WTO Legal Status and Evolving Practice of Export Taxes
Recent US and EU sabre-rattling over the WTO-consistency of certain Chinese export taxes has raised the question of whether multilateral trade rules allow countries to impose taxes upon the export of raw materials, essentially in order to ensure a price advantage to domestic industries.
This article seeks to shed light on the question by reviewing the relevant rules and Member practice on export taxes. For present purposes, ‘export tax’ and ‘export duty’ can be used interchangeably. The article addresses only the WTO legal framework relevant to export duties and does not evaluate their economic implications.
The bottom line is: although general WTO rules do not discipline Members’ application of export taxes, Members can agree – and several recently acceded countries, including China, have agreed – to legally binding commitments in this regard. Some Members have proposed the establishment of a new multilateral WTO Agreement on Export Taxes as part of the Doha Development Agenda, so far with little traction. Although there is some talk of challenging export taxes as de facto export prohibitions or as indirect subsidies, most observers seem to agree that export taxes remain one of the last significant aspects of multilateral trade policy that lies beyond the scope of current rules.
(Lack of) WTO Rules on Export Duties
For all the wisdom and foresight framed into the GATT and then WTO Agreements, the drafters appear to have either missed the issue of export taxes, underestimated future concerns, or perhaps intentionally reserved this area to the Contracting Parties as ‘policy space.’ While the binding of tariff lines is a cornerstone of the multilateral trading system, GATT Article II on Schedules of Concessions only concerns import duties and charges in connection with importation. No mention is made of export duties, and therefore no formal GATT legal framework even exists for Members to schedule commitments with respect to exports. That said, as discussed below, nothing prevents the establishment of such frameworks.
The drafters of the GATT clearly considered the potential for discrimination and trade distortion with respect to imports as well as to exports. For example, General Most-Favoured-Nation Treatment under GATT Article I:1 applies “[w]ith respect to customs duties and charges of any kind imposed on or in connection with importation or exportation….” Likewise, GATT Article XI, on General Elimination of Quantitative Restrictions, specifically references export taxes and duties as means by which Members may legally prohibit or restrict imports and exports. With a few narrow exceptions, Article XI:1 forbids Members from instituting or maintaining “prohibitions or restrictions other than duties, taxes or other charges, whether made effective through quotas, import or export licences or other measures…” with respect to both imports and exports. Article XI:1 can therefore be read positively to allow Members to institute or maintain prohibitions or restrictions by applying duties, taxes or other charges.
GATT Article XI:2 provides a “safe harbour” for Members to apply export prohibitions and restrictions for certain public policy purposes that would otherwise violate Article XI:1. For example, governments may apply export quotas or outright prohibitions in order to ‘prevent or relieve critical shortages of foodstuffs or other products essential to the exporting [Member]’. (Article XI:2(a).) This provides legal cover for measures taken by certain governments during the recent global food crisis aimed at ensuring the availability of affordable food to their citizens. Although such restrictions have been condemned from economic and systemic trade policy perspectives, GATT rules clearly provide Members ‘space’ to choose to feed their own people before supplying export markets.
Economic Development Toolbox
Given the evident lack of rules on export taxes, WTO Members, especially developing and least-developed countries, apply export taxes in order to raise revenue in a transparent manner and to advance development objectives of economic diversification and industrialisation. In a comprehensive 2004 WTO Discussion Paper on The Role of Export Taxes in the Field of Primary Commodities, Roberta Piermartini argued that “[e]xport taxes on primary commodities (especially unprocessed) work as an indirect subsidy to higher value-added manufacturing or processing industries. Export taxes on primary commodities can be used to reduce the domestic price of primary products in order to guarantee supply of intermediate inputs at below world market prices for domestic processing industries. In this way, export taxes provide an incentive for the development of domestic manufacturing or processing industries with higher value-added exports.”
Although the paper discusses potential negative economic implications of export taxes, including inefficient transfers of wealth within markets and among markets, the legal situation is clear: “export taxes are not prohibited by the WTO. About one third of WTO Members impose export duties.” Even if the negative economic analysis is justified, developing and least-developed countries appear loath to forego the ‘policy space’ for using what is in their view a WTO-consistent economic development tool.
Concerning the use of tariffs to support industrial policies, developing countries have noted developed countries’ application tariffs peaks and tariff escalation to restrict or prevent importation of ‘sensitive’, usually processed and value-added, products mostly from developing and least-developed countries. Although the non-agricultural market access (NAMA) negotiations under the Doha Development Agenda aim to address the problems of tariff peaks and escalation, it is difficult to imagine developing and least- developed countries ‘disarming’ on export duties without obtaining bound market access for their value-added products.
Toward New Rules?
Some developed countries with established processing industries have reacted against commodity-producing countries’ efforts to ‘transfer wealth’ and add value in their local economies.
WTO Accession Negotiations
Several recently acceded WTO members, including China, Mongolia, Saudi Arabia, Ukraine and Vietnam, have committed in their accession negotiations to eliminate at least some export taxes, with varying scope and economic effect of commitments. Existing Members can apply significant pressure on acceding countries to undertake commitments beyond general WTO rules, and undertakings to eliminate export taxes are prime examples of such ‘WTO-plus’ commitments.
When it became clear that Mongolia’s domestic cashmere processing industry was disappearing due to the unrestricted export of raw cashmere, the government requested from WTO Members and received a temporary waiver of its accession commitment to phase out export duties. Russia also seems to have realised that its WTO accession commitment to the Europeans to eliminate export duties on timber would inhibit the development of its domestic processing industries. Prime Minister Putin has recently suggested that the Russian government is reconsidering this commitment. In fact, Russian export duties on timber are set to increase dramatically as of January 2009 (Bridges Year 12 No.4 page 21).
China’s WTO Accession Protocol includes a commitment to eliminate all taxes applied to exports, with the exception of 84 listed tariff lines. WTO accession commitments to eliminate export taxes are undoubtedly enforceable under the Dispute Settlement Understanding just as any other rule or commitment. Any doubts on this point were settled by the recent Auto Parts WTO case against China where all parties agreed that the protocol was an ‘integral part’ of the WTO Agreement (WT/DS/339-340-342/R, para. 7.740).
Regional Trade Agreements
Outside the WTO context, some countries have included the elimination of export taxes in their regional and bilateral trade agendas. For example, EU Association Agreements and Free Trade Agreements generally seek to eliminate such taxes between and among the parties. The North American Free Trade Agreement includes disciplines on export duties, as do bilateral trade agreements negotiated, for example, by Canada, Japan and others.
The Doha Development Agenda
The EU has been the principal demandeur under the Doha Development Agenda for substantive commitments by all WTO Members to bind and eliminate or reduce export taxes. With its negotiating proposal, the EU seeks to confirm that GATT rules and disciplines will prevent Members from using export taxes for industrial or trade policy purposes. The EU has presented its proposal in the context of current NAMA negotiations on non-tariff barriers (NTBs) to trade, and therefore styles the issue as a ‘tax’ matter. This is a creative approach, particularly since export tariffs can hardly be discussed as in the context on non-tariff barriers…. Some Members have also questioned whether the Doha mandate covers this topic at all. Reflecting Members’ apparent failure to achieve consensus on this issue, the most recent draft modalities for NAMA does not reference the EU proposal as ‘meriting particular attention in text-based negotiations in order to achieve substantive NTB results’ (para. 24).
WTO Dispute Settlement
The application of export taxes has never been found to violate GATT Article XI. On the contrary, in recent WTO panel report on India - Quantitative Restrictions recognized that
“the text of Article XI:1 is very broad in scope, providing for a general ban on import or export restrictions or prohibitions “other than duties, taxes or other charges”. As was noted by the panel in Japan - Trade in Semi-conductors, the wording of Article XI:1 is comprehensive: it applies ‘to all measures instituted or maintained by a [Member] prohibiting or restricting the importation, exportation, or sale for export of products other than measures that take the form of duties, taxes or other charges’.” (WT/DS90/R, para. 5.128, emphasis supplied.)
Some observers have questioned, however, whether the lower prices for the domestic industry that inevitably result from the application of export taxes could be considered a ‘financial contribution’ under the WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement). The Panel in United States – Measures Treating Export Restraints as Subsidies directly addressed this question, and found that an export restraint, defined as including export taxes, ‘cannot constitute government-entrusted or government-directed provision of goods… and hence does not constitute a financial contribution’ under the SCM Agreement. (WT/DS/194/R, para. 8.75-76.) It should be noted that this case was not reviewed by the Appellate Body, so there remains a chance that some Members will mount a new challenge.
The question has also been raised as to whether a WTO complaint might be brought against export duties that are so high as to effectively prohibit exports. Although ‘the disciplines of Article XI:1 extend to restrictions of a de facto nature’ (Argentina - Hides and Leather, WT/DS155/R, para. 11.17), such extension would not appear to reach the positive allowance of prohibitions or restrictions through the application of ‘duties, taxes or other charges’. In any case, high import duties would probably be the more likely test case for this de facto legal challenge. Many WTO Members, including developing countries, that maintain trade-restrictive or trade-prohibitive tariff peaks on sensitive products might not be keen to have a precedent set in this area.
The China Challenge
In light of the above discussion, on what basis could the United States or the European Union bring a WTO claim against Chinese export restrictions? Recent reports have referred to problems with China’s export quotas and taxes: export quotas can be challenged as inconsistent with GATT Article XI, and export taxes can be challenged when applied to products not inscribed on China’s list of exceptions to its accession commitment to eliminate export taxes (Annex 6 to China’s Accession Protocol). Export taxes applied to products not on China’s list appear to be consistent with general WTO rules.
Daniel Crosby practices international trade law as a partner with the law firm Budin & Partners in Geneva.