Trade Policy for Natural Resources: What are the issues?

Natural resources account for 20 per cent of global merchandise trade, and have a number of distinctive features. Prices are volatile; resources dominate many countries’ exports, and are of vital importance for importers. They carry large rents, the distribution of which depends on world prices. Development and production of extractive resources often requires the participation of multinational corporations in contractual and fiscal relationships with local governments. There are major incentives for active policy yet, since policy is often implemented through export restrictions and through domestic tax instruments, it is largely outside WTO disciplines. This paper investigates the incentives and means by which governments can use policy to alter their international terms of trade, to redistribute rents within the national economy, and to encourage resource processing industry. It is argued that the policy equilibrium is inefficient, leading to a wide dispersion of international prices, highlighted in examples such as fuel subsidies and taxes, and restrictions on food exports. There is a need to bring export restrictions within WTO disciplines and also to use international agreements to supplement bilateral investment treaties in providing an environment supportive of high levels of investment in the sector.