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An analysis of Export Restriction Rules and Proposals under the WTO

This memorandum is a redacted version of a confidential research paper on export restriction negotiations under the auspices of World Trade Organization (WTO). The complete version of this paper has two components: the first is a sketch of the existing legal framework and negotiation proposals on export restriction; the second is the provision of negotiation proposals. Due to confidentiality considerations, only the first component of analysis is publicly available and presented here. This memorandum is organized in three parts. The first part elaborates on the most relevant WTO treaties, namely the General Agreement on Tariffs and Trade 1994 (GATT) and the Agreement on Agriculture (AoA). We discuss how the ambiguity of terms in these provisions poses challenges to effective disciplines on export restriction. Second, we analyze proposals from several WTO Members that seek to clarify the ambiguities or fill the void in the existing discipline. Third, we discuss regional trade treaties, including TTIP, CETA, and TTP, along with other less prominent WTO agreements.

Executive Summary


This memorandum is a redacted version of a confidential research paper on export restriction negotiations under the auspices of World Trade Organization (WTO). The complete version of this paper has two components: the first is a sketch of the existing legal framework and negotiation proposals on export restriction; the second is the provision of negotiation proposals. Due to confidentiality considerations, only the first component of analysis is publicly available and presented here.


This memorandum is organized in three parts. The first part elaborates on the most relevant WTO treaties, namely the General Agreement on Tariffs and Trade 1994 (GATT) and the Agreement on Agriculture (AoA). We discuss how the ambiguity of terms in these provisions poses challenges to effective disciplines on export restriction. Second, we analyze proposals from several WTO Members that seek to clarify the ambiguities or fill the void in the existing discipline. Third, we discuss regional trade treaties, including TTIP, CETA, and TTP, along with other less prominent WTO agreements.


The WTO Framework:

In this section, we discuss the most relevant WTO Covered Agreements in relation to food security: GATT and AoA.


GATT Article XI


Article XI of GATT 1994 prohibits the application of quantitative restrictions except when they are applied temporally to prevent or relieve the critical shortage.


“1. No prohibitions or restrictions other than duties, taxes or other charges, whether made effective through quotas, import or export licenses or other measures, shall be instituted or maintained by any contracting party on the importation of any product of the territory of any other contracting party or on the exportation or sale for export of any product destined for the territory of any other contracting party.


2. the provisions of paragraph 1 of this Article shall not extend to the following:


(a) Export prohibitions or restrictions temporarily applied to prevent or relieve critical shortages of foodstuffs or other products essential to the exporting contracting party;”


With respect to paragraph 1, the term “prohibitions or restrictions” is used in a very broad manner, and it is understood to mean as a "legal ban on the trade or importation of a specified commodity." In Colombia – Ports of Entry, the panel concluded that "restrictions" refers to "measures that create uncertainties and affect investment plans, restrict market access for imports, or make importation prohibitively costly”[1]. While the panel in India – Quantitative Restrictions concluded that the term "restrictions" is "broad", and in terms of its ordinary meaning, is "a limitation on action, a limiting condition or regulation."[2]


Paragraph 2 of GATT Article XI is an exception that allows for the use of any export restrictions under limited circumstances for a limited time. Paragraph 2 also contains many undefined and ambiguous terms. Therefore, it may lead exporting countries to use different interpretations of the same word that best suit the interpreters. We will point out some ambiguous terms below.


“Temporarily”;

The treaty does delineate the period that can be counted as “temporarily.” Subsequently, In China-Raw Materials, China claims that the term “temporarily” should be counted in relation to the duration required to relieve critical shortage: “China submits that the time period will be defined in relation to the time required to prevent or relieve the critical shortage”[3]. On the other hand, both of complainants (the United States and the European Union) and third parties (Brazil and Canada) argue that a temporary measure must have an expiry date. To support their argument, Brazil defined the term "temporarily applied" as "lasting or meant to last for a limited time only; not permanent; made or arranged to supply a passing need.”[4] Furthermore, in this case, the panel defined "temporarily" as "for a time (only)" and "during a limited time". The term "limited time" means "appointed, fixed" and "circumscribed within definite limits, bounded, restricted."[5]


“Critical shortage”;

In addition, the article states that "the restriction is applied temporarily to prevent or relieve critical shortage" without specifying the amount or percentage of the shortage of the food that could be considered as a critical shortage. Moreover, the article does not differentiate between actual and potential critical shortage, an area of ambiguity that has manifested in a prior dispute. The critical issue is whether the restriction is a preventive action should occur before the critical shortage and what the signs that will allow this preventive measures. On the other hand, “relieve critical shortage” indicated that the shortage already occurred so that the restrictions will follow. In the China-Raw Material case, both parties defined the mentioned terms and when it supposed to be applied in accordance with their interest but the panel settle the conflict by defining it as “the term "critical" indicates that a shortage must be of "decisive importance" or “grave", or even rising to the level of a "crisis" or catastrophe. Article XI: 2(a) states that measures in the form of restrictions or bans may be used on a temporary basis to either outright "prevent" or otherwise "relieve" such a shortage”[6] [China-Raw Materials, Panel Report P94].


“Essential”;

Likewise, “essential” is not well-defined. China, in China-Raw Materials dispute, considered that for a product to be essential, it must be "material, important or requisite for the exporting Member."[7] In addition, China submits that Article XI:2(a) does not limit the types of "other products" that may be subject to restrictions, except that the products must be "essential"[8] To the exporting Member [China-Raw Materials, Panel Report P86]. The complainants argue that China's reliance on a broad definition of the term "product" as covering a raw material ignores the fact that the term "essential" serves to limit the scope of "products."[9] However, the panel interpretation was broad and did not resolve the disagreement, which further demonstrates that the article is not well-defined.


In conclusion, thus far, the guidance on the terms of the provision has only been interpreted in one dispute, which leaves inadequate guidance as to how these terms should be applied to a food security situation.


GATT Article XX


GATT Article XX allows WTO Members to derogate from their obligations under the GATT under a list of justifications, including public moral grounds; health; prison labor; and national historic/cultural treasures. Such measures cannot constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade.[10]


“Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures:


“(i) involving restrictions on exports of domestic materials necessary to ensure essential quantities of such materials to a domestic processing industry during periods when the domestic price of such materials is held below the world price as part of a governmental stabilization plan; Provided that such restrictions shall not operate to increase the exports of or the protection afforded to such domestic industry, and shall not depart from the provisions of this Agreement relating to non-discrimination;


(j) Essential to the acquisition or distribution of products in general or local short supply; Provided that any such measures shall be consistent with the principle that all contracting parties are entitled to an equitable share of the international supply of such products, and that any such measures, which are inconsistent with the other provisions of the Agreement shall be discontinued as soon as the conditions giving rise to them have ceased to exist. The contracting parties shall review the need for this subparagraph not later than 30 June 1960."


What if the country wanted to export their internal materials and increase the price for the benefit of their country's income even though it is mentioned at the end of the paragraph that it should not depart from the provisions relating to non-discrimination? The meaning of equitable refers to any given circumstance in which the WTO Member diverts an excessive share of its supply to individual countries and will be contrary to the principle of equitable distribution However, a number of question could be a raised according the application of the article. For instance, what if the contracting parties had a dispute about the shares of the international supply for such product? Is there a limit that the WTO states in order to limit the share of each country so that they have this obligation not to exceed? In addition, the general or local short supply was applied to cases where a product although in the international short supply was not necessarily in short supply in all markets throughout the world. Also, it was not used in the sense that every country that is importing a commodity was in short supply. This requires the contracting parties to have some flexibility to take trade restrictive action when a certain product becomes temporarily scared. Even those who have the flexibility to take restrictive action won't it affect the other? Further due, the flexibility in this situation is constrained by the requirement imposed to respect the principle of equitable shares for the members.


GATT Article XXI


Article XXI includes Security Exceptions that allows a contracting party to take measures to protect it security interest.


"Nothing in this Agreement shall be construed


(a) to require any contracting party to furnish any information the disclosure of which it considers contrary to its essential security interests; or


(b) to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests


taken in time of war or other emergency in international relations; or”


Importantly, “essential security interests” is not defined. When the “US notified the contracting parties of an Executive Order 12513 of May 1, 1985, that is prohibiting all imports of goods and services of Nicaraguan origin and all exports from the US of goods to or destined for Nicaragua. Nicaragua stated that the text of Article XXI made it clear that the contracting parties were competent to judge whether a situation of "war or other emergency in international relations" existed and requested that a Panel is set up under Article XXIII:2 to examine the issue. The United States stated that its actions had been taken for national security reasons and were covered by Article XXI:(b)(iii) of the GATT and that this provision left it to each contracting party to judge what action it considered necessary for the protection of its essential security interest. The Panel stated that, the dispute agreed upon both parties in the United States had acted contrary to certain trade-facilitating provisions of the General Agreement but was disagreed on the question of whether the non-observance of these provisions was justified by Article XXI(b)(iii). Therefore, the panel did not consider the question of whether the terms of Article XXI precluded it from examining the validity of the United States' invocation of that Article. It concluded that as it was not authorized to examine the justification, it could find that the United States neither to be complying with its obligations under the General Agreement nor to be failing to carry out its obligations under that Agreement. The Panel further noted that, in the view of Nicaragua, this provision should be interpreted in the light of the basic principles of international law and in harmony with the decisions of the United Nations and of the International Court of Justice and should, therefore, be regarded as merely providing contracting parties subjected to an aggression with the right of self-defense. The Panel also noted that, in the view of the United States, Article XXI applied to any action which the contracting party taking it considered necessary for the protection of its essential security interests and that the Panel, both by the terms of Article XXI and by its mandate, was precluded from examining the validity of the United States’ invocation of Article XXI.” [11]


Furthermore, the self-judging nature of the provision of section (b) could lead to an arbitrary decision. The United States embargo on trade with Cuba, which was imposed by means of Proclamation 3447 by the President of the United States, dated 3 February 1962, was not formally raised by the contracting parties but notified by Cuba in the inventory of non-tariff measures.[12] The United States invoked GATT Article XXI as justification for its action. Also, section b:(i), mentioned “relating to 'fissionable materials' or the materials from which they are derived.” Criteria are needed to clarify the meaning.


Agreement on Agriculture Article 12


This article lists the procedures that should be applied when a country intends to apply the exception in GATT Article XI: 2(a) which allow applying restrictions on exportation. In principle, all WTO agreements and understandings on trade in goods apply to agriculture, including the GATT 1994 and WTO agreements on such matters as customs valuation, import licensing procedures, pre-shipment inspection, emergency safeguard measures, subsidies and technical barriers to trade. However, where there is any conflict between these agreements and the Agreement on Agriculture, the provisions of the Agreement on Agriculture prevail.


“1. Where any Member institutes any new export prohibition or restriction on foodstuffs in accordance with paragraph 2(a) of Article XI of GATT 1994, the Member shall observe the following provisions:


(a) The Member instituting the export prohibition or restriction shall give due consideration to the effects of such prohibition or restriction on importing member food security.


(b) Before any Member institutes an export prohibition or restriction, it shall give notice in writing, as far in advance as practicable, to the Committee on Agriculture comprising such information as the nature and the duration of such measure, and shall consult, upon request, with any other Member having a substantial interest as an importer with respect to any matter related to the measure in question. The Member instituting such export prohibition or restriction shall provide, upon request, such a Member with necessary information.


2. The provisions of this Article shall not apply to any developing country Member unless the measure is taken by a developing country Member which is a net-food exporter of the specific foodstuff concerned."


Paragraph 1 of this article does not clarify the relevant consideration. In addition, the article states that "it shall give notice in writing," which obligates on the Member instituting export restriction to produce "writing notice." Nevertheless, the article does not specify detailed period for such a notice, necessary information to be included in the notice, or actions that could be taken if the importing Member disapproves the request.


The group of “net-food importing developing countries” is well defined in the WTO legal context, but no such definition exists for the “net-food exporting developing countries” mentioned in Paragraph 2 of AoA Article 12.


In conclusion, both the GATT and AoA, the most relevant agreements in relation to export restrictions contain ambiguous terms and incomplete description of obligations that constrains the effectiveness of the existing WTO framework.


Proposals


In this part of our memorandum, we will examine a number of proposals that suggest amendment or revision to some of the provision of WTO agreements. They were proposed by Switzerland, Cairns Group, Jordan, the Democratic Republic of the Congo, the Republic of Korea, the United States, and Japan.


Switzerland

Switzerland submitted its opening ideas concerning the directions governed by Article 20 of the Agreement on Agriculture. Switzerland offered a number of dicta relating to this agreement. In the export restrictions, "Switzerland proposes that only the elimination of all export restrictions on the products should be binding at zero, for all export tariffs." Additionally, Switzerland suggests "that tariffs should be negotiated by an individual product or case-by-case basis in the framework of an application/offer procedure which may be supplemented, where appropriate, by a tariff reduction formula."


The Republic of Korea

The proposal submitted by Korea was a result of its concern on the food security of the country as a net food importing country. The proposal advocates “that the Uruguay Round was not successful in ascertaining a balanced manner of interest for both countries, including the exporting and importing partnered countries. Suggesting that the food security situation of the developed countries is unstable.” Moreover, Korea proposed to strengthen the disciplines in the following areas: “to prohibit exporting countries from imposing export restrictions and prohibitions arbitrarily; to prohibit the use of export tax for the purpose of export restriction; to secure transparency in the operation of state trading enterprises and to prevent their circumventing of reduction commitment in export subsidy.”



The Democratic Republic of the Congo

The proposal of the Democratic Republic of the Congo only stated the issues that they thought needed to be considered. In the export subsidies, Congo emphasized the need for the elimination of the forms of export subsidy and a reduction by 60 per cent of the conclusion of the Uruguay Round commitments, as well as the need for food aid to be granted to support importing developing countries and the abolition of export taxes.


Jordan

In the Jordanian proposal of the negotiation process that began in March 2000, it mentions that Jordan follows a strict economic adjustment leading to internal and external trade liberalization within the country’s bound tariff to an average of 30 percent. In comparison to the other trading partner countries, Jordan proposed that the WTO countries should eliminate all forms of export subsidies and that they should be bound to a zero rate.


Cairns Group

With a view toward providing increased certainty of supply for food importing countries and a particular focus on the least developed and developing net-food importing countries, the Cairns Group proposed that the agriculture negotiations should provide opportunities for developing countries to grow. Cairns requested that the negotiations should develop both improved disciplines on export restrictions and taxes and eliminate tariff escalation, preserve Article 12.2 of the Agreement on Agriculture, and provide additional special and differential treatment provisions to address the legitimate needs of developing countries, including the least developed and net-food importing developing countries.


The United States

In accordance with the long-term objective of establishing a fairer, more market-oriented agricultural trading system and procedures agreed at the March meeting of the Committee on Agriculture, the United States submitted a comprehensive agricultural reform proposal for correcting and preventing restrictions and distortions in world agricultural markets.


The proposal summarized a two-phase process for trade reform. The first phase eliminates export subsidies and reduces worldwide tariffs and trade-distorting domestic support over a 5-year period. This would be accomplished by harmonizing tariffs and trade-distorting domestic support at substantially lower levels than what is currently allowed. The second phase is the eventual elimination of all tariffs and trade-distorting support by a specific date to be established in these negotiations. The United States proposed "to strengthen substantially WTO disciplines on export restrictions to increase the reliability of global food supply" and "to prohibit the use of export taxes, including differential export taxes, for competitive advantage or supply management purpose."


Japan

Japan's negotiating proposal is based upon the fundamental philosophy of coexistence of agriculture. Japan is actively engaged in the agricultural negotiations in accordance with Article 20 of the AoA. This negotiating proposal has incorporated some views and comments from a wide-range of the society, including not only agricultural producers but also the consumers themselves. More specifically, Japan proposed the following:


Export prohibitions/restrictions, export taxes


"(a) Ensuring food security for its population is an important responsibility of each government. Export prohibitions and restrictions, which an exporting country will take temporarily, can severely affect the food security of an importing country, even if it can be considered a necessary measure for the exporting country in view of ensuring its own food security.


(b) With regard to imports, all border measures, other than tariffs, have been replaced by tariffs in principle. On the other hand, Members can freely take export prohibitions and restriction measures under the current Agreement. Japan thus proposes that all export prohibitions and restrictions be tariffed (i.e. replaced by the export taxes).


(c) All import tariffs are bound and commitment has been made to reduce them under the current Agreement, even though there exists no provision concerning export taxes. It is necessary, therefore, to bind the level of all export taxes, including those possibly introduced in the future. With regard to products subject to the export tax, it is also necessary to establish quotas in which exports equivalent to a certain proportion of domestic production will be exempt from the export tax. Disciplines in this regard should be defined.


(d) Furthermore, clarification of the disciplines on export restrictions is necessary in order to prepare for a situation where an exporting country, if export taxes have not been introduced, faces an urgent need to restrict exports."


Section 4.2 of Japan's proposal concerned export prohibitions/restrictions and export taxes. Japan proposed that all export prohibitions and restrictions should be tariffed (i.e. replaced by the export taxes). Also, Export rules and disciplines should be strengthened, since it is necessary to ensure the stability and predictability of exports in order to ensure food security in importing countries. Export state trading could affect the entire international market of a specific agricultural product, as well as the food security of importing countries. Therefore, disciplines on export state trading should be clarified in order to improve its transparency and predictability.


Treaties


(i) Regional Trade Agreements

we will discuss three regional trade agreements, the Transatlantic Trade and Investment Partnership (TTIP), the Comprehensive Economic and Trade Agreement (CETA), the Trans-Pacific Partnership (TPP), the North American Free Trade Agreement (NAFTA), Canada-Chile free trade agreement and Canada- Costa Rica Free Trade Agreement.


TTIP

The Transatlantic Trade and Investment Partnership (TTIP) agreement is being negotiated between the United States and the European Union. TTIP negotiations began in July 2013 and currently taking place behind closed doors. In relation to food security, the European Union's proposal for legal text on "Agriculture" in TTIP which made public on 21 March 2016 stated that [13]


“1. The Parties recognize the efforts undertaken in international fora to enhance global food security and nutrition and sustainable agriculture and commit to actively engage in cooperation in those fora. To this end, the Parties shall:


refrain from undertaking export restrictions as well as the use of export taxes, which might exacerbate volatility, increase prices and have a detrimental effect on critical supplies of agricultural goods to the Parties and to other trading partners, and seek a coordinated approach in the relevant fora" [14]


CETA

CETA, between the European Union and Canada, seeks to boost trade, strengthen economic relations and create jobs. In relation to food security,


CETA Article 2.6 Duties, taxes or other fees and charges on exports


“A Party may not adopt or maintain any duties, taxes or other fees and charges imposed on, or in connection with, the export of a good to the other Party, or any internal taxes or fees and charges on a good exported to the other Party, that is in excess of those that would be imposed on those goods when destined for internal sale.” [Art,2.6, CETA]


CETA Article 2.11 Import and Export Restrictions


"1. Except as otherwise provided in this Agreement, a Party shall not adopt or maintain any prohibition or restriction on the importation of any goods of the other Party or on the exportation or sale for export of any goods destined for the territory of the other Party. Except in accordance with Article XI of the GATT 1994. To this end Article, XI of the GATT 1994 is incorporated into and made a part of this Agreement.


2. If a Party adopts or maintains a prohibition or restriction on the importation from or exportation to a third country of a good, that Party may:


(a) Limit or prohibit the importation from the territory of the other Party of a good of that third country; or


(b) Limit or prohibit the exportation of a good to that third country through the territory of the other Party.


3. If a Party adopts or maintains a prohibition or restriction on the importation of a good from a third country, the Parties, at the request of the other Party, shall enter into discussions with a view to avoiding undue interference with or distortion of pricing, marketing or distribution arrangements in the other Party.


4. This Article does not apply to a measure, including that measure’s continuation, prompt renewal or amendment, in respect of the following:


(a) The export of logs of all species. If a Party ceases to require export permits for logs destined for a third country, that Party will permanently cease requiring export permits for logs destined for the other Party;


(b) for a period of three years following the entry into force of this Agreement, the export of unprocessed fish pursuant to Newfoundland and Labrador’s applicable legislation;


(c) Canadian excise duties on absolute alcohol, as listed under tariff item 2207.10.90 in Canada’s Schedule of Concessions annexed to the Marrakesh Protocol (Schedule V), used in manufacturing under the provisions of the Excise Act, 2001, S.C. 2002, c. 22; and


(d) The importation of used vehicles into Canada that does not conform to Canada's safety and environmental requirements." [Art,2.11, CETA]


Under the rules of CETA, all export duties and other export restrictions will prohibited in accordance with Art. XI of the GATT. Nevertheless, a Member might request consultations in occasions where they feel that their interests are or could be harmfully affected by such a measure by the other Party.


TPP
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