MAC: Mines and Communities

WTO Row Spotlights Nations Clamping Down On Resources

Published by MAC on 2011-07-25
Source: PlanetArk

Analysis: WTO Row Spotlights Nations Clamping Down On Resources

By Krittivas Mukherjee


21 July 2011

Countries from India and Indonesia to Russia are tightening their grip on natural resources as they limit exports to build up domestic industry in a trend that will spawn many challenges to World Trade Organization rules.

Export barriers are tightening on commodities rangingpho from food and coal to iron ore and coveted rare earths that have critical roles in high-tech devices as countries harden positions on what they see as a sovereign right to development.

The WTO ruled this month that China broke trade laws when it curbed exports of coveted raw materials, a verdict that seemed to cast a doubt over nations' right to control and use raw materials on their soil.

Between October last year and April 2011, at least 30 new export curbs were imposed by countries such as China, India and Vietnam, up from 25 slapped on during the previous 12 months, the WTO said in a report in June.

"Every country is trying to conserve its resources," R.N. Patra, head of India's state-run rare earths company, IREL, told Reuters. "It is their right how they want to use them."

Indonesia had raised the floor price of coal, Australia had a levy on a minimum price, and even the United States had restrictions on the export of 10 elements, Patra added.

"This did not exist a few years ago. But in the future there will be greater competition for resources."

Economic Recovery to Drive Battle

As the world economy recovers from its slowdown, that battle for resources will only intensify, analysts said, although, for now, many producing countries need the income from exports to plug large fiscal deficits.

Export curbs run the gamut from taxes to restrictive quotas and outright bans.

For example, India has a 20 percent export tax on iron ore and controls grain exports; Indonesia's curbs include giving priority to domestic demand for gas and coal and export taxes on cocoa and palm while Mongolia, a potential source of rare earths, is talking about an export tax on ores.

Increased export curbs by developing countries stem from short-term protectionist motives rather than long-term industrial policy, said Razeen Sally, director of the European Center for International Political Economy, a think-tank based in Brussels.

"There is a trend and a copying effect going on -- when China does it, other will do it too -- but I do not think this makes economic sense at all," Sally told Reuters.

"We can expect more cases to come to the WTO as we see many more of these restrictions. The case against China is important in the sense that it sends a signal that countries don't have carte blanche when it comes to export restrictions."

Building Domestic Industry

China has faced pressure over export limits on rare earth minerals, which have key applications in high-tech appliances ranging from fiber optics to mobile phones.

The country controls 97 percent of world supplies of the metals and has cited environmental concerns and resource depletion for trimming back exports in the WTO row.

"The WTO dispute opens a larger debate on the changing dynamics of global trade in which developing countries, like China or India, are slowly looking at moving away from the model of exporting raw materials to the developed world to produce value-added products," said T.S. Vishwanath, an adviser with APJ-SLG Law Offices, a firm specializing in trade issues.

Conserving resources could give downstream producers just the edge they need to stay ahead of the curve in fiercely competitive international markets.

In extreme cases, a country which is a monopoly supplier of a commodity with limited substitution may drive out whole industries in a competing import-dependent country.

That is why China's curbs on rare earth metals have drawn so much attention, despite involving low trade volumes. But one analyst said the country was also looking to support its manufacturers and the military.

"The Chinese equate rare earths with their own stability, not just in the manufacturing sector but also the military sector," said Ben Simpfendorfer, managing director of business consultancy Silk Road Associates, which is based in Hong Kong.

While natural resources are vital for the industrial development of Asia's fast-developing economies, for now, many Asian nations are primarily concerned with food security at a time of potentially acute, destabilizing inflation and fluctuating supply and demand, Simpendorfer said.

Politics, Environment

In the developing world, where land has traditionally been the only source of livelihood for hundreds of millions of indigenous people, forest and mountain dwellers and farmers, conserving natural resources is an explosive political issue.

Rising industrial activities fuel the demand for land, feeding conflict between firms and vast populations living in the countryside who form the core support base of governments.

Such protests scatter across the developing world from Brazil to Indonesia, and governments have damped the unrest with the strategy of getting investors to devote some of their income to the development of local communities.

India is framing a law to force private miners to share profits or make royalty payments, so generating funds to aid local communities' development in a bid to win popular approval for projects and undermine support for a Maoist rebellion.

"There is a trend of a huge outcry in producing countries and the view is people there should benefit from their own resources," said Paranjoy Guha Thakurta, a political commentator in New Delhi. "Governments cannot ignore the protests anymore."

As growing environmental concern piles pressure on developing countries to cut carbon emissions, they are likely to hold on to resources key to building clean energy equipment.

In the context of global climate talks, developing economies could use an export tax to counter or preempt border adjustment measures that developed countries set on imports.

"Energy security and concerns over carbon emissions will mean more and more countries will want to conserve their resources to build their alternative energy capacity or energy-saving equipment," said IREL's Patra.

"For so long the West has been taking the cheap resources of the East. Going forward we will see that will not happen anymore."

(Editing by Clarence Fernandez)

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