Introduction: The following article was written by Dr Majid al-Moneef, Adviser to the Saudi Minister of Petroleum and Mineral Resources.
It is commonly argued that trade in crude oil is excluded from World Trade Organization (WTO) rules.
This is due to the fact that crude oil trade has not featured in the seven rounds of negotiation of WTO’s predecessor, the General Agreement on Tariffs and Trade (GATT), since 1947, which resulted, among other things, in tariff cuts on manufactured goods.
Apparently, the exclusion of crude oil trade in the old GATT rounds was due to several factors, such as the belief that oil is a strategic commodity, the control of global oil trade by the multinational oil companies of the industrialized countries and the concentration during the negotiation rounds on manufactured goods, since custom duties on raw materials, including oil, were either absent or low.
It should be pointed out that there is no explicit provision in GATT and the other agreements constituting WTO that exclude oil and oil products from their rules.
Oil is indirectly mentioned in Article 20 (General Exceptions) of the GATT Agreement, where a reference is made to export restrictions in paragraph (g) to regulate exports of natural resources (oil included) for the purpose of conservation if that is also linked to the restriction of local consumption.
The oil exporting countries which acceded to WTO and its predecessor GATT were satisfied that Article 20 (g) gives them the right to quantitative or export restrictions on the principle of sovereignty over natural resources.
Oil was also featured in the course of the WTO accession negotiations of China, a major oil importer.
Under its original membership timetable in 2000, China is required to abolish a $0.26/B import tax on crude and gradually dismantle import quotas on refined products.
Therefore since oil trade is not expressly exempted from WTO rules, and since no exceptions related to oil exporting countries when joining the Organization were made and their membership in OPEC and participation in oil production management was not mentioned, and since the dispute settlement body within the WTO has looked into various oil-related issues, such as the 1994 ruling in favor of Venezuela against the United States concerning the latter’s reformulated gasoline import restrictions, it would be reasonable to conclude that oil, like any other internationally traded commodity, is subject to the basic WTO principles; ie:
1.The principle of the most favored nation (Article I:I GATT).
2.The principle of national treatment and non-discrimination
(Article III GATT).
3. The prohibition of quantitative restrictions on trade (Article XI).
4. The principle of negotiations on the assessment of custom duties.
It seems the belief that oil trade is excluded from the negotiations of WTO and its predecessor GATT is perhaps due to the fact that crude oil and products were not featured in the negotiations to reduce customs duties (the Fourth Principle) or in many countries’ tariff lists for binding, which makes it theoretically possible to impose or increase tariffs in the future.
On the other hand, refined petroleum products were tariff bound by several countries, especially following the Uruguay Round.
Crude oil is either exempted or subject to low tariff rates in most of the world’s net crude importers.
The US imposes a rate of $0.105/B of imported crude oil with specific gravity higher than 25° API ($0.63/B for the countries of the North American Free Trade Agreement NAFTA) and $0.525/B for specific gravity of the less than 25° ($0.31/B for the NAFTA countries).
The European Union (EU) does not impose duties on imported crude oil, while Japan imposes 215 yen per imported kiloliter (approximately 34 yen per barrel).
The possible imposition of additional tariffs on crude oil might create other trade-related difficulties, such as when a significant part of the industrialized countries’ crude imports comes from geographically neighboring states or countries with which they have strong trade ties.
A significant share of American imports comes from Canada and Mexico (partners in NAFTA) as well as Venezuela.
On the other hand, the crude imports of the EU come from the former Soviet Union, Norway and north and west African countries, which have various trade agreements with the member states of the EU. This makes the imposition of duties on crude oil, which is currently exempted, more difficult.
Historically, neither customs duties on crude oil nor trade policies per se have represented a hindrance to the continuous flow of the oil trade internationally.
What did affect this flow were fiscal and energy policies in the major oil importing areas. Excise taxes on petroleum products determined their prices to the final consumer and consequently influenced demand.
Energy policies in many industrialized countries intended to encourage the use of alternative fuels for many reasons such as energy security and the protection of the environment also had an effect on oil demand and trade flows.
Refined products, on the other hand, are deemed part of the industrial (chemical) products covered by the schedules submitted by most countries following the Uruguay Round. The member states of the EU impose a 3.5-4.7 percent tariff on petroleum products.
The US imposes a tariff equivalent to 5.8 percent on imported products and $0.84/B of lubricating oils. Japan imposes duties of up to 3.033 yen per kiloliter on imports of products based on their different uses.
Even in countries like the US and Japan, customs duties imposed on crude oil are generally considered minimal compared with the import price to these countries.
In 1999, the price of crude oil imported by the US and Japan amounted to $16.80/B and $17.90/B respectively, meaning that custom duties were less than 1 percent of the price of imports in both countries, while the customs duty in the EU is zero.
Although customs duties on oil products are higher than those on crude oil, they are considered relatively low and do not impede international trade in petroleum, which is more influenced by environmental standards and excise taxes on petroleum products, especially gasoline.
For example, excise and value added taxes on a composite barrel of oil products amounted at the end of 1999 to approximately $13.20/B in the US and $32.60/B in Japan, while in the EU these taxes ranged between $52/B and $90/B. Comparatively, custom duties on a barrel of crude oil or refined products amounted to $0.25/B in the US, and less than $1.00/B in the EU.
Such taxes on consumption are imposed on products regardless of their origin, whether produced locally or imported. As such, they do not conflict with the WTO principle of national treatment, notwithstanding the fact that Paragraph IV of Article III of the GATT Agreement has restricted the sovereignty principle in this respect to the requirement that imports are not treated less favorably than like products on the local market.
Therefore such taxes do not fall under the jurisdiction of the world trade regime in its present form.
With the presence of WTO’s Committee on Trade and Environment, several oil related issues might arise in the coming years within the framework of international environmental concerns and negotiations on climate change.
Other issues that affect oil industry services could also be raised within GATS (the General Agreement of Trade in Services), while issues related to oil investment might come within the purview of the proposed Agreement on Investment of WTO. All these might widen the scope of future interaction between oil issues and WTO.
Requesting liberalization of crude oil and product trade within the WTO framework beyond the existing commitments of the importing countries requires multilateral negotiations and the application of the principle of reciprocity. Customs duties imposed on crude oil in major consumer countries are low.
Although they are not yet bounded in many countries, they are not expected to increase, given the state of the markets and the consumer countries’ projected oil needs.
In any case, the pursuit of freer trade in oil would appear to be inextricably linked to the issue of excessive taxation on products and subsidies to coal.
This would entail looking beyond trade policies and into domestic fiscal, energy and environmental policies, which do not yet fall within the WTO’s remit.
Such issues are therefore better tackled in world energy forums such as the producer-consumer meeting which was held in Riyadh in November 2000 or the global environmental negotiations such as the UN Framework Convention on Climate Change and the Kyoto Protocols.
by Dr Majid A al-Moneef
(mees)
© 2001 Mena Report (www.menareport.com)
