The Challenge of Export Controls

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The Challenge of Export Controls

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Bibliographic details

• Authors: Chad P Bown
• Published: June 1, 2023

Overview

• The World Trade Organization (WTO) is struggling to define its role in a fast-shifting geopolitical climate, facing both trade wars and real wars.
• The resurgence of export restrictions—bans, controls, and sanctions—is a particularly concerning area for the rules-based trading system.
• Such policies can push trading partners to respond with additional actions, often in conflict with other WTO rules, risking a downward spiral.
• The WTO should encourage members to limit use of export restrictions and keep them targeted and temporary, but it also needs to do more to protect the most vulnerable countries.

Examples of export restrictions and consequences

• Agricultural export restrictions in response to spiking commodity prices in 2007–11 drove up world prices and contributed to food insecurity; the Group of Twenty (G20) launched the Agricultural Market Information System (AMIS) to improve monitoring of global food stocks.
• China historically restricted exports of raw materials and other critical inputs, giving implicit subsidies to downstream industries despite its 2001 WTO accession commitment not to restrict exports; China lost two formal WTO disputes and was facing a third in 2016.
• In April 2021, India suddenly banned exports of COVID-19 vaccines, halting promised exports to COVAX and leaving international funding effectively commandeered.
• In 2022, Russia withheld energy shipments to Europe, weaponizing natural gas and prompting policies to reduce sourcing from “countries of concern,” exemplified by the US Inflation Reduction Act of 2022 offering discriminatory tax credit incentives to shift battery input sourcing outside Russia and China.
• The United States and other industrialized economies have imposed export controls on high-technology products to protect national security; examples include bans on high-tech exports to Russia and joint US-Japan-The Netherlands restrictions on equipment for advanced node semiconductors in response to China’s “military-civil fusion” policy.

Weak WTO rules and limited experience

• WTO rules that might limit national use of export restrictions are relatively weak.
• Article XI of the General Agreement on Tariffs and Trade (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), but “essential products” are not defined.
• Article XXI provides a national security exception that allows countries to invoke policies and justify them as needed to protect essential security interests.
• The multilateral trading system developed during the Cold War never had to confront hard questions involving export controls, military adversaries, and related sanctions; those issues resurfaced as countries like China (2001) and Russia (2012) joined the WTO—“until now.”
• The WTO should encourage additional market surveillance and transparency initiatives, like AMIS, to reduce the emergence of export restrictions driven by information shortages and fears of market shortages.
• For security-motivated actions, legal rulings from WTO dispute settlement have strained the system; the United States has suggested pursuing “non-violation” claims and moving to arbitration to rebalance trade quickly after a national security defense is invoked.
  • The proposed arbitration approach follows the WTO’s reciprocity principle: if one country restricts exports, trading partners may be expected to retaliate, creating a cost that discourages overuse of export restrictions.
  • Rapid arbitration is preferred over waiting years for the normal WTO legal process.

New vulnerabilities for developing and nonaligned countries

• Sanctions and export controls arising from Russia’s invasion of Ukraine have serious implications for “nonaligned” developing economies that may want to stay neutral but face risks of secondary sanctions.
• Three illustrative cases:
  • Food and fertilizer: Russia is a major global supplier; taking Russian wheat off world markets would harm global food security. Sanctioning countries attempted to clarify that trading humanitarian goods is legally permissible by carving out exceptions.
  • Crude oil and petroleum products: The G7 developed a plan to allow purchases of Russian products only if transactions fall below a price cap; following the price cap is complex because price cap levels might change and potential buyers need up-to-date information.
  • Dual-use high-tech goods (e.g., semiconductors): US law often prevents reexport of export-controlled products sent to third countries; companies in third countries may face strong incentives to engage in arbitrage despite legal constraints, and governments not part of the sanctioning coalition may not understand the full consequences.
• Capacity-constrained countries need help understanding rights and trade-offs:
  • Governments may want domestic screening procedures to prevent firms from reexporting controlled products.
  • Without access to legal counsel, governments may over comply, foregoing legal trade at economic cost.

How the WTO can help — practical measures and institutional lessons

• Draw from WTO experience in supporting developing economies:
  • The Trade Facilitation Agreement work to reduce bureaucratic barriers could be analogously applied to help border officials comply with sanctions, keeping compliant trade flowing and avoiding secondary sanctions.
• Learn from the Advisory Centre on WTO Law (ACWL):
  • The ACWL provides highly subsidized legal assistance to poor countries and has represented them in dozens of formal WTO dispute settlement proceedings over more than 20 years.
  • The ACWL has governance rules to address conflicts of interest and supports developing economies impartially, even when positions are politically unpopular.
  • Providing subsidized legal assistance for sanction or export control compliance would be politically sensitive but could be crucial for capacity-limited countries to avoid severe economic consequences.
• In the new geopolitical environment, trading becomes more expensive and legalistic; emerging market economies will need more legal advice to continue trading in support of economic development.

Other contexts and broader concerns

• The Russia–Ukraine context is not unique; export controls motivated by attempts to prevent future conflict (for example, impacting sales to China) pose similar concerns.
• The WTO cannot prevent countries from implementing policies in the name of national security, but it can help “innocent bystanders” remain innocent bystanders and preserve the gains from globalization.

Source: F&D Magazine — “The Challenge of Export Controls”, Chad P. Bown, June 2023

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