for the United States.

Comment: Quantitative restrictions, such as Dow, AEA, and APGA advocate, are out of bounds. Those organizations don’t care. All that matters to them is buying gas at the lowest possible price. So they lobby to (1) exempt themselves from having to compete with foreign buyers, and (2) deny gas producers a basic economic liberty (“unfettered” freedom to export) they claim for themselves. How noble!

WTO rules also permit temporary restrictions on exports to prevent or relieve critical shortages of essential products, but that can hardly be said to apply to our current situation with supplies of natural gas.

Comment: The best insurance against future shortages is exactly what Dow and AEA denounce — “unfettered,” “unconstrained,” “unlimited” freedom to compete in the global marketplace. The bigger their potential customer base, the more oil & gas companies will invest in exploration and production.

Bacchus next argues that the preferential treatment given to Free Trade Agreement (FTA) countries in LNG export licensing is discriminatory — another potential conflict with WTO rules.

First of all, the current US process gives special treatment in licensing exports of natural gas to countries with which we have a free trade agreement. Natural gas exports to these countries are deemed to be in the “public interest” and permitted without delay. In contrast, the Department of Energy has elected to subject licensing requests for LNG exports to non-FTA countries to a thorough and lengthy assessment intended to determine whether exports of natural gas to those countries serve our “public interest.” In this way, applicants that will ship LNG to FTA countries are, preferentially, given expedited review in the licensing process as compared to those applicants that will ship LNG to non-FTA countries.

Comment: The Department of Energy’s witness, Dr. Paula Grant, notes that the Natural Gas Act “neither defines ‘public interest’ nor identifies criteria that must be considered.” In the past, the Department of Energy has based “public interest” determinations on several factors including “economic impacts, international considerations, U.S. energy security, and environmental considerations, among others.” It is far from evident that the FTA exports automatically deemed to be in the public interest would pass muster under the multi-factoral review applied to non-FTA exports. This bifurcated system seems both discriminatory and arbitrary.

Bacchus goes on to discuss three “legal concerns” regarding the consistency of the current LNG export licensing process with WTO rules.

One remaining legal concern is the question of the lengthy delays in granting export licenses. Under WTO rules, a license can clearly be a restriction on exports, and case law has defined the notion of a “restriction” broadly to include licensing procedures that pose limitations on actions or have a limiting effect, such as by creating uncertainties or by affecting investment plans. In one case, delays of up to three months in issuing export licenses were found to be inconsistent with the rules.

Comment: Since 2011, DOE has received 31 applications to export LNG to non-FTA countries. To date, DOE has granted six authorizations. As the sages teach, “Trade delayed is trade denied.”

A second remaining legal concern is the lack of clarity in how the Department of Energy defines the “public interest.” Conceivably, even lengthy delays in the licensing process could be excused under WTO rules of it could be proven by the United States that such delays are necessary to protect life or health, or are related to the conservation of exhaustible natural resources, so long as the process is not applied in a way that results in arbitrary or unjustifiable discrimination or a disguised restriction on international trade. If, however, in determining the “public interest,” the DOE considers as a factor the effect the proposed exports will have on domestic producers that use natural gas when producing their products in their competition with like foreign products, then these exceptions to WTO rules will not be available, and will not excuse a WTO violation caused by lengthy licensing delays.

Comment: Bingo! Dow and AEA argue for LNG export restrictions precisely to reduce their input costs relative to those of foreign competitors. In effect, they equate the public interest with whatever enhances their bottom line. Their agenda conflicts with both the letter and spirit of rule-based trade.

A third remaining legal concern may arise under the WTO rules on governmental subsidies. Under WTO rules, subsidies are illegal if they are specific to certain industries and cause adverse effects in the marketplace. The questions in a WTO case would be: by restricting exports so as to reduce the domestic price of natural gas, is the United States granting a subsidy to the manufacturing firms that are the downstream users of natural gas, and, if so, does that subsidy have illegal trade effects?

Comment: Dow and AEA want to Congress to subsidize their exports by curbing oil & gas industry exports. This is both short-sighted and incoherent. It is short-sighted because the smaller the market oil & gas companies are allowed to serve, the less they will invest in exploration and production. Freedom to export is the best long-term strategy for keeping natural gas supplies plentiful and affordable.

The Dow-AEA public-interest rationale is incoherent because it can also, with equal validity, be invoked to justify restrictions on their exports. Dow and its AEA allies argue that curbing gas exports is in the public interest because lower gas prices will reduce their production costs and make them more competitive. But the products they manufacture — chemicals, plastics, aluminum, and steel — are intermediate goods and input costs to still other companies. So by Dow and AEA’s logic, Congress should curb exports of chemicals, plastics, steel, and aluminum to boost the competitiveness of companies manufacturing pharmaceuticals, computers, automobiles, and other consumer goods.

Dow and AEA would scream bloody murder if Congress proposed to give them a dose of their own medicine. Come on guys, admit it, if you are free to sell your products to the highest bidder, then oil & gas companies should be as well. Or is Dow prepared to argue that some companies — those who make the biggest campaign contributions — are “more equal” than others?

Bacchus concludes by explaining why Congress should care about WTO-related legal concerns when deliberating on natural gas export policy.

First, and foremost, of course, the United States of America should always comply with our international treaty obligations. If we don’t, then who will?

Comment: Trade liberalization is one of the great, hard-won achievements of U.S. foreign policy in the post-war era. It promotes peace and prosperity and, therefore, the “public interest” of all mankind. The U.S. is its chief architect, proponent, and defender. We dishonor it at our peril.

Second, we could choose to ignore our treaty obligations as a Member of the WTO, but that could prove costly. If, in an exercise of our sovereignty, we chose not to comply with a ruling against us in the WTO, the resulting economic sanctions could cost us billions of dollars in lost trade – annually.

Comment: Bacchus doesn’t provide any specifics on this point. I did a quick Google search. Here’s what I found. If a country refuses to abide by a WTO dispute settlement, the injured party or parties may lawfully retaliate.

An example is Brazil’s retaliation against U.S. subsidies to cotton producers. The dispute began in 2002, and in 2008 the WTO ruled that the U.S. cotton subsidies were discriminatory. In 2010, the Brazilian government, with WTO approval, published a list of 100 U.S. goods that would be subject to higher tariffs unless the two governments reached an accord in 30 days. The tariffs would raise the cost of U.S. imports by an estimated $531 million. It was one of the few times the “WTO has allowed cross-retaliation, meaning the wronged party can retaliate against a sector not involved in the case,” according to the BBC.

And lastly, and significantly, the United States has for decades, as a matter of bipartisan trade policy, opposed restrictions on exports because of the many ways such restrictions distort world trade and deny economic opportunities to the American people. In furtherance of this policy, the United States has been in the forefront in the WTO in fighting rising restrictions on exports worldwide, and is, even as we meet today, aggressively pursuing, with the bipartisan support of the Congress, not one but two major WTO cases against Chinese export restrictions, on raw materials and on rare earth elements.

Comment: As indicated above, the day after the hearing, the WTO announced its ruling against China’s export restrictions. LNG export foes want Congress to flout the same trade principles and provisions the U.S. invoked in its successful WTO petition against China’s export restrictions. Congress cannot heed their advice without making America look hypocritical and undermining other nations’ respect for rule-based trade.

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