In August, President Joko “Jokowi” Widodo attended the 15th annual BRICS Summit in South Africa in Indonesia’s capacity as ASEAN chair. In his address to the summit, Jokowi called for an end to trade discrimination and highlighted the right of developing countries to engage in industrial downstreaming by adding value to their own natural resources.
His statements were a thinly veiled criticism of the World Trade Organisation (WTO) and its ruling against Indonesia’s ban on nickel exports. In 2022, the WTO sided with the European Union, arguing the ban unfairly harmed Europe’s stainless steel industry.
Widodo’s comments come at a time when developing countries are pushing for more representation within international institutions and geopolitical tensions are undermining the WTO’s ability to uphold the rules of the global trading system.
Why do countries restrict exports?
Indonesia isn’t the only country that has attempted to impose restrictions on exports. Over the past decade, several WTO member states – particularly those involved in natural resource extraction – have implemented measures such as tariffs, quotas, and bans to curtail certain exports. This has been driven by factors like resource scarcity, environmental conservation objectives, and the promotion of downstream industries.
For instance, the United States has used export controls to limit the outbound shipment of petroleum products and western red cedar, citing the need to safeguard domestic sectors. Similarly, Canada has enforced export limitations on chemicals, molasses, and wood logs.
So why might the WTO oppose restrictions on exports? The main reason is that the implementation of export restrictions on natural resources can result in trade imbalances, especially when certain resources are concentrated in only a handful of countries.
This creates the potential for exporting countries to exert unfair influence over the supply and price of these resources within the global marketplace.
When can a country impose export restrictions?
Under the WTO, the main provision relating to quantitative export restrictions is Article XI: 1 of the 1994 General Agreement on Tariffs and Trade (GATT).
This article states that: “No prohibitions or restrictions other than duties, taxes or other charges, whether made effective through quotas, import or export licences or other measures, shall be instituted or maintained by any contracting party […] on the exportation or sale for export of any product destined for the territory of any other contracting party.”
However, some GATT articles allow export bans and restrictions for certain public policy purposes. For instance, Article XX of the GATT, exempts certain measures from WTO obligations if they are ‘necessary’ to protect human, animal, or plant life and health’ or they relate ‘to the conservation of exhaustible natural resources’.
Article XI:2 also allows the imposition of quantitative restrictions if they are temporarily applied to prevent or relieve critical shortages of foodstuffs or other products essential to the exporting contracting party.
To satisfy this exemption, three elements must be satisfied, namely measures must be ‘temporarily applied,’ ‘prevent or relieve critical shortages’ and be ‘essential.’
Historically, the WTO has taken a dim view of countries imposing export restrictions.
For instance, in 1988 Canada imposed an export ban on unprocessed herring and salmon which it considered necessary for the proper management of local fish stocks and the international marketing of its processed salmon and herring. However, the GATT Panel Report reasoned that these export bans were not ‘necessary’ for the marketing of these commodities as stated under Article XI:2(b).
Similarly, in 2011, the US, the EU, and Mexico brought a complaint against China before the WTO because China imposed export quotas and duties on nine raw materials used to manufacture high technology products. The panel and the appellate body ruled in favour of the complainants, finding these measures were not ‘temporarily applied’ to prevent or relieve a ‘critical shortage’ of the raw materials.
Why did Indonesia introduce a ban on nickel ore exports?
In the midst of increasing competition in the electric vehicle industry, the significance of nickel as a material for the production of batteries is paramount.
As the home of the world’s largest nickel reserves, Indonesia has an interest in maximising the value of its industry through downstream processing. But nickel importing nations have an interest in keeping industrial processing capabilities at home.
To encourage the development of local processing capabilities, Indonesia applied a nickel ore export ban in January 2020, two years ahead of its initial January 2022 schedule.
The objective of the ban was to encourage nickel extractors and foreign importers to refine nickel ore in Indonesia, allowing it to export higher-value commodities. President Joko Widodo fully supported the ban.
The Coordinating Minister for Maritime Affairs and Investment, Luhut Binsar Pandjaitan, has also said Indonesia wants to become a global player in lithium batteries in three to four years. High grade nickel is an import store of power in lithium-ion batteries.
The case against Indonesia
But not everyone was happy with the ban. It removed millions of tons of supply from the market, creating a global shortage.
Responding to the ban, the European Union (EU) launched a complaint at the WTO, contending that Indonesia’s prohibition had unfairly constrained EU manufacturers’ nickel access, which is crucial for the production of steel. The US also supported the complaint due to its significant nickel imports, which were affected by Indonesia’s actions.
Earlier precedents and the requirements set out under Article XI:2 meant Indonesia was always going to face an uphill battle to defend its export ban on nickel ore.
Indonesia’s export ban has so far lasted for seven years, although there were brief pauses allowing the export of lower-quality nickel ore. As expected, the panel examined the length of the export ban, and found the ban could not be considered ‘temporarily applied.’
Indonesia also failed to present any grounds to establish the existence of a ‘critical shortage’ of nickel ore.
In response to the ruling, Indonesia filed an appeal on 12 December 2022 to be considered by the WTO’s appellate body.
Fortunately for Indonesia, the WTO’s initial ruling does not have legal force until their appeal has been heard.
And the appeal won’t be heard any time soon. There are currently 29 other cases in the queue and the backlog cannot be cleared until the US ends its veto of the appellate body.
Human interest versus the national interest
The Indonesian government’s reasoning for a nickel export ban was clear, if not entirely legal – it intended to catalyse investment in the refinement of nickel ore domestically, allowing for the development of a downstream industry and higher value exports.
So far, the ban has achieved its aim. Chinese companies have invested heavily in the development of smelters to shore up nickel supply for their domestic factories, which require the mineral for producing electric vehicle batteries. Indonesia has successfully grown its nickel exports from $6 billion in 2013 to US $30 billion in 2022.
However, this strategy has also triggered a domestic backlash because of the uneven flow of benefits – particularly to foreign investors and the 6,000 Chinese workers employed in Indonesia.
In many ways, Indonesia’s nickel export ban has become an allegory of the failures of the modern global trading system. Should developing countries – which endured centuries of colonial exploitation – have the right to process their own natural resources? Should citizens have a greater stake in the sale of a country’s natural resources? And how will the WTO maintain a fair and equitable system of trade if it is unable to enforce its rulings?
Much like Indonesia’s appeal, these questions will not be resolved anytime soon.