This week and the next one, I will focus on natural resources trade, the special theme of WTR 2010 that raises critical issues about resource nationalism. Natural resources include fuels, forestry, mining and fisheries that provide basic inputs to most economic activities and whose extraction and use affect the environment. Since agricultural products are cultivated rather than extracted from the natural environment, they are excluded from the definition of natural resources. Some natural resources, such as oil and natural gas, are non-renewable, whereas others, such as forests and fisheries, are renewable but also potentially exhaustible if not properly managed.
WTR 2010 analyzes the characteristics of trade in natural resources, whose share in world trade is growing, the policy choices for governments and the role of international cooperation in this trade’s management. Among the significant characteristics of natural resources trade that affect the modes of as well as the gains from trade are: (1) the skewed geographical distribution of natural resources; (2) the widespread market failures, as negative environmental externalities such as air and water pollution, in the exploitation of natural resources; (3) the sustainability of natural resources weakened by the use of modern technologies; (4) the high export dependency of some countries on geographically concentrated natural resources, referred to as the “natural resources curse” or the “paradox of plenty”; (5) the high volatility of natural resource prices in boom-and-bust cycles, especially if they are susceptible to speculative bubbles.
The geographical concentration of natural resources creates the potential for mutual gains from trade but its realization is hampered by the exhaustibility of natural resources and the frequent market failures in their exploitation and trade. These market failures emanate from the imperfectly competitive markets themselves and the improperly defined or ineffectively enforced property rights. One of the channels through which the natural resources curse can be transmitted is the “Dutch disease,” when rising foreign exchange revenues from natural resources exports causes deindustrialization. This occurs through real exchange rate appreciation, which reduces the international competitiveness of the manufacturing sector.
Here are a few important facts about natural resources trade: (1) Its total value, at $3.7 trillion, 24 percent of world merchandise trade, in 2008, rose sixfold during 1998-2008, although its volume has not changed much. (2) Fuels, primarily petroleum, account for the lion’s share of natural resources trade, which increased from 57 percent in 1998 to 77 percent in 2008. (3) The top 15 natural resources exporters accounted for 52 percent and the top 15 importers accounted for 71 percent of global natural resource shipments in 2008. (4) Relative to merchandise trade, natural resources trade is affected by export taxes and quantitative restrictions more than by import tariffs. (The restrictions natural resource exporters confront in importing countries tend to rise with the stage of processing, referred to as “tariff escalation,” discouraging exporters’ higher value-added production.) Export restrictions are inadequately addressed by WTO rules that condone export taxes. The General Agreement on Tariffs and Trade’s (GATT) Article XI - General Elimination of Quantitative Restrictions bans “prohibitions or restrictions other than duties, taxes or other charges” on exports but allows for several significant exemptions. Article XX - General Exceptions also has several loopholes that permit quantitative export restrictions. (5) Natural resource subsidies, especially to fisheries, are also quite widespread.
WTR 2010 emphasizes two drivers of the globalization of natural resources trade: technological progress in transportation technology since the mid-19th century and the development of centralized commodity markets since the 1980s. The latter was facilitated by the largely homogenous nature of natural resources that enables the determination of a unified price through competitive transactions on organized exchanges. But natural resources trade does not fit all that well into the perfectly competitive market model given the skewed geographic distribution of natural resources and high fixed costs of extraction that lead to high concentration and monopoly power, as in the case of the OPEC cartel. Another less well known but potentially no less important case is the recent emergence of China’s global production and export monopoly of the rare earth elements (REEs), precious minerals that are essential in manufacturing many high-technology products. Many experts believe that China controls the destiny of the electron-economy, which depends critically on REEs, in the 21st century. I will discuss this case in next week’s column.
In his speech at the launch of WTR 2010, WTO Director-General Pascal Lamy, advocating international cooperation over confrontation in natural resources trade, warned that inadequate global trade rules risked “stoking the fires of resource nationalism, where power asymmetries across countries and beggar-thy-neighbor motivations dominate trade policy outcomes.” He acknowledged that countries that export natural resources might have legitimate reasons for export restrictions. They might want to rectify negative externalities that damage the environment; they might wish to diversify their economies away from overdependence on natural resource exports and to promote their domestic industries that use natural resources as inputs; and, they might need the export taxes for revenue. But he denounced beggar-thy-neighbor export restrictions that extract a terms-of-trade advantage by raising natural resource prices for importing countries. He warned that “as the world emerges from global recession, competing interests in natural resource trade are likely to become a stronger source of policy tension.”
In next week’s column, I will conclude the discussion of natural resources trade and natural resource nationalism, paying special attention to China’s controversial strategic efforts as a rising global industrial power to secure access to scarce natural resources.
