Can governments future-proof their economic power in a green(er) global economy? This question seems to lie at the heart of many governments’ trade policies. It is not a new question per se. In 1974, many resource-rich countries resolved that it was time to create a new international economic order (NIEO) to preserve:
Full permanent sovereignty of every State over its natural resources and all economic activities. In order to safeguard these resources, each State is entitled to exercise effective control over them and their exploitation with means suitable to its situation, […].
Within this new model of governance, such primary commodity producers would take back control over resources and their exploitation, free of coercion (and domination). Developing countries demanded a break from their trajected dependencies through unconditioned access to modern science and technology to facilitate indigenous development. These proposals required regulatory interventions and restricted border access to change the future redistribution of global wealth. Yet, for many critics, the NIEO remained an uneasy bedfellow with the rules-based multilateral trading system, reduced to special and different treatment to developing countries but not a reimagining of global markets.
Recent developments in Indonesian development policy recall these earlier debates. Contextualising Indonesia’s strategy in NIEO terms is necessary, for Indonesia argued in Indonesia–Raw Materials, a complaint brought by the EU, that its ‘policy space’ must be interpreted in connection to the international law principle of Permanent Sovereignty over Natural Resources (PSNR), which informs the normative context for the WTO’s commitment to sustainable development (Annex B-2, para 8). The principle of PSNR reflects an NIEO argument against an unabated commitment to supply raw materials to the advanced capitalist world.
“Moving Indonesia” – Building Indonesia’s EV Production Market
Indonesia accounts for one-quarter of global nickel reserves and is expected to ‘dominate’ nickel ore production by 2040. In the Raw Materials dispute, Indonesia argued that throughout the 2000s, nickel ore production increased ‘more than seven-fold, with dire consequences for Indonesia’s environment and the sustainability of its nickel resources.’ Until a few years ago, the growth of the nickel market corresponded with the increased demand for producing stainless steel (Indonesia–Raw Materials panel report, circulated 30 November 2022, para 2.29). Such production did not stem from Indonesia’s activities but rather from ‘predatory’ foreign mining that caused significant ecological damage and depleted Indonesia’s reserves, leaving ‘environmental destruction as a legacy for the Indonesian people.’ (Annex B-2, 2, emphasis in original). Strong words from Indonesia and yet necessary to understand their decision to resist a push from Western, advanced economies and, instead, to claim absolute economic sovereignty and lay the foundations for a new strategy.
While the European Union’s (EU) complaint stemmed from Indonesia’s present measures, Indonesia’s goal was the future. Indonesia’s submissions detailed how demand for nickel ore as an input to produce electric vehicle (EV) batteries was to ‘explode in the next 20 years’ (we may note it took even less time). Though Indonesia framed its measures as part of ‘sustainable mining and mineral resource management,’ Indonesia’s sustainable economic development lies in its future EV battery production industry. Nickel ore is ‘essential’ for Indonesia’s future. Yet, this is exactly why Europe also needs Indonesia’s nickel – the EU’s EV battery strategy is likewise tied to a move away from fossil fuels and carbon emissions reduction. Though nickel is a critical resource for exporting countries’ green industrialisation, they are not a global public good –– they remain in the interest of the Indonesian people’s ‘national development’ first.
Indonesia’s Challenged Measures
The EU’s claims concerned two measures: an export ban on nickel ore (regardless of concentration) and a domestic processing requirement (DPR) within all mining business licenses and permits that obliges all mineral processing and/or Indonesia’s nickel ore to be purified domestically (report, paras. 2.2-2.4, 2.13). Indonesia’s regulatory framework prioritises value added to the domestic economy and a ‘sustainable’ approach that puts domestic needs first (panel report, 2.35). There is also an environmental element to the regulation, as all businesses must prepare environmental impact assessments that consider the goal of sustainable development and ‘global issues on environment.’ (panel report, para 2.36). The EU contended that the DPR has ‘the consequence of preventing exports of the raw materials concerned unless they have been duly processed and/or purified.’
In effect, Indonesia will no longer export raw nickel ore. Still, Indonesia will export products from nickel ore purification, such as nickel pig iron, ferronickel, and nickel matte (panel report, para 2.23). Indonesia’s measures have huge consequences for nickel demand, which is projected to increase due to the production of lithium-ion batteries (panel report, para 2.31). The United States (US) has targeted refined nickel imports as vital for building ‘resilient’ ‘American manufacturing’ and broad-based growth. A study from the Carnegie Endowment showed that Japan and China have been the largest sources of foreign direct investment in Indonesia’s mineral sector since 2017.
Indonesia’s future, therefore, lies in its control of the exportation of raw materials, environment monitoring, and the ‘development of the upstream and intermediate industry’ dependent on its natural resources (panel report, paras 2.37-2.38). At the time of the panel’s establishment, Indonesia continued to use pyrometallurgical processes for sulfide nickel deposits. Indonesia intended to have new refining facilities that use hydrometallurgical processes, such as pressure acid leaching, operational in the future (panel report, paras. 2.46-2.47). The panel report devoted considerable space to addressing the growing environmental concerns with nickel mining and purification techniques.
Indonesia’s Sustainable Future
Indonesia did not dispute that it has restricted nickel ore exports in some form since January 2014 (panel report, para 7.38). Indonesia did argue that its DPR, which also addresses domestic actors, was an internal measure and did not fall within the scope of GATT Article XI:1 (panel report, para. 7.61).
Upon review, the panel concluded that the DPR regulated the sale of nickel ore to ‘create a situation where there is no nickel ore available for exporters to sell abroad’ but instead must be sold to domestic processors who then transform it into something other than nickel ore. The panel concluded that Indonesia’s DPR created a limiting effect on exports and, consequently, was inconsistent with Article XI:1 of the GATT and eligible for exclusion from that obligation contained in Article XI:2(a) if the elements of that provision were satisfied.
Article XI:2(a) of the GATT provides the following:
Export prohibitions or restrictions temporarily applied to prevent or relieve critical shortages of foodstuffs or other products essential to the exporting contracting party.
The assessment of GATT Article XI:2(a) requires panel assessment of the following terms: i) temporarily applied measures; ii) to ‘prevent or relieve’; iii) ‘critical shortages’; and iv) ‘foodstuffs or other products essential to the exporting’ Member. Ultimately, the panel found that Indonesia had not demonstrated that nickel ore is an essential product, that the export restrictions were not temporarily applied, and that Indonesia failed to demonstrate an ‘imminent critical shortage’ of nickel ore that the challenge measures sought to prevent (panel report, para 7.153). Indonesia responded to the report by appealing into the void (on 8 December 2022), leaving the EU with few options but to negotiate an arrangement or unilaterally respond in defiance of the EU’s WTO obligations. For this blog, I am focusing on Indonesia’s efforts to carve out its measures by invoking Article XI:2(a) of the GATT by exploring a few of the elements examined in terms of Indonesia’s future power in EV battery production.
Nickel Ore as an Essential Product
Indonesia identified three reasons why its nickel was ‘essential’: i) the contribution of mining to Indonesia’s government revenue and to employment; ii) the contribution of nickel to Indonesia’s steel industry, which accounts for 3.95% of total industrial GDP; and iii) the implementation of a plan to expand EV battery production in Indonesia ‘in the short term.’ (panel report, para 7.87).
Other WTO members crafting their own industrial strategy in a greener global economy weighed in on Indonesia’s efforts to safeguard an industry it did not yet have a foothold in but did possess the critical materials for.
The US joined the EU in observing that the term ‘foodstuffs’ in Article XI:2(a) sets the context for conveying how to interpret the term ‘essential’ in this provision. (US Responses, para 7; US Executive Summary, para 12). The EU had contended that, per the Appellate Body, ‘essential’ did not equate to ‘great economic importance’ but addresses a ‘vital need of the population’ (panel report, 7.90). Japan and the US accepted ‘the possibility that securing inputs for a domestic industry could be allowed’ under GATT Article XI:2(a). However, Japan noted that a Member must explain how the ‘development’ of a domestic industry is ‘absolutely necessary or indispensable to meet the basic needs of the population,’ making an input in that industry an ‘essential’ one to the Member (panel report, para 7.92). The United Kingdom adopted a position similar to that seen in the India-Solar Cells Appellate Body report, arguing that a Member seeking to buffer its domestic supply should assess whether imported inputs could satisfy domestic industry demands.
South Korea turned to a single document referring to the GATT drafting history, specifically a working group report that debated the use of export restrictions to ‘protect or promote a domestic fabricating industry.’ The assessment must be understood in context, whereby the draft GATT had the following general exception (then Article XX(I)(i)):
Involving restrictions on exports of domestic materials necessary to assure essential quantities of such materials to a domestic processing industry during periods when the domestic price of such materials is held below the world price as part of a government stabilization plan; provided that such restrictions shall not operate to increase the exports of or the protection afforded to such domestic industry, and shall not depart from the provisions of this Agreement relating to non-discrimination.
Such restrictions may be justified when associated with a governmental stabilisation plan, provided the restrictions met the other non-discrimination requirements and Article XX’s chapeau (Department of State Publication 3107, April 1948). The Working Group concluded that a contracting party cannot promote a domestic industry ‘by reducing the supply of such materials available to foreign competitors.’ However, this conclusion was tempered by the group’s decision to clarify that the objective of any restriction required scrutiny as part of any individual determination (para 12).
During the Indonesia–Raw Materials dispute proceedings, the panel asked a question that considered the relevance of Indonesia’s strategy to foster an industry:
Is the desire to develop a particular industry in a Member enough to make an input product in that industry “essential” to the Member within the meaning of Article XI:2(a) of the GATT 1994? Is Article XI:2(a) of the GATT 1994 meant to address a Member’s development goals?
The US answered that ‘the fact that a product is one of the input products for an industry which the Member desires to develop can be a supporting factor for the product’s “essentialness” to the Member’ (emphasis added). The US seemed to water down this argument by distinguishing between products that ‘may be “important to” the responding Member’ and those products ‘that are “essential” within the meaning of Article XI:2(a).’ Nonetheless, this statement is the only one that suggests a US position whereby a panel could consider safeguarding essential materials for a potential domestic industry. Arguably, this could be quite a remarkable evolution from the safeguards area, involving a surge of imports that causes (or threatens) serious injury to an established domestic industry.
In its findings, the Indonesia–Raw Materials panel agreed with the panel in China–Raw Materials that the determination of what is an essential product within the meaning of Article XI:2(a) of the GATT depends upon the circumstances faced by a Member at the time restrictions are imposed (panel report para 7.94).
The panel asked Indonesia to provide information concerning Indonesia’s EV battery industry. At the time of the panel proceedings, Indonesia confirmed that when the measures were adopted, ‘there was no employment in the EV battery industry, but there were estimates that building an EV ecosystem would contribute significantly to GDP’ (panel report para 7.99). Moreover, Indonesia confirmed that at panel establishment (and certainly not when first imposing restrictions), ‘EV battery production had not yet started in Indonesia.’ Nor could Indonesia demonstrate how stainless steel and EV batteries were ‘important products’ to Indonesian manufacturing (panel report, para 7.101).
Ultimately, the panel acknowledged the need to protect ‘essential’ –understood as ‘indispensable’– ‘industrial input products’ to maintain an industry ‘through a passing need’ but not to protect that industry from ‘the vagaries of competition.’ The temporality of the means to protection served as the analytical focus rather than a scrutiny of the Member’s determination of the necessity of the input. As the instigation of protection must be able to ‘pass,’ the panel excluded from scope the use of trade restrictions to ‘create an industry that did not yet exist.’ (panel report, para 7.100).
The panel distinguished the circumstances of Indonesia from that of China in China–Raw Materials, for China sought to protect refractory-grade bauxite as an existing input in iron and steel Chinese production, already a ‘significant source of employment.’ (panel report, para 7.100). Moreover, China had already established footholds in the downstream sectors, another factor distinguishing China from Indonesia’s case. In effect, Indonesia could not rely on the carveout to justify the creation of a domestic industry, as the carveout was only applicable to harm caused to existing industries. Indonesia could not demonstrate a critical shortage without an established industry. The panel observed: ‘Unlike the situation of bauxite in China, however, nickel ore is not already an input to important downstream industries in Indonesia.’ (Panel report, 7.101). Critical, in this case, translated to something critical to an existing industry.
Establishing a timeframe for Indonesia’s measures
Furthermore, the panel observed that the Appellate Body agreed with the panel in China–Raw Materials that ‘temporarily’ in the sense of Article XI:2(a) refers to ‘relief in extraordinary conditions to bridge a passing need,’ confirming a finite timeframe (panel report, 7.112). Additionally, technological development would be critical to Indonesia’s refining and processing of low-grade iron ore, yet Indonesia could not determine where or when the technology would be needed. In listening to Indonesia’s arguments for the measures, the panel repeatedly referred to Indonesian projections, noting that Indonesia failed to show evidence of increased domestic capacity or new technology that would set specific achievable criteria for concluding all restrictive measures. This made it difficult to set a timeframe, leading to the conclusion that the measures would last indefinitely (panel report, para 7.119-122).
Existing WTO jurisprudence has failed to grapple with the idea of forecasting development. The Appellate Body in China–Raw Materials relied on dictionary definitions to unpack the terms ‘temporarily’ to ‘prevent or relieve’ critical shortages, as found in Article XI:2(a). Yet, both the Appellate Body in China–Raw Materials and the panel in Indonesia–Raw Materials derived their assessment from a normative assumption of returning to normality – ordinary market conditions – a moment whereby ‘critical’ transitions to ‘not critical’ and restrictions are lifted (panel report, para 7.138).
Later, the Indonesia–Raw Materials panel interpreted the term critical as ‘a turning point’ (panel report, para 7.149). For example, the Appellate Body in China–Raw Materials stated, ‘the notion of criticality is the expectation of reaching a point in time at which conditions are no longer “critical”.’ (Appellate Body Report, para 328). But this is analytically distinct from technological evolution, whereby supply and demand develop as industries grow (or, conversely, shrink) in response to innovation over time. In simpler terms, technology and environmental business outpace the legal conceptualisation of normal market conditions, so policymakers may be unable to set parameters to a ‘passing need’ or return to normality.
The existing definitions offered by the Appellate Body exclude policy that seeks to prevent critical shortages through longer-term reconstructions of supply problems. Most notably, the text does not suggest that a respondent Member must show a critical shortage is imminent. Yet, the Appellate Body injected a short-term logic to Article XI:2(a), most evident in their assessment that Article XI:2(a) provides a basis for ‘preventative or anticipatory measures adopted to pre-empt an imminent critical shortage.’ (Appellate Body report, para 327). A government may only act when immediately necessary. The Appellate Body confirmed the exceptional circumstances to escape Article XI of the GATT. However, the Indonesia-Raw Materials panel adhered to this assessment, which may explain why there was no further probing into what Indonesia sought to do in this case.
The panel concluded that Indonesia’s invocation of PSNR must remain consistent with its WTO obligations (panel report, para 7.137). However, the panel did not consider how Indonesia’s invocation of PSNR may strengthen its argument that control over resources was protection from economic interference and exploitation. A significant part of the NIEO was to establish value-added production (or, in this case, purification) processes domestically. Restricting the use of export restrictions for creating an industry -- explicitly prohibits the use of restrictions to move up a complex supply chain. There is a fallacy to the logic that only industrialised countries could benefit from the carveout by preventing established industries’ critical shortages, yet arguing that the WTO obligations exist to help all Members coordinate their economic growth.
We may contrast this panel’s interpretation to the similarly worded requirements in Article XX(j) of GATT 1994, as demonstrated in India–Solar Cells. As I have explained elsewhere, the India-Solar Cells panel found Article XX(j) did not cover prospective shortages, such that India needed to evidence actual disruption in imports to justify restrictions of products in short supply (panel report, paras. 7.244, 7.250, 7.262, Appellate Body Report, para 5.75). In both instances, the respondent Members could not rely on hypothetical future industries, for the panel required present-day evidence to explain the use of trade restrictions.
In the interest of future-proofing its resource power in the greener economic order, Indonesia’s regulatory objectives are mixed. Indonesia confirmed to the panel that its export ban on low-grade nickel related to the prevention of environmental degradation ‘typically associated with export-oriented shallow strip mines.’ In addition, Indonesia’s efforts to shut down the export of low-grade ore relate to concerns of ‘fraudulent customs declarations’ that claim low-grade ore, which are exporting illegal high-grade ore. Even if technological innovations may one day allow Indonesia to improve domestic processing of low-grade ore, Indonesia could not identify an ‘imminent shortage’ of low-grade ore when adopting the measures (panel report, para 7.147-148).
Two questions emerge. First, what empirical research is available to show that export restrictions are necessary tools for industrialisation? Second, if large industrialised countries are reorganising so-called risky supply chains (for security or resiliency reasons), could this change the rule calculus regarding new entry into industries?
With respect to the first question, the OECD has noted tremendous growth in the use of export restrictions, producing ‘negative spillover effects cascading down global supply chains.’ Is this a rehash of import substitution industrialisation (ISI), or do today’s geopolitical and climate change concerns alter the calculus? One of the most significant parts of the panel report is the panel’s struggle to identify a plan to phase out restrictions from Indonesia – could strict export restrictions continue far longer than necessary? One evaluation of ISI has been that, upon assessment, buffered domestic producers have little incentive to consider efficiency, consumer preferences, or quality (381-382). Without existing firms operating in a sector, how sustainable is a government’s top-down approach to establishing growth? If Indonesia incentivises foreign firms to build exclusively in Indonesia, would those firms have greater access to government decision-making? When does domestic promotion turn into protectionism, and what domestic political structures exist to enable the distribution of the economy’s gains from these higher productive activities (namely, skill and technology transfer)? How far can domestic processing requirements take industrialisation ambitions if governments should account for spending and tax calculations that factor multiple production sources to guarantee ‘resilience’ in global supply chains?
Almost a decade ago, Mark Wu observed of cases concerning China’s rare earths export restrictions (from 2009 to 2016) that China appeared willing ‘to endure the negative externalities associated with upstream producers and processing’ if left in control of rare earth minerals for downstream industries with ‘large future commercial potential.’ Indonesia’s appeal into the void of the Indonesia–Raw Materials panel report – affords its policymakers an indefinite ‘free pass’ to the restrictions. Does this likewise label Indonesia a ‘bad faith’ actor intent on protectionist trade policy? Indonesia has committed to becoming a leader in EV production and put consumption subsidies and tax incentives for EV sales in place. Indonesian policymakers have learned from China’s rare earth mineral export restrictions –– with evidence that Chinese and Vietnamese manufacturers have moved EV production to Indonesia.
Projections and Precedence? Canada and the WTO’s Next Steps
With respect to the second question above, Canada’s recent decision to likewise establish a high tariff wall against Chinese EVs proves that future-proofing sectors needed for green industrialisation is another complex negotiation for the WTO membership. Considering how panels have interpreted GATT Articles XI:2(a) and XX(j) regarding Members’ future demands and growth of yet-to-exist sectors, Canada will likewise face difficulty defending its measures. For now, Canada and Indonesia’s measures suggest that economic and political domestic gains outweigh any international tensions from WTO illegal actions. Perhaps it is time to dig deeper into the meaning of critical supply beyond dictionaries and ahistorical references (something I am working on). To close, what are the EU and other Members left to do?
One potential way forward is to lean into the WTO’s efforts to reimagine its functions and press Indonesia to settle with the EU rather than block the panel report (or complete FTA negotiations), attach export duty commitments to Indonesia’s schedules, coordinate with the WTO Secretariat on the timeframe of measures, invite foreign industry expertise to understand development ends better and commit to more frequent, more transparent details of practices for calculating negative externalities at the WTO (with harmed trading partners).
