Distortions of Trade and Competition in the Raw Materials Sector For Non-Discriminatory Access and Reliable Trade Rules
BDI – Federation of German Industries Department Security and Raw Materials
Distortions of Trade and Competition in the Raw Materials Sector For Non-Discriminatory Access and Reliable Trade Rules
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Table of Contents 1. Background...........................................................................................................................................................4 1.1 What are trade restrictions?.............................................................................................................................5 1.2 Trade restrictions for raw materials are on the increase all over the world......................................................6 1.3 The international legal framework conditions..................................................................................................6 1.4 China‘s market power.....................................................................................................................................7 2. Examples...............................................................................................................................................................8 2.1 Distortions of trade and competition illustrated by the example of rare earths...............................................8 2.2 Distortions of trade and competition for copper and copper scrap ...............................................................9 2.3 Distortions of trade and competition for steel raw materials and scrap steel................................................12 2.4 Trade obstacles for renewable resources......................................................................................................13 3. Challenges..........................................................................................................................................................14 3.1 Increase in distortions of trade and competition on the raw materials markets ...........................................14 3.2 WTO rules no longer in keeping with the times..............................................................................................14 3.3 Lack of transparency with measures restricting trade...................................................................................15 3.4 Negative impact on competition and prosperity............................................................................................15 4. Demands of industry..........................................................................................................................................16 4.1 Making greater use of bilateral and multilateral agreements for the removal of export restrictions and for
access to raw materials.................................................................................................................................16
4.2 Securing fairness in international competition..............................................................................................16 4.3 The German government and the EU must demand compliance with international agreements.................16 4.4 Creating transparent framework conditions at the political level..................................................................15 4.5 Resumption of talks within the framework of the G7 and G20.....................................................................17 4.6 Partnership instead of protectionism............................................................................................................17 Imprint ................................................................................................................................................................... 18
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BDI – Federation of German Industries Department Security and Raw Materials
Distortions of Trade and Competition in the Raw Materials Sector For Non-Discriminatory Access and Reliable Trade Rules
1. Background In 2013, Germany imported mineral and fossil raw materials of a value of 143 billion Euro. Around 70 percent of these imports were energy resources and about 30 percent were made up of metals and industrial minerals. These raw materials are sourced from all over the world. Good trade relations and the removal of barriers to trade in the raw materials sector are therefore of vital importance for a secure supply of raw materials. Secure and non-discriminatory access to raw materials is crucial for Germany as an industrial nation and hightech location. The global demand for raw materials is being boosted by the continued industrialization of developing countries and emerging economies as well as the ongoing development of innovative technologies. As one of the biggest importers of raw materials, Germany is dependent on their availability on the international markets. Free trade is consequently decisive for the competitiveness and future viability of Germany as an industrial nation. However, in recent years developments in the international raw materials markets have demonstrated that the growing shortage and increased cost of important raw materials can impose a major burden on industry.
For some years now, a number of countries have been pursuing proactive policies aimed at safeguarding raw materials in order to secure the availability of such resources for their own business enterprises. On the one hand, imports of raw materials are financially promoted by trade distorting state measures and on the other hand, raw materials exports are restricted. This leads to intense price fluctuations and an artificial shortage on the world raw materials markets. The whole industrial value chain is affected by trading practices that distort competition. Both, Germany’s domestic production of raw materials and the country’s raw materials production in foreign mining are suffering from distortions of trade and competition, since competitiveness is being undermined by state measures. In addition, strict requirements are in force in Germany with regard to environmental, social, and labour standards, which all have the effect of making production more expensive. However, there is a lack of international standards that would guarantee a level playing field. Industry, as Germany’s growth engine, will continue to be dependent on the import of raw materials. It is the responsibility of policy makers to establish a fair and reliable framework for the supply of raw materials.
Growing challenges for the European Union's raw material supply
Market concentration on few states
Protectionism, state intervention
Consolidation of the upstream sector
Expansion of competition
Influencing factors
Influencing factors
Influencing factors
Influencing factors
- Production concentration on hightech raw materials: e.g. tungsten: 87% in CHN and RUS; niobium: 93% in BRA
- State intervention to safeguard domestic industry (e.g. export taxes/licences, trade defence instruments etc.)
- Oligopolistic structures (e.g. iron ore: top 3 control about 60% of the seaward iron ore trade)
- Market entry of new producers through backward integration in industry and trade
- Often in countries with insecure business environment (corruption, political risks, conflicts)
- State uses production monopoly as an instrument of trade policy
- Major M&A activities in the mining industry
- Declining quality of raw material deposits
Danger to value creation chain without state support
Increasing distortions of competition through state interventions
Danger to competition through growing market power of suppliers
Stronger competition for raw materials with lower yield
Source: WV Stahl
- Rising costs of extraction
BDI – Federation of German Industries Department Security and Raw Materials
Distortions of Trade and Competition in the Raw Materials Sector For Non-Discriminatory Access and Reliable Trade Rules
1.1 What are trade restrictions?
Protectionist measure
Trade restrictions are measures that impede international trade and the exchange of goods. They aim to protect domestic economies and discriminate against foreign enterprises. A distinction is made by dividing trade restrictions into “tariff” and “non-tariff” trade barriers. Import and export duties are the classic instrument of protectionism to which one country resorts to in order to create an advantage for itself at the expense of another country. Non-tariff trade barrier is the term for all kind of trade restrictions which are not imposed in the form of duties, such as import bans, quotas, or licensing procedures. Both tariff and non-tariff trade barriers lead to distortions of competition and restrict world trade. According to the World Trade Organization (WTO), trade restrictions in the raw materials secto rare common. For example, export taxes are higher (eleven percent) for raw materials than for world trade as a whole (five percent).
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Explanation -- Customs duty as a kind of tax -- Import duty (protective tariff) protects domestic firms from foreign competition
import tariffs/export tariffs
-- Export duties raise cost and reduce exports domestic supply increases with effect of lowering prices -- Distortion between world market prices and domestic prices
import/export bans
-- absolute or relative prohibition on importing or exporting certain goods -- restriction of quantity of imports or exports
contingents/quotas
-- on fulfilment of the quota no more of the product affected may be imported or exported
minimum price requirements
-- product may only be offered at a certain minimum price
non-automatic licensing procedures
-- authorization in the form of a licence or permit for the import or export of a product -- tax rebates for imports/exports
subsidies
-- reimbursement of value added tax
Source: WTO, OECD
Origin of German raw materials imports Canada: USA:
Coal, Fe, Se, Ti Coal, Ge, Li, V, W, Zn, PGM, kaolin
Jamaica: Clay Surinam: Tonerde Colombia: Coal Peru: Ag, Cu, Pb, Sn Brazil: Cu, Fe, Mn, Nb, Si, graphite Bolivia: Pb Chile: Cu, Li, Mo Argentina: Cu Spain: Zn, Al-hydroxide, clay Libya: Crude oil Guinea: Bauxite Ghana: Bauxite Namibia: Fluorite South Africa: Coal, Cr, Fe, PGM, ferro-alloy, andalusite, fluorite Israel: Phosphate China: Ge, Mg, Mn, Mo, Sb, SE, W, ferro-alloy, barite, colored earths, fluorite, mica, graphite, magnesite India: Diamonds, mica, emery Indonesia: Sn Australia: Coal, Pb, Zn Source: BGR, 2014
Iceland: Ireland: Norway:
Al Pb, Zn, Al-hydroxide Natural gas, crude oil, coal, Al, Si, Ti, ferro-alloy, feldspar, natural stone Sweden: Fe, Pb, Se, Zn Finland: Zn Denmark: Diatomite Netherlands Natural gas, Al, Pb, clay Natural gas, crude oil, coal, Al, Co, Russia: Cu, Fe, Ni, Pb, W, PGM, ferro-alloy.
Legend Ag: Silver Al: Aluminium Co: Cobalt Cr: Chrome Cu: Copper Fe: Iron Ge: Germanium Li: Lithium
Mg: Magnesium Mn: Manganese Mo: Molybdenum Nb: Niobium Ni: Nickel Pb: Lead PGM:Platinum group metals Sb: Antimony
SE: Si: Sn: Ti: V: W: Zn: Zr:
Rare earths Silicon Tin Titanium Tungsten Vanadium Zinc Zirconium
UK: Crude oil, Al, Pb, fluorite, kaolin Greece: Ni, perlite Ukraine: Ni Poland: Coal, Cu Lithuania: Peat Turkey: Feldspar Kazakhstan: Crude oil, Ag, Ti Belgium: Mo, Pb, PGM, ferro-alloy, borate, dolomite, kaolin, cement Austria: Mg, SE, V, W, gypsum, graphite, natural stone France: Ag, Al, Al-hydroxide, natural stone, phosphate, cement
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BDI – Federation of German Industries Department Security and Raw Materials
Distortions of Trade and Competition in the Raw Materials Sector For Non-Discriminatory Access and Reliable Trade Rules
1.2 Growing number of trade restrictions all over the world International institutions, such as the World Trade Organization (WTO) or the Organization for Economic Cooperation and Development (OECD), confirm that there is an increase in the number of new trade barriers within the G20. Despite the voluntary commitment of the G20 nations to a joint standstill agreement – pledging not to introduce any new obstacles to trade and to dismantle existing measures – growing protectionism can be recorded. A growing concentration of supply and increasing state interventions are central influencing factors on the availability of raw materials and are creating far-reaching distortions of competition in the international raw materials market. Since 2008, the number of protectionist measures has risen from around 100 to a total of 858. Only 119 measures were removed over the same period. Between June 2013 and July 2014 alone, there was a rise in new trade barriers of 25 percent. A total of 170 new trade restrictions were introduced over this period with the increase in export restrictions amounting to around 39 percent. For several years, there has been a constant increase in trade restrictions. Alongside a high number of import measures, such as refunding value added tax for certain raw material imports, trade restrictions in the raw materials sector are
dominated by export licences and taxes. Export taxes decrease the volume of exports and increase domestic supply, leading to lower prices domestically and high prices on the world market. Another common measure is the non-automatic issuing of export licences. Exporters must obtain authorization in advance in the form of a licence or permit in order to export their product. In this way, the government has control over who can export and what quantities can be exported. In 2012, nine top producers of various raw materials applied non-automatic export licences and thus restricted trade of around 240 primary raw materials and semi-finished goods.1 1.3 The international legal framework Reliable trade rules along with legal and institutional framework conditions are a precondition for fair competition, also on the international raw materials markets. With the General Agreement on Tariffs and Trade (GATT) and the consequent founding of the WTO, there now exists a central international organization, which is responsible for regulating trade relations. The binding effect of the WTO rules enhances legal certainty in international trade.
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Source: OECD, 2014
Trade restricting measures continuing rapid advance Development of the number of potentially trade restricting measures 1000 858
900
+25 800 688 700
+29
600
534 +26
500
424
400
333
+27
+49
300
223 +123
200 100 100 0
2008
Oct. 09
Oct. 10
Sept. 11 Apr. 11
Jun. 13 Jul. 14
Source: 11th Report on Potentially Trade-Restrictive Measures (2014); WV Stahl
Russia China India Indonesia Argentina Egypt USA Turkey South Africa Thailand Tunisia Japan Brazil Vietnam Mexico Ecuador Algeria Saudi-Arabia Nigeria Philippines Switzerland South Korea Pakistan
32 23 16 14 13 10 8 7 7 6 4 4 4 3 3 3 3 2 2 2 2
June 2013 - July 2014
+170
1 1 0
10
20
30
40
BDI – Federation of German Industries Department Security and Raw Materials
Compared with import restrictions, the elimination of export restrictions has so far not been addressed prominently in the multilateral trade system. The WTO rules governing import restrictions are both great in number and detail. In several negotiations, the world trade system has made a successful contribution to a substantial removal of import tariffs and import restrictions. Under GATT Article XI:1, export taxes are not an inadmissible restriction on exports and there is no explicit rule imposing a legally binding upper limit. Therefore, WTO members can implement export taxes unilaterally.2 In contrast, quantitative import and export restrictions are basically prohibited. However, there are various exemption clauses that permit export restrictions in special cases. These cover not only temporary protective measures but also general exceptions such as those intended to protect health and the environment. A precondition for “special cases” is that domestic enterprises must be equally affected by the measure, meaning that the measure also curtails domestic production. Since export tariffs are legally permitted at the multilateral level, provided that no special regulations have been included in the WTO accession protocols (e.g. in the case of China), export tariffs are frequently prohibited in regional or bilateral trade agreements (e. g. EU or EU-Mexico). For German and European industry, bilateral trade agreements are an important instrument for creating an international legal foundation.
Distortions of Trade and Competition in the Raw Materials Sector For Non-Discriminatory Access and Reliable Trade Rules
Export restrictions on raw materials (2012) Share of 2012 production restricted by any export measure
Product
1
Antimony
98 %
Bolivia*, China*, Dominican Republic, Grenada, Malaysia, Philippines, Russia*, Tajikistan, Vietnam
2
Rare earth elements
97 %
China*
3
Tungsten
96 %
Bolivia*, China*, Dominican Republic, Grenada, Malaysia, Philippines, Russia*, Vietnam*
4
Magnesium
92 %
China*
5
Graphite
88 %
China*, India*
6
Magnesite
85 %
China*, Malaysia
7
Barytes
78 %
China*, India*
8
Fluorspar
75 %
China*, Malaysia
9
Lead
66 %
China*, Dominican Republic, Grenada, Malaysia, Philippines, South Africa, Vietnam
10
Tin
63 %
Bolivia*, China*, Dominican Republic, Grenada, Malaysia, Philippines, Russia, Vietnam
11
Zinc
54 %
China*, Dominican Republic, Grenada, Malaysia, Philippines, Vietnam
12
Manganese
52 %
China*, Dominican Republic, Gabon*, Grenada, India, Malaysia, Philippines, Vietnam
1.4 China’s market power In the last few decades, the People's Republic of China has advanced to become the leading consumer of raw materials. In the case of most critical raw materials, China now both consumes and produces more than 50 percent of the world total. The raw material supply is very concentrated for a number of raw materials (inlcuding tungsten or antimony). In the case of tungsten, Germany is entirely dependent on imports as there is currently no primary mining of this resource. In contrast, for certain raw materials China has by far the biggest share of worldwide production, for instance with 75 to 90 percent for tungsten. China uses its market power as a tool for controlling trade on the international raw materials markets. 96 percent of the world's tungsten production was restricted by export measures in 2012.
2
Bound tariffs serve as a negotiation basis within the WTO. They constitute a legally binding ceiling above which the tariffs applied by the WTO member states must not rise.
Producer countries restricting exports
Rank**
13
Molybdenum
47 %
China*, Dominican Republic, Grenada, Malaysia, Philippines, Russia, South Africa, Vietnam
14
Palladium
45 %
Dominican Republic, Ghana, Grenada, Malaysia, Philippines, Russia*
15
Aluminium
45 %
China*, Dominican Republic, Grenada, Guinea, India*, Malaysia, Philippines, Russia, Vietnam
±
Sources: Production data USGS Minerals Yearbook. OECD Inventory of Export Restrictions.
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BDI – Federation of German Industries Department Security and Raw Materials
Distortions of Trade and Competition in the Raw Materials Sector For Non-Discriminatory Access and Reliable Trade Rules
2. Examples 2.1 Distortions of trade and competition illustrated by the example of rare earths
Development of export quotas for rare earths in China (2004 - 2012)
With more than 90 percent of world production, China has a near monopolistic position for the 17 metals that constitute the so-called rare earths. The import ratio for the EU and other western industrial nations amounts to practically 100 percent. The global economy is therefore dependent on supplies from China. Rare earths are needed all over the world for the manufacturing of high tech products and technologies. Physically speaking, rare earths are not rare since other countries such as the USA, Australia or even Germany actually have deposits of rare earths. However, extracting and especially separating them is a very intricate process and extremely costly in economic terms.
Year
In the past, China adopted a targeted industrial policy strategy to capture the production of rare earths by means of dumping prices, making projects outside the People’s Republic economically unviable. Over a period of several years, the country has been reducing the export ratio for rare earths. In 2005, the export quota was still around 65,000 tonnes. In 2010, it was only 30,000 tonnes, a reduction of 40 percent as compared to the previous year. These measures obviously run against the interests of the buyer countries. In 2010, global demand was between 5,000 to 10,000 tonnes higher than the global, i.e. Chinese, supply. This artificial created shortage led to a rise in prices on the international raw materials markets compared with Chinese domestic prices and obstructed access to raw materials for foreign enterprises. For this reason, the EU, together with the USA and Japan, filed a complaint at the WTO in early 2012 and demanded an official arbitration procedure.
2004
Difference compared to Export quota [t] previous year [%] 65,609
Estimated demand outside China [t] 57,000
2005
65,609
0
46,000
2006
61,821
-6
50,000
2007
59,643
-4
50,000
2008
56,939
-5
56,000
2009
50,145
-12
25,000
2010
30,258
-40
49,000
2011
30,246
0
35,000
2012
~31,130*
+3
45,000?
Source: BGR. *First allocation of rare earths exports for 2012: 24.904 tonnes (confirmed and provisional)
The WTO procedure: The major buyer countries argue that China’s implementation of export quotas, tariffs, and minimum prices violates the international rules of trade and its WTO-accession treaty. The Chinese government defends its policy, arguing that the measures are necessary in accordance with the exception clause in GATT article XX in order to protect the environment and promote sustainable development. Thus, China claims that the export restrictions concur with WTO rules.However, the exception clause relating to environmental protection only applies when the extraction of the raw materials in question is also restricted in the home country. In China, this was not the case. In the WTO accession protocol, China pledged to abolish its export tariffs, including those on rare earths and also waived the right to apply the general exemption clauses of the WTO. In the beginning of 2014, the WTO court of arbitration ruled that the export quotas create unfair competitive advantages for Chinese firms and thus violates the rules of free world trade. The exemption clauses cannot be applied for China in this case. After a trade dispute lasting several years, China has revoked the export quotas for rare earths but new restrictions are already being planned. Under the framework of the new directives of the People’s Republic, the quantity of exports is no longer limited by a quota. However, exporters require a licence to be allowed to export rare earths. This leads to mines being shut down and a further monopolisation domestically. Above all, the Chinese export policy on rare earths and the in-
BDI – Federation of German Industries Department Security and Raw Materials
Distortions of Trade and Competition in the Raw Materials Sector For Non-Discriminatory Access and Reliable Trade Rules
genious exercise of quantity control compromises new projects on the international markets. For example, the projects Mountain Pass (California) or Mount Weld (Australia) cannot be launched for reasons of economic viability. For the foreseeable future, the supply situation will therefore remain tense.
the import tax (VAT) on 17 percent of the copper price, amounting to a cut of around 5 percent in the price of the Shanghai Futures Exchange (SHFE). As a result, shortages can arise for the supply of European firms. In addition, export taxes and export prohibitions are introduced for scrap in order to curtail exports. For example, Russia imposes a prohibitively high export tax of 50 percent on copper scrap. Consequently, German production facilities cannot buy raw materials or scrap in these countries because high taxes block exports.
2.2 Distortions of trade and competition for copper and copper scrap At the beginning of the value chain, scrap is an important raw material for manufacturing semi-finished products. Scrap is mainly produced in highly industrialised nations like Germany. Raw materials from scrap are immediately available for the value chain (urban mining). They do not have to be obtained in complex operations from ore mining. Copper recycling is a significant resource for Germany but distortions of competition are also very striking in the recycling sector. Companies that benefit from state subsidies and loans on favourable terms can compete more successfully on the European markets, e.g. by means of import incentives for scrap. China, for example, gives import tax rebates for copper scrap and scrap containing copper. The country reimburses the firms with 30 percent of
Overview of distortions of trade and competition illustrated by the example of copper Brazil
Russia
India
Copper ores, concentrates, slag
Import tariff 2%
Import tariff 5%
Import tariff 2%
Non-refined copper, copper anodes
Import tariff 6%
Import tariff 5%
Import tariff 5%
China lifting of VAT charge on imports Export tariff 10 % Export tariff 30 % Import tariff ref. copper 2 %, alloys 1 %
Refined copper, copper cathodes
Import tariff 6%
Import tariff 5%
Import tariff 5%
Export tariff 30 %
Import tariff 5% Import tariff on products from ref. copper 4 %, on products from copper alloy 7 % Copper ingots, rods, copper sections
Import tariff 12 %
Export tariff 10 %
Import tariff 5%
Export tariff 30 %
Import tariff 5% Import tariff on products from ref. copper 4 %, from copper alloy 7 % Copper wire
Import tariff 12 %
Export tariff 10 %
Import tariff 5%
Export tariff 30 %
Copper piping
Import tariff 14 %
Import tariff 5%
Import tariff 7,5 %
Import tariff 4 %
Copper cable
Import tariff 14 %
Import tariff 15 %
Import tariff 10 %
Import tariff 5 % Refunding of turnover tax (17%) on import
Copper scrap
Import tariff 2%
Export tariff 50 %
Import tariff 5%
Export prohibited
Source: Production data USGS Minerals Yearbook. OECD Inventory of Export Restrictions.
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BDI – Federation of German Industries Department Security and Raw Materials
Distortions of Trade and Competition in the Raw Materials Sector For Non-Discriminatory Access and Reliable Trade Rules
BDI – Federation of German Industries Department Security and Raw Materials
Distortions of Trade and Competition in the Raw Materials Sector For Non-Discriminatory Access and Reliable Trade Rules
Reduction of trade distortions for renewable raw materials The supply of renewable raw materials for German industry can only be secured if market distortions caused by state intervention are dismantled.
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BDI – Federation of German Industries Department Security and Raw Materials
2.3 Distortions of trade and competition with steel raw materials and steel scrap The steel industry in the EU is highly dependent on imports. This dependency amounts to 100 percent for many raw materials relevant for steel. In recent years, the use of trade barriers has significantly increased, often under the pretext of protecting the environment and resources. The application of export duties are particularly noticable in areas that concern raw materials for the steel production. In some cases, the maximum tax rates are as much as 45 percent.
Distortions of Trade and Competition in the Raw Materials Sector For Non-Discriminatory Access and Reliable Trade Rules
It is not only the primary input materials like iron ore and coal which are affected by trade barriers but also the secondary raw material steel scrap. At present, there are trade restrictions in force in this area in more than 30 countries. Industrialising countries in Asia and Africa in particular impose export tariffs or export prohibitions in order to guarantee an adequate and cost-favourable supply of scrap for their domestic industry. In Africa, it is above all export prohibitions that are in force, other regions predominantly apply export taxes, which permit constant readjustment to regulate the desired level of curtailment.
Increasing compartmentalization of raw material marktes - selection of trade restrictions for steel scrap
Belarus: export tax 15%, min. 20 €/t
Russia: export tax 15%, min. 15 €/t
Ukraine: export tax 13.2 €/t; export licensing system Kazakhstan: export tax 15%, min. 20 €/t Azerbaijan: export ban Iran: export tax up to 50% China: export tax 40% Algeria: export licensing system Morocco: export licensing system
Vietnam: export tax 22% Sri Lanka: export tax 10% Malaysia: export tax 10%; export licensing system
Jordan: export tax 50 US$/t
Sri Lanka/ Indonesia: export bans
Ghana/ Kenia/ Zambia/ East Africa: export bans Kenia: export tax 20%
Uruguay: export licensing system Argentina: export tax 20%
Source: OECD (2014), WV Stahl
India: export tax 15%
BDI – Federation of German Industries Department Security and Raw Materials
Distortions of Trade and Competition in the Raw Materials Sector For Non-Discriminatory Access and Reliable Trade Rules
2.4 Trade restrictions for renewable resources
ble raw materials (apart from timber is around 60 percent.3 Potential additional areas for the cultivation of biomass are mostly situated outside Germany. For this reason, German industry will in future continue to be dependent on the import of renewable resources. On account of existing trade barriers such as export tariffs or quotas, the use of renewable resources is being increasingly restricted. The supply of German industry with industrially used renewable resources can only be safeguarded if market distortions through state intervention are removed and imports at competitive world market prices are guaranteed. Where import tariffs impede the industrial use of renewable resources, the German government and the European Commission should make a major commitment to cutting import tariffs on industrially used renewable resources.
The industrial use of renewable resources is gaining in importance both in Germany and globally. Against the background of fossil resources becoming scarcer, renewable resources have an important role to play in the diversification of natural resources. The use of renewable resources assists in conserving fossil resources and promoting sustainable development and also contributes to create jobs and value in rural areas. In view of the finite nature of crude oil and natural gas reserves, renewable resources will be an indispensable part of Germany’s future supply of natural resources. Renewable resources have long been established in various branches and are needed for the production of diverse applications. The share of imports renewa-
3
Source: Fachagentur Nachwachsende Rohstoffe
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BDI – Federation of German Industries Department Security and Raw Materials
Distortions of Trade and Competition in the Raw Materials Sector For Non-Discriminatory Access and Reliable Trade Rules
3. Challenges 3.1 Increase in distortions of trade and competition on the raw materials markets In contrast to the commitment undertaken by the G20 countries, the introduction of trade restricting measures has accelerated. According to estimates by the EU Commission, around twelve new measures are introduced every month.4 In view of heavy dependencies and international value chains, the growing escalation of this trend constitutes a global challenge. The protectionist practices not only have an influence on domestic firms and prices but also global adverse effects on the raw materials markets. An active and integrated raw materials policy is needed in order to confront trade restrictions and distortions of competition on the raw materials markets. The number of regulatory specifications on sustainability and transparency in the raw materials trade has risen in recent years yet overall pays too little attention to the goal of the physical safeguarding of raw materials. The challenge is to create an appropriate balance between the diverse interests of securing raw material supply. Bilateral trade agreements play a key role in complementing the WTO and are an important element for the raw material supply. However, so far there has been no success in countering the trend towards growing protectionism. This challenge must be confronted more resolutely at the multilateral level.
4
EU Kommission, 2014
3.2 WTO rules no longer up-to-date The WTO set of rules on export restrictions is an area, which has so far given the member countries a great deal of scope. A clear trend is emerging that countries are increasingly falling back on the exception clauses, i.e. security or environmental standards, as justification for trade restrictions in order to curtail raw material exports, e.g. with high tariffs or quotas. These measures purport to be in conformity with the WTO. According to Article XI:2(a), quantitative export restrictions are permissible if they are “temporary” or applied to combat a “critical” lack or in accordance with exceptions in Article XX serve to preserve natural resources, to protect the environment or health, or are necessary for national security. However, the WTO set of rules does not contain a definition of what is meant by temporary or critical. The challenge therefore arises to investigate on a regular basis whether exceptions are truly applicable and the rules are being followed. Bringing a case before the WTO is a long drawn-out and resource-intensive process, which frequently only leads to concrete results after several years. The WTO implementation mechanism has so far proved to be too weak since the intricacy and length of arbitration procedures are enormous. It is not possible to react directly to infringements of the rules and, since the WTO lacks the necessary capacities, launching frequent procedures is basically impossible. Moreover, it often takes years before a WTO ruling takes effect.
BDI – Federation of German Industries Department Security and Raw Materials
Distortions of Trade and Competition in the Raw Materials Sector For Non-Discriminatory Access and Reliable Trade Rules
3.3 Lack of transparency with measures restricting trade
3.4 Negative impact on competition and prosperity
Transparency with regard to trade restricting measures is a basic weak point in the international trade in raw materials. Governments have extremely wide scope in deciding whether and if so what information they will disclose about the implementation of protectionist measures. Another critical fact is that trade restrictions are often imposed at very short notice. Frequently, no information is made available about their design, duration or the intended goal of the measure introduced. The ability of the stakeholders affected to exert influence or to react to measures that have already been implemented is thereby highly limited. Monitoring by the relevant institutions (WTO, OECD, UNCTAD) concentrates on trade restrictions that have already been introduced (ex post). Since no “ex ante” information is available, enterprises cannot anticipate the negative impact of the trade restriction and consequently cannot adapt their raw material supply accordingly. The same applies to the extraction of raw materials.
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Trade restrictions lead to rising world market prices. Since access to raw materials is artificially limited, the trade restrictions have the effect of distorting competition. The negative economic effects range from a limitation of supply and the manipulation of trading conditions and trade flows to a decline in global welfare. Trade in the raw materials sector is inefficiently restricted by the introduction of both import and export tariffs. In fact, these measures very rarely work to the benefit of the countries applying them since protectionist measures reduce the opportunities for growth. Generally, export restrictions are imposed for unprocessed metal in order to boost domestic value creation. According to a study by the OECD and the NorthWest University in South Africa, in the case of various African nations there is no evidence to suggest that limitations on raw materials exports have any positive effect on the competitiveness of downstream processing industries.5 A wealth of resources and a competitive mining sector do not automatically generate comparative advantages in subsequent processing.
5
OECD, 2015
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BDI – Federation of German Industries Department Security and Raw Materials
Distortions of Trade and Competition in the Raw Materials Sector For Non-Discriminatory Access and Reliable Trade Rules
4. Demands of industry 4.1 Making greater use of bilateral and multilateral agreements for the removal of export restrictions and for access to raw materials
4.3 The German government and the EU must demand compliance with international agreements
To secure the raw material supply, the German government and the EU must continue to pursue the path of the steady expansion of international trade agreements. At the multilateral level, particularly in the WTO protocols of accession, articles on export restrictions must be included in order to avoid distortions of international competition in the raw materials sector. The removal of trade restrictions on raw materials and of subsidies that distort competition must be made a fundamental condition for the conclusion of trade agreements and WTO accession agreements. The role of the WTO has to be strengthened since concerted multilateral action yields the greatest gains in efficiency. In bilateral talks, including in the TTIP negotiations, constant efforts are needed to bring about the removal of measures distorting trade and competition in the raw materials sector.
The WTO members have the right of notification in order to point to non-tariff trade barriers erected by other WTO members. The use of this instrument has so far been inadequate. As a rule, the trading partners do not make strong enough claims for proper compliance with the international agreements. For Germany and Europe, a secure supply of raw materials at competitive conditions is imperative for value creation, growth, and prosperity and will continue to be so in the future. That is why the German government and the EU should take stronger action against violations of international agreements and play a prominent part in demanding compliance. In particular at the political level there should be a determined effort to confront those distortions of competition in the international raw materials markets, which are caused by the policies of other states.
4.2 Securing fairness in international competition
4.4 Creating transparent framework conditions at the political level
It is of key importance to guarantee a level playing field for access to raw materials. This requires reliable rules of trade and a more consistent application of penalties in cases of violations of the rules. Although in some cases there is no formal infringement of the WTO trading rules, the actions of several countries are not in accordance with the principle of fair competition. Administrative measures are taken to compensate for the lack of competitiveness of a country’s own industry, while doing existential damages to other more competitive rivals, for example those from Germany. In order to be able to take action against distortions of trade and competition in the raw materials sector, the WTO rules concerning restrictions on exports must be improved. It is necessary to expand the WTO’s dispute settlement mechanism so that international distortions of competition can be confronted more rapidly and more effectively. The procedures at present are too protracted, costly, and capacity-intensive. A continued development of the WTO rules must be the long-term goal at the multilateral level.
There must be enhanced transparency with regard to the application of trade restricting measures so that trading partners and participants in the market can take state interventions into account and plan their raw material sourcing accordingly. Information policy, especially before the introduction of a protectionist measure, is of crucial importance for estimating costs, risk management, and for basic market opportunities. The OECD inventory already provides a comprehensive basis of information on export restrictions in the raw material sector from 2009 to 2012. It is currently being updated, but this work cannot meet the need for ex ante information. A complete system of information requires information at an early stage and an evaluation of whether or not the measure achieved its purpose and is necessary in future. Protectionist measures that have achieved their original goal or have proved to be inappropriate must be promptly abolished. The politicians are called upon to support the relevant institutions in the monitoring of protectionist measures in order to create transparent framework conditions.
BDI – Federation of German Industries Department Security and Raw Materials
Distortions of Trade and Competition in the Raw Materials Sector For Non-Discriminatory Access and Reliable Trade Rules
4.5 Resumption of talks within the framework of the G7 and G20
4.6 Partnership instead of protectionism
From the viewpoint of the German industry, it is essential to remove trade barriers and distortions of competition in order to strengthen mulilateral trade. That is why industry strongly welcomes the commitment undertaken by the G20 not to introduce new barriers to trade. However, this standstill agreement lacks effectiveness. At future talks of the G7 and the G20, the focus should again be put on addressing the increase of political interference in the trade in raw materials. In the long term, fair and equitable access to raw materials must be secured globally. The G20 has an important function in this respect. The problem of growing protectionism must be placed on the international agenda.
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A sustainable raw materials industry is a multilateral task. In view of globalisation and volatile markets, global cooperation is required. Whereas protectionist measures adopted by countries where raw materials are extracted have not brought about the desired improvement in the competitiveness of downstream processing industries, a sustainable raw materials industry could be promoted globally by trust, greater market transparency, and fair trading conditions. Ultimately, both producers and consumers benefit from trade relations based on equal rights. With its policy of raw material partnerships or cooperation with resource-rich countries, the German government has already followed this path of cooperation in order to create a win-win situation for both sides: on the one hand, through an improvement in the long-term supply of raw materials, on the other hand, through the transfer of know-how and the training and upgrading of skilled personnel. The consequent further development of the local raw materials industry creates jobs and builds prosperity. In the years to come this model must be evaluated with regard to the welfare effects for both sides and should be adapted as required.
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BDI – Federation of German Industries Department Security and Raw Materials
Distortions of Trade and Competition in the Raw Materials Sector For Non-Discriminatory Access and Reliable Trade Rules
Imprint Publisher Bundesverband der Deutschen Industrie e. V. (BDI) Breite Straße 29 10178 Berlin T: +49 30 2028-0 www.bdi.eu Editorial Staff Matthias Wachter, Head of Department Department of Security and Raw Materials Anna-Lynn Ratz, Senior Manager Department of Security and Raw Materials Design and Implementation Sarah Pöhlmann Department of Marketing, Online and Event Management Layout Michel Arencibia www.man-design.net Print Das Druckteam Berlin www.druckteam-berlin.de Publisher Industrie-Förderung GmbH, Berlin Picture Credits Cover: © 57940360 / M. Johannsen / Fotolia.com Page 10: © 83953154 / Thaut Images / Fotolia.com Status October 2015 BDI-Publications No.: 0043
