Beware pitfalls of resource nationalism: lessons from Indonesia

As countries and companies compete for critical minerals in the green energy transition, in which battery metals — cobalt, graphite, lithium, nickel and manganese — are crucial, host states in Southern Africa are resorting to export controls on unprocessed critical minerals.

These are principally intended to bolster the host state’s control over its mineral patrimony, compelling mining companies to engage in domestic beneficiation.

Criticised by some as “rent seeking” behaviour, export controls take many forms, including prohibitions on the export of unprocessed minerals or quotas on the quantities that may be exported. Most recently, in June the Namibian government approved the prohibition of the export of unprocessed critical minerals, including lithium ore, cobalt, manganese, graphite and rare earth minerals. This follows a similar development in Zimbabwe, which banned the export of unprocessed lithium in December.

While the circumstances motivating the adoption of export controls vary, these interventions are frequently driven by the relative increase in demand and pricing of specific minerals, coupled with funding constraints in the host state, and/or host states capitalising on the siren call of resource nationalism.

Notwithstanding these temptations, resource-rich countries in Southern Africa ought to be aware of the consequences of contravening their international trade law obligations under the World Trade Organisation’s (WTO’s) 1994 General Agreement on Tariffs & Trade (GATT).

Of particular importance in this regard is article XI:1 of the GATT, which prohibits WTO member states from maintaining or imposing prohibitions or restrictions on the export or sale for export of products. A contravention is established by demonstrating that the measures in issue are a prohibition or restriction on the export or sale for export of products from a member state, made effective through quotas, export licences or other measures.

There are limited exceptions, outlined in article XI:2, where quantitative restrictions may be maintained, including export prohibitions or restrictions temporarily applied to prevent or relieve critical shortages of products essential to the exporting member state. There are likewise limited circumstances described in article XX of the GATT, in which domestic measures adopted by member states, which would otherwise contravene the GATT, may be exempt from its application.

The application of article XI to export controls on unprocessed minerals was recently assessed by the WTO panel in its “Indonesia — raw materials” decision, delivered in November. The panel ultimately concluded that Indonesia’s imposition of measures prohibiting the export of nickel ore, and requiring that nickel ore be processed domestically, contravened article XI:1 of the GATT.

The panel assessed these measures and held that both constituted export prohibitions or restrictions within the meaning of article XI:1. Despite the fact that Indonesia and the EU (the complainant) agreed that the export ban constituted an export restriction within the meaning of article XI:1, Indonesia sought to argue that the domestic processing requirement was “an internal requirement regulating the sale and processing of nickel ore, rather than a border measure regulating the ‘exportation ... of [a] product’”.

The panel rejected Indonesia’s claim that there were delineations in the obligations applicable to domestic measures, as opposed to border measures, under article XI:1. Indonesia had argued that because the domestic processing requirement applies to all mining companies, regardless of whether sales were conducted in the domestic or foreign market, it was a domestic measure that should not be subject to article XI:1.

The panel rejected this interpretation and instead found that the fact that Indonesia’s domestic processing requirement might address domestic actors does not remove it from the scope of article XI:1, as in effect it operates to prevent the sale of nickel ore for export. The panel accordingly concluded that the domestic processing requirement amounted to a measure relating to the sale for export of products, within the meaning of article XI:1 and subject to its obligations.

Critical shortage

As regards Indonesia’s attempt to rely on article XI:2(a) of the GATT to justify the measures, the country argued that the measures were intended to relieve a critical shortage of nickel ore, which was essential to its economy. Notwithstanding the importance of nickel mining in Indonesia as well as the significance of nickel as an input for the steel industry and EV battery production, the panel noted that article XI:2(a) was not intended to allow member states to impose export restrictions on raw materials to protect or promote domestic industries.

The panel concluded that even though in theory article XI:2(a) can be utilised to address shortages of industrial inputs (including exhaustible natural resources), the shortage must be critical and capable of being resolved. Of particular significance was whether measures could permissibly be taken to address the normal depletion of natural resources, as well as satisfy expanding domestic demand related to the development of downstream processing industries.

The panel found that addressing a shortage under normal market conditions, or anticipated demand increases prompted by normal market forces, was not enough to bring a measure within the scope of article XI:2(a). Indonesia failed to demonstrate the existence of an imminent, critical shortage of nickel ore, and the panel concluded that neither the export ban nor the domestic processing requirement was exempt from article XI:1.

It similarly rejected Indonesia’s attempt to argue that, notwithstanding the panel’s conclusion regarding the measures’ noncompliance with article XI, the measures were nevertheless justified under article XX.

Following its assessment the panel recommended that Indonesia bring its export regime into conformity with its GATT obligations. Indonesia appealed to the appellate body on December 8. This decision joins several other panel and appellate body decisions that have grappled with the “WTO-compatibility” of member states maintaining export restrictions on critical minerals, including the appellate body decision in “China —rare earths”.

Inquorate

While there are important consequences from the panel’s decision on whether the types of export control measures adopted by mining jurisdictions contravene countries’ GATT obligations, the effect is tempered by the fact that in light of Indonesia’s appeal to the appellate body the WTO dispute settlement body cannot adopt the panel report, and as such the report does not yet have formal legal status. This is particularly problematic as the appellate body remains inquorate after the expiry of the terms of two of the three remaining members in December 2019.

Notwithstanding the uncertain status of the report the reasoning reflected in it provides useful guidance for subsequent cases before the WTO involving comparable issues. It in any event aligns with the appellate body’s decision in “China — rare earths” where export restrictions on rare earths, tungsten and molybdenum were found to contravene article XI of the GATT, and were not justifiable under the article XX(g) exception.

In view of this, countries pursuing export bans on unprocessed minerals should be cautious of flouting their GATT obligations, as they may become vulnerable to challenges by other member states. Zimbabwe and Namibia, which recently introduced export bans on unprocessed minerals, should be wary of injured trading partners referring disputes to the WTO’s dispute settlement body. This could result in a suspension of reciprocal tariff concessions or the imposition of retaliatory countermeasures where the relevant member state fails to comply with a dispute settlement body ruling.

First published by Business Day on 10 August 2023.