Introduction: Why a Report on Natural Resources

The World Trade Report is the flagship annual publication of the WTO that aims to deepen our understanding of key issues facing the multilateral trading system. Past World Trade Reports have dealt with contingent protection, new theories of trade, and standards, among other topics. The subject of the forthcoming World Trade Report 2010 is ?b>Trade in Natural Resources: Challenges in Global Governance?

Trade in natural resources represents an important and growing share of world trade. In 2008 this share was roughly 24% of world merchandise trade in dollar values. Although the volume of natural resources trade has been relatively steady in the past ten years, its share in value terms has grown 20% per year. Yet the importance of natural resources risks to be understated by these figures as these sectors are simply fundamental for human life. Non-renewable resources such as oil and natural gas are transformed into energy which is essential in the production of any other good and service. Renewable resources such as forests, fisheries and aquifers are some of the world most precious natural assets. They also have the potential to provide an unending stream of products that contribute greatly to the quality of human life if managed properly.

Natural resources trade has a number of unusual characteristics that may require us to re-examine certain basic economic assumptions and reassess the adequacy of existing trade rules, or the absence thereof. Natural resources also present special challenges for policy makers since they are both essential to the production process and potentially exhaustible. Consequently, their extraction and use need to be carefully managed in order to balance the competing needs of current and future generations. Moreover, the unequal distribution of natural resources across countries and the volatility of their prices have been continuing sources of international tension. As world output growth resumes following the financial crisis and global recession, upward pressure on natural resources prices will almost certainly return.

The international and inter-generational conflict inherent in natural resources trade makes transparent, predictable and properly designed trade rules particularly valuable. Trade in natural resources will take place whether the global community has adequate rules or not, as the needs that motivate these exchanges persist and increase over time. However, inadequate rules may well lead to the re-emergence of natural resource nationalism, where power asymmetries across countries and beggar-thy-neighbour motives influence trade policy outcomes. In a world that needs efficient management of its natural resource endowments, such a development would likely have a deleterious effect on global welfare.

The Themes of the World Trade Report 2010

The World Trade Report 2010 will focus on the analysis of international trade and trade policy as it applies to natural resources sectors such as fuels, forestry, mining products and fisheries. However, rather than presenting a long list of sectors one after another, the 2010 Report will take a different approach, breaking down the discussion according to five cross-cutting themes. An important aspect of natural resources is their shared economic characteristics: uneven geographical distribution, exhaustibility, the presence of externalities, dominance of resources within national economies and volatility. These represent the five major themes of the World Trade Report 2010, as they often motivate policy interventions in these sectors. For this reason, it is worth examining them in greater detail below.

Many scarce natural resources are highly concentrated in a handful of countries. This uneven geographical distribution gives rise to concerns about monopoly control, access to supply, and adverse impacts on economic growth and development. Oil is an obvious example of a natural resource whose supply is concentrated in the hands of a relatively small number of producers, but it is by no means unique.

Another key feature of natural resources is the fact that they are exhaustible. This is true for non-renewable resources such as minerals, but also for renewable resources such as fisheries, which may not be able to recover their productive capacity if over-exploited. The exhaustibility of natural resources gives rise to important economic problems, such as the presence of imperfect competition and economic rents (i.e. the premium that the owner of a resource receives above its opportunity cost) which may lead to an inefficient allocation of resources across different uses and over time. Moreover, exhaustibility may be exacerbated by open access problems that arise when property rights over natural resources are poorly defined.

Costs associated with the production, consumption and trade of natural resources are often not fully reflected in market prices for those resources. In economics this type of market failure, which is by no means restricted to natural resources, is referred to as an externality. A well-known example is air pollution and greenhouse gas emissions from fuel combustion, which affects everyone on the planet. Another example is the negative effect that trade in plants may have on the biodiversity of an ecosystem through the diffusion of invasive plant species.

Natural resources tend to have a dominant role in some (particularly developing) countries: in most resource rich economies, natural resources represent a large share of GDP and of exports. While the presence of natural resources may be a blessing for some economies, more often it is a curse (i.e. new discoveries have a negative effect on future prospects for economic growth), as resource rich economies face several economic problems such corruption, conflict, and Dutch disease (i.e. when resource exports crowd out exports from other sectors).

Finally, natural resource sectors are often characterized by extreme volatility in prices and supplies. Volatility not only creates obvious problems on the demand (import) side, but also on the supply side, as volatility tends to have a negative impact on investment and growth in resource exporting economies.

A Brief Outline of the World Trade Report 2010

The Report will be organized in four main chapters. A brief description of each of these sections follows.

Natural Resources: Definitions, Specificities and Trade Patterns
This section will provide a broad overview of the importance of trade in natural resources at a global level. It will introduce the definitions and terminology and illustrate the empirical relevance of the key economic features of natural resources discussed above. The section will also provide a description of how commodity exchanges work, and a variety of summary statistics on the magnitude and direction of world trade flows in natural resources.

Economic Theory, Trade and Natural resources
This section will focus on the economic characteristics of natural resources and their implications for international trade. It will address the general questions of whether and under what conditions trade provides an efficient mechanism for ensuring access to natural resources. In particular, it will analyze trade in non-renewable resources under perfect and imperfect competition; trade when natural resources suffer of open access problems and have other forms of environmental externalities; the economics of the so-called natural resource curse facing resource exporters; and the determinants and effects of resource volatility on exporting and importing countries.

Trade Policy and Natural Resources
This section will consider the policy choices at the disposal of national governments in addressing some of the issues related to trade in natural resources. It will provide a taxonomy of key trade and domestic measures such as export taxes, import tariffs, consumption taxes, and data on their current use. The section will analyse the effects of these policy tools in the context of different market failures, including monopoly power in the natural resource sector, open access, environmental externalities. Finally, the section will consider political economy distortions, such as the influence of lobby groups in the determination of policy measures, and the role of regional trade cooperation in addressing some of the economic problems that characterize natural resources.

Natural Resources and the Multilateral Trading System
This section will discuss the international regulation of trade in natural resources. It will provide an overview of how natural resources fit within the legal framework of the WTO and will examine how the rights and obligations of WTO Members relate to the particular problems arising from trade in natural resources. The section will also discuss other important international agreements that regulate trade in natural resources and their relationship with WTO disciplines. The third objective of the section will be to consider a number of challenges for the multilateral trading system that may arise in relation to trade in natural resources, such as the treatment of export restrictions, the regulation of subsidies, and the coherence of WTO rules and other international agreements.