Wednesday, March 06, 2013

In early 2012, the WTO Appellate Body issued a report that found China had unlawfully used export restrictions on raw materials. The complainants, the United States (US), the European Union (EU), and Mexico had brought complaints concerning China’s export restrictions measures on raw materials of which China is the dominant supplier.

The complainants alleged that China’s unlawful use of export duty, minimum export price requirements, export license requirements and export quotas on various raw materials was inconsistent with China's WTO commitments. The complainants argued that these policies had given China’s domestic industry an unfair advantage by ensuring a sufficient supply of raw materials, at lower and more stable prices, within the domestic market. Consequently China had become a more attractive hub for businesses looking to set up.
More legal challenges of export restrictions at the WTO are expected to follow this decision. Notably, on 13 March 2012, the EU, US and Japan filed disputes concerning China’s export restriction measures in the rare earths sector. Rare earths comprise 17 different metals which are used to make high-strength magnets and constitute vital inputs for a range of mass consumer, ‘green’ technology and military applications. It is expected that other countries will join the proceedings as third parties.
From a South African perspective, the WTO Appellate Body decision against China’s export restriction is very instructive. One view is that this is relevant to South Africa considering that the government has in recent years been lobbied by certain industry players to consider the use of export restrictions in the form of export taxes as a policy tool to foster local beneficiation, especially in the chrome sector. According to media reports this has been the view of companies such as Merafe Resources.  The CEO of this JSE listed ferrochrome producer is reported to have expressed the concern that there is a need for more protection in the chrome industry, as is the case in China and India.
Another view is that export taxes could be utilised as a tool to increase the tax base and raise revenue streams for the taxman. It is perhaps no co-incidence that proposed amendments to the customs legislation in South Africa include a framework for the levying of export taxes. From a legal standpoint, resource rich countries intending to use export restrictions as a policy tool will have to ensure that their WTO commitments allow them to do so. South Africa is a member of the WTO and is consequently subject to the WTO rules.
Under the WTO legal framework, export taxes are not generally prohibited. Article XI of GATT 1947 prohibits quantitative restrictions on both export and imports excluding duties, taxes or other charges. The exception to this provision includes prohibitions or restrictions temporarily applied to relieve critical shortages of essential products. Notably, export taxes are permitted under the WTO law, unless otherwise prohibited in a protocol of accession of an individual member state. An accession protocol is a legally binding document by which countries make so called “WTO-plus commitments” which are binding commitments beyond the general WTO commitments that bind all the member states.
South Africa’s position, however, is very different from that of China. South Africa is one of the founding members of the GATT and consequently was not required to sign an accession protocol. China, on the other hand, entered into an accession protocol when joining the WTO, in terms of which it committed to eliminate various forms of export restrictions. What may, however, pose as barriers to the possible use of export taxes by South Africa, are the bilateral and regional free trade agreements (FTAs) which South Africa has entered into with the EU, amongst other parties.
South Africa is still considering the pros and cons of using export taxes in sectors such as raw chrome ore to promote domestic ferrochrome industries. The use of export taxes as a development policy tool is expected to gain momentum especially among developing and least developed countries. India is a prime example of a developing country which has been successful in promoting its local ferrochrome industry through the imposition of export taxes in 2007 on raw chrome ore. Through such a measure, India has managed to reduce exports to countries such as China, thereby promoting its downstream ferrochrome industry.
This has, however, had a knock-on effect as China has had to obtain chrome ore from other sources such as South Africa. South Africa’s ferrochrome industry, which competes with China’s ferrochrome industry, is now feeling the effects as China had to divert its source of chrome imports to South Africa, which has an estimated 82% of the world’s chrome reserves. According to an OECD report, from 2006 to 2008, South Africa’s exports of chromite to China increased by an estimated 200%. The OECD report also revealed that this is a concern for South Africa as it may affect the long-term profitability of the country’s own downstream industry, which competes with China’s downstream industry of ferrochromium. China, however, is imposing export restrictions on ferrochrome.
Zimbabwe has also imposed export taxes in the raw chrome ore sector, but this has not been as successful as in India. The question of whether such measures should be utilised as a policy tool by a state involves numerous considerations. Therefore the enquiry extends beyond the legal analysis, as it also requires an economic analysis which should be assessed on a case to case basis.
The structure of developing countries is changing greatly, having previously relied heavily on raw materials exports. Over the past few decades developing countries have begun to establish downstream industries which benefit from the presence of domestic raw materials. It can be foreseen that more resource rich countries, especially African countries which have a comparative advantage in terms of raw materials, are likely to fight to preserve their policy space to use measures like export taxes when negotiating future FTAs.
For African countries struggling with socio economic issues, export restrictions may have a knock on effect in that reduced exports may lead to the expansion of sectors such as manufacturing and inevitably lead to more employment creation. In this regard, South Africa may also consider the use of export restrictions to increase beneficiation by creating more employment through reducing the exportation of potential jobs.
While South Africa’s WTO commitments allow it to use export taxes, its bilateral and regional FTA commitments must be heavily weighed before such taxes are imposed. South Africa should also consider preserving its right to use export restrictions when negotiating future FTAs.
Nkululeko Khumalo is an associate and Magalie Masamba is a candidate attorney at Bowman Gilfillan