## Developing economies will need help navigating the growing number of sanctions and export controls

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### The challenge of export controls and trade disruption
- The multilateral trading system is facing trade wars and real wars; the WTO may struggle even to maintain the status quo.
- Resurgence of export restrictions—bans, controls, and sanctions—is a particularly concerning area for the rules-based trading system.
- Headline-grabbing policies can trigger retaliatory responses that conflict with WTO rules and risk a downward spiral.

### Examples and recent incidents
- April 2021: India banned exports of COVID-19 vaccines, halting exports to COVAX and diverting international funding.
- 2007–11: Spiking commodity prices led countries to restrict exports of various agricultural products, driving up world prices and contributing to food insecurity.
- 2022: Russia weaponized exports of natural gas by withholding energy shipments to Europe during its invasion of Ukraine.
- Inflation Reduction Act of 2022: US offered discriminatory tax credit incentives to shift sourcing of inputs for batteries in electric vehicles outside Russia and China.
- China historically restricted exports of raw materials and critical inputs despite its 2001 WTO accession commitment; it lost two formal WTO disputes and faced a third in 2016.
- Recent coordinated export controls: Japan and The Netherlands agreed with the United States to jointly restrict exports of equipment used for production of advanced node semiconductors in response to China’s “military-civil fusion” policy.

### Weak WTO rules and legal challenges
- WTO rules that might limit national use of export restrictions are relatively weak.
- Article XI of GATT allows exceptions for “export prohibitions or restrictions temporarily applied to prevent or relieve critical shortages of foodstuffs or other products essential to the exporting contracting party” (emphasis added); “essential products” are not defined.
- Article XX1 provides a national security exception allowing countries to invoke policies to protect essential security interests.
- The multilateral trading system developed during the Cold War and had limited experience with export controls, military adversaries, and related sanctions.
- Formal WTO litigation over security-motivated measures has strained the system and produced limited useful outcomes.

### Proposed dispute-response mechanism and incentives
- The United States suggested in a WTO statement that adversely affected trading partners pursue “non-violation” claims leading immediately to arbitration, with concessions to “rebalance” trade.
- The arbitration approach would follow the WTO’s reciprocity principle: if one country restricts exports, trading partners could retaliate, creating a cost that discourages overuse of export restrictions for national security purposes.
- Faster arbitration—rather than waiting years for the normal WTO legal process—could provide timely incentives and limit escalation.

### New vulnerabilities for nonaligned developing economies
- Sanctions and export controls tied to Russia’s invasion of Ukraine create complex implications for capacity-constrained, nonaligned developing economies that seek neutrality.
- Three illustrative cases:
  - Food and fertilizer: Russia is a major global supplier; removing Russian wheat from world markets would harm global food security. Sanctioning countries attempted to carve out humanitarian goods and make clear it was legally okay to trade them.
  - Crude oil and petroleum products: G7 developed a plan to allow purchases only if transactions fell below a price cap. Compliance is complex because the price cap level might change and differential access can be economically significant.
  - Dual-use high-tech goods (semiconductors): US export-controlled products often carry reexport restrictions under US law; third-country firms may face arbitrage incentives but may be unaware of legal consequences if their governments are not part of the sanctioning coalition.

### Capacity, compliance, and legal assistance needs
- Developing-country governments need help understanding rights and trade-offs, and may want to:
  - Establish domestic screening procedures to prevent firms from reexporting controlled products.
  - Avoid overcompliance that cuts off legal trade and imposes development costs.
- The WTO can draw from existing experience to assist members:
  - Trade Facilitation Agreement precedent: the WTO has supported developing-economy trade by reducing bureaucratic barriers and could analogously work with border officials to help members comply with sanctions.
  - Advisory Centre on WTO Law (ACWL) precedent: ACWL provides highly subsidized legal assistance to poor countries and has represented clients in dozens of formal WTO dispute settlement proceedings over more than 20 years.
  - ACWL governance rules address conflicts of interest and allow support for different developing economies on opposite sides of separate cases, illustrating a model for politically impartial legal assistance.

### Policy implications and recommendations
- WTO should continue to encourage members to limit use of export restrictions and keep them targeted and temporary when implemented.
- WTO should promote additional market surveillance and transparency initiatives, like AMIS, to reduce information shortages that prompt export restrictions.
- WTO could explore rapid arbitration or non-violation claim mechanisms to rebalance trade and deter misuse of national security exceptions.
- Provide subsidized, impartial legal assistance and border-official support to capacity-constrained developing economies to help them navigate sanctions, export controls, and secondary-sanctions risks.
- Recognize that in a world with more sanctions and export controls, trading becomes more expensive and legalistic; emerging market economies will need more legal advice to continue trading for development.

*Chad P. Bown, Finance & Development, June 2023.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2023/june/bown.pdf_