U.S. Export Restraints on Crude Oil Violate International Agreements And Are Vulnerable To Challenge

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1 U.S. Export Restraints on Crude Oil Violate International Agreements And Are Vulnerable To Challenge This article summarizes how the current export restrictions on U.S. crude oil are direct violations of binding and enforceable commitments made by the United States as well as some of the potential challenges that could be brought against those export restrictions. by Alan M. Dunn* The GATT Prohibits Export Restraints on Almost All Products The U.S. current policy of restricting crude oil exports is fundamentally at odds with binding U.S. commitments under a number of international agreements. One of the most important and prevalent international agreements is the General Agreement on Tariffs and Trade (GATT), which is the foundation agreement for the World Trade Organization (WTO). Among the principle commitments adopted by all WTO member countries is a prohibition on the imposition of quantitative restraints on exports except under certain very limited circumstances. 1 Although the United States Constitution does not allow international agreements to serve as self-executing treaties, the U.S. has adopted many 1 This commitment is set forth in the General Agreement on Tariffs and Trade (GATT) Article XI, which prohibits quantitative restrictions on exports (as well as imports) except under limited exigent circumstances. Article XI of the GATT In relevant part, GATT Article XI provides: GATT Article XI: General Elimination of Quantitative Restrictions 1. 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 importation of any product of the territory of any other contracting party or on the exportation or sale for export of any product destined for the territory of any other contracting party. 2. The provisions of paragraph 1 of this Article shall not extend to the following: (a) 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) For a discussion of how narrowly the exception in subsection 2.(a) is construed in GATT jurisprudence, see the Analysis of U.S. GATT Obligations and exemptions with respect to LNG exports prepared by author Alan Dunn for public submission as part of the Cheniere Energy LNG export application for Sabine Pass at DOE website: 10_111sabine.pdf (analysis of GATT obligations and exemptions starts on p. 80). 1

2 international agreements into U.S. law through statutory implementation, including the GATT, which imposes the obligations of those agreements on the U.S. Crude Oil Is Treated No Differently Than Other Commodities Crude oil, although a very important commodity in world markets, is treated no differently than any other product with respect to GATT disciplines on trade. The U.S. took no reservations with respect to exports of crude oil (or natural gas) at the time it acceded to the GATT (i.e., our government requested no derogations from the basic GATT obligations and prohibitions with respect to crude oil, including the Article XI prohibition on quantitative export restraints). Therefore, the basic prohibition on restricting exports extends to crude oil. (NB: The same is true of natural gas in any form, including LNG.) Similarly, the U.S. also has taken no such reservations regarding crude oil (or natural gas) under its free trade agreements (FTAs) or bilateral investment treaties (BITs), most of which also incorporate the GATT prohibitions on restricting exports. The Prohibition on Export Restrictions Is Enforceable in International Forums GATT obligations prohibiting export restrictions are enforceable in binding proceedings under the WTO Dispute Settlement Understanding (DSU). These are the very same procedures recently used by the U.S. to successfully challenge China s restrictions on exports of raw materials 2 and coerce Chinese compliance through the DSU mechanism. Currently, the U.S. again is using these procedures to pursue a second challenge to China s export restraints on rare earths, tungsten, 2 WTO Appellate Body Report, China Measures Related to the Exportation of Various Raw Materials, WT/DS394/AB/R (circulated Jan. 30, 2012) (complainant United States); WT/DS395/AB/R (complainant European Union), WT/DS398/AB/R (complainant Mexico); and Panel Reports WT/DS394/R, WT/DS395/R & WT/DS398/R (July 5, 2011).. The complainants challenged four types of export restraints imposed on the different raw materials at issue: (i) export duties; (ii) export quotas; (iii) minimum export price requirements; and (iv) export licensing requirements, specifically: Quantitative restrictions and export duties on the export of bauxite, coke, fluorspar, silicon carbide, and zinc. Additional requirements and procedures in connection with the export of the materials, including, but not limited to, restricting the right to export based on, for example, prior export experience; establishing criteria that foreign-invested enterprises must satisfy in order to export that are different from those that domestic entities must satisfy; and requiring exporters to pay fees. A minimum export price system for the materials and requiring the examination and approval of export contracts and export prices. 2

3 and molybdenum. 3 The first round of cases against China s export restrictions on various raw materials, brought by the U.S., EU, and joined by Japan, successfully proved that China was violating its WTO obligations set forth in GATT 1994 Articles VII, VIII, X and XI all of which also are obligations of the U.S. The currently pending second round of cases brought by the U.S. and other countries against China s export restrictions raises complaints about other export restraints that are similar or identical to those already determined to violate China s WTO obligations in the first case. It is worth noting that some of the Chinese measures found to improperly restrict exports are comparable to the U.S. export restrictions on crude oil. Similar Chinese export restraint measures include: Quantitative restrictions (note U.S. limits on crude oil exports to Canada as well as the near total ban on export of U.S. crude oil to all other WTO member countries) Additional requirements and procedures vis-à-vis the quantitative restrictions, such as limits on the mode of transportation Delayed licensing requirements on exports (all but automatic and expeditious export licensing has been found to violate GATT obligations in prior disputes) 3 China Measures Related to the Exportation of Rare Earths, Tungsten and Molybdenum, Request for Consultations, WT/DS431/1 (Mar. 13, 2012) (complaint by the United States), WT/DS432WT/1 (Mar. 13, 2012) (complaint by the European Union), DS433/1 (Mar. 15, 2012) (complaint by Japan). Complainants in this WTO dispute settlement proceeding allege that China maintains restrictions including export duties, export quotas, minimum export price requirements, export licensing requirements and additional requirements and procedures in connection with the administration of the quantitative restrictions including: Export duties and quantitative restrictions on various forms of rare earths, tungsten and molybdenum. Additional requirements and procedures in connection with the administration of the quantitative restrictions on various forms of rare earths, tungsten and molybdenum, including but not limited to fees and formalities, restrictions on the right to export such as prior export experience requirements and minimum capital requirements, and other conditions that appear to treat foreign invested entities differently from domestic entities. Other restrictions such as licensing requirements on the export of various forms of rare earths, tungsten and molybdenum, including in connection with the administration of the quantitative restrictions that China imposes on the export of various forms of rare earths, tungsten, and molybdenum. A minimum export price system for the export of various forms of rare earths, tungsten and molybdenum, and also requiring the examination and approval of export contracts and export prices, including in connection with the administration and collection of the export duties for various forms of rare earths, tungsten and molybdenum. Note, the Panel expects to issue its final report to the parties by November 21, 2013, in accordance with the timetable adopted after consultation with the parties. 3

4 Many other U.S. international agreements incorporate the GATT obligations and prohibitions either by reference or direct recitation, and most of those agreements also provide a right of action by which parties may challenge violations to the agreements, typically in international arbitration and sometimes in the courts. These agreements usually provide a separate recourse to dispute settlement proceedings in addition to proceedings under the WTO. For example, bilateral investment treaties (BITs) and trade and investment facilitation agreements (TIFAs) often incorporate the GATT obligations and provide rights of action under arbitration. U.S. Statutes Regarding Oil Export Licensing Should Be Interpreted By the Agency and the Courts to Avoid Conflict With GATT Rules The current U.S. export control regime on exports of crude oil finds its roots in a complicated web of U.S. statutes and implementing regulations administered by the U.S. Department of Commerce. 4 Some of the statutes are focused on oil from particular regions, while others focus on crude oil in particular forms and inventories. It is important to note that despite the fact the U.S. Congress has passed a number of laws authorizing the Executive branch to restrict exports of crude oil and/or impose certain conditions on such exports, all of these laws leave the U.S. President and/or various executive branch agencies with sufficient discretion to grant exports of crude oil if the export would be consistent with the U.S. national 5 interest. With this discretion given to the President and the Executive branch, there is room for interpretation of the law both by the implementing agency (the Commerce Department) and by U.S. federal courts as to what is consistent with the U.S. national interest. Basic rules of statutory interpretation resolve any ambiguity with respect to potential conflicts with U.S. obligations under GATT 1994 by compelling the Executive branch and the courts to interpret the statute in a manner that is consistent with the GATT. Where a statute is ambiguous, the agency s interpretation must, of course, be a permissible construction and a reasonable 6 interpretation of the statute. The Court of Appeals for the Federal Circuit has held that when interpreting statutes, a permissible and reasonable interpretation 4 The relevant statutes include: Mineral Leasing Act, 30 U.S.C. 185(u); Outer Continental Shelf Lands Act ( OCSLA ), 43 U.S.C. 1354; Energy Policy & Conservation Act, 42 U.S.C. 6201; Export Administration Act of 1979, 50 U.S.C. App. 2406; and Naval Petroleum Reserves Production Act, 10 U.S.C. 7430(e). And the implementing regulations are administered by the U.S. Department of Commerce as part of the short supply controls at 15 C.F.R. Part C.F.R (b)(2). Chevron U.S.A., Inc. v. Natural Resources Defense Council, 467 U.S. 837 (1984). 4

5 means that wherever a statutory standard such as a public interest or national interest finding can be interpreted in a manner consistent with the GATT, it should be. For example, the Court of Appeals for the Federal Circuit ruled that: [A]n interpretation and application of [a] statute which would conflict with the GATT Codes would clearly violate the intent of Congress. 7 A 1996 Federal Circuit Court opinion further amplified this point, stating that an agency must convince the Court that Congress intended for a statute to deviate from the GATT to uphold the agency s interpretation of such statute in violation of the GATT. 8 Furthermore, the Supreme Court s Charming Betsy principle states that an: act of Congress ought never be construed to violate the law of nations 9 if any other possible construction remains. The Charming Betsy principle is a long standing, well established interpretive device in Supreme Court jurisprudence which requires the courts to construe statutes so as to avoid violating executive agreements and treaties to which the U.S. is a party wherever possible. In short, the Commerce Department s strong reluctance to make a determination that is GATT consistent (i.e., approval of licenses to export crude oil to other GATT signatories) could be viewed by the U.S. courts as a failure to apply a permissible construction or a reasonable interpretation to the ambiguous statutory provision because Commerce s decision would be in conflict with the U.S. commitments under GATT Such a failure could and should be held by the courts to be incompatible with accepted rules of statutory construction. Thus, persons or organizations adversely affected by an interpretation that denied an export license could bring an action against the U.S. government to overturn a Commerce Department decision not to issue an export license. Discrimination and Delays in Export Licensing Can Violate the GATT While export licensing regimes clearly are permitted under GATT Article XI, any discriminatory export restriction, including restrictions implemented through export licenses, must not operate to discriminate between consumers in the U.S. or another WTO member country on the one hand, and consumers in any other WTO member country on the other. For this reason, allowing ongoing exports to sales of 7 Fed. Mogul Corp. v. U.S., 63 F.3d 1572 (CAFC 1995); See also Luigi Bormioli Corp., Inc., v. United States, 304 F.3d 1362 (2002) No , September 13, Caterpillar Inc., v. U.S., 941 F. Supp (CIT 1996). Murray v. The Schooner Charming Betsy, 6 U.S. 64 (1804). 5

6 crude to Canadian refiners and U.S. buyers while banning sales to most other WTO member countries is a violation of the non-discrimination provisions of the GATT. 10 Note also that an improper denial of an export license is not required to establish a violation of the GATT. Mere delays in issuing export licenses have been determined to constitute a violation of GATT obligations. Although decisions of WTO and GATT Panels have not set a specific number of days that would constitute a delay that would be inconsistent with the GATT, an export license review period of three (3) months has been found to be too long. 11 Discussion of Exemptions to the Prohibition and Why They Do Not Apply There are exemptions from the GATT prohibition on export restraints but a careful review of the exemptions strongly suggests that none of the specific exigent circumstances are applicable to the U.S. crude oil market at present (except for certain narrow national security-based export restrictions by which the U.S. blocks reexports by WTO members to countries such as Cuba and Iran). The exceptions are only briefly addressed here but it must be noted that these exceptions to the basic prohibition on export restrictions have been narrowly construed by the GATT dispute panels over many years of jurisprudence resulting from the settlement of disputes among GATT member countries. In addition, any attempt to rely on these exceptions to the GATT prohibition on export restraints would, in most cases, require the U.S. to impose similarly onerous restrictions on domestic U.S. production and consumption of crude oil. Such a result almost certainly would be politically unacceptable in the U.S. GATT Article XI(1) Exceptions From Quantitative Export Restrictions: 2(a) Critical Shortages - U.S. crude oil production is soaring from historical levels. In some grades and locations, crude oil production is exceeding 10 See Article I: General Most-Favoured-Nation Treatment of GATT See also Article XX(j) and the chapeau to Article XX of GATT The GATT panel in Japan Semi-Conductors agreed with the United States complaint that Japan s export license procedures, which led to delays of up to three months in the issuance of licenses for semi-conductors due to the monitoring of costs and export prices, were non-automatic and constituted a restriction on the exportation of those products contrary to Article XI:1. See, GATT Panel Report, Japan Trade in Semi- Conductors, BISD 35S/116, adopted May 4, 1988, paras. 118, 132(b), citing GATT Panel Report, EEC Programme of Minimum Import Prices, Licenses and Surety Deposits for Certain Processed Fruits and Vegetables, BISD 25S/68, adopted Oct. 18, 1978, para This GATT Panel noted that the CONTRACTING PARTIES had found in a previous case that automatic licensing did not constitute a restriction within the meaning of Article XI:1 and that an import license issued on the fifth working day following the day on which the license application was lodged could be deemed to have been automatically granted (BISD 25S/95). 6

7 current U.S. refining capacity as well as transport capacity for shipments to Canada. U.S. producers are facing the prospect of having their oil shut in the wells if they can neither refine it in the U.S. nor export it. Under these circumstances, it is difficult to see how the U.S. can claim a critical shortage of crude oil. 2(b) Proper Standards - This exemption only allows proper safety regulations for exports, not restrictions on export quantities for reasons of domestic use or price considerations or environmental considerations. GATT Article XX General Exceptions: NOTE: The following Article XX exceptions to the GATT disciplines only allow export restrictions under narrow exigent circumstances and not where export restraints constitute a disguised restriction on international trade or a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail. Importantly, the U.S. also would be required to impose similar restrictions on domestic production and consumption of oil in order to rely on any of the Article XX exceptions to the prohibition on restricting exports of crude oil. Imposing a near total ban on U.S. domestic production and consumption of crude oil is not a result that would be politically acceptable in the U.S. Nor is a ban on domestic production and consumption of crude oil within the scope of authority of the export licensing agency, the Department of Commerce. As a result, the Commerce Department cannot deny an export license based on one of the Article XX exceptions without also giving rise to a violation by reason of failing to meet the requirements of the exception. (b) necessary to protect human, animal or plant life or health - Although novel arguments might be advanced under this rubric, any reliance on this exception to the prohibition on export restrictions would require the U.S. to impose similar restrictions on domestic production and consumption. (g) conservation of exhaustible natural resources - Again, unless domestic consumption of crude oil is constrained on terms similar to the export restriction (i.e., a near total ban on exports) the U.S. cannot rely on this exception to the prohibition on export restrictions. (i) as part of a government stabilization plan - This exception is only available where export restrictions are necessary because domestic prices for materials are held below the world price. In the absence of a government stabilization plan, this exception in Article XX(i) cannot apply to U.S. export restrictions on crude oil. 7

8 (j) essential to the acquisition or distribution of products in general or local short supply - This exception is subject to the condition that: Provided that any such measures shall be consistent with the principle that all contracting parties are entitled to an equitable share of the international supply of such products, and that any such measures, which are inconsistent with the other provisions of the Agreement shall be discontinued as soon as the conditions giving rise to them have ceased to exist. Thus, this exception would not serve to support the near total ban on crude oil exports. GATT Article XXI National Security Exceptions: GATT Article XXI (b) allows a broad exemption for essential security interests enabling any contracting party to take any action which it considers necessary for the protection of its essential security interests: (i) relating to fissionable materials or the materials from which they are derived; Conclusion (ii) relating to the traffic in arms, ammunition and implements of war and to such traffic in other goods and materials as is carried on directly or indirectly for the purpose of supplying a military establishment; (iii) taken in time of war or other emergency in international relations. The U.S. probably can continue to rely upon this exception for the imposition of export (and reexport) embargoes on countries such as Cuba and Iran based on a national security emergency in international relations. However, the U.S. cannot use the Article XXI (b)(iii) language regarding war or other emergency in international relations to justify an exception to the Article XI prohibition on exports to other WTO member countries. The acceptable use of the GATT Article XXI (b) national security exception has been very narrowly construed by the GATT as well as by WTO panels in more recent years. Also, crude oil (except in the Naval Petroleum Reserves) is not currently on the list of products subject to export controls for national security reasons as required by 50 U.S.C. App. 2404(a)(1) and (c)(1). Therefore, GATT Article XXI (b) appears to offer no further protection for export restrictions on crude oil under current or foreseeable circumstances. The General Agreement on Tariffs and Trade (GATT) Article XI prohibits U.S. export restrictions on crude oil to other GATT/WTO member countries, except under very limited exigent circumstances. The limited exceptions to the basic prohibition on export restrictions are narrowly construed and reliance on these exceptions to 8

9 the GATT prohibition would require the U.S. to impose onerous restrictions on domestic U.S. production and consumption of crude oil. In addition, even delaying exports under protracted export licensing schemes have been found to be violations of the GATT. The U.S. government is fully aware of the GATT obligations that prohibit the imposition of quantitative export restraints as well as the limited nature of the exceptions to this prohibition. In fact, the U.S. has very recently successfully brought complaints against major trading partners for GATT- inconsistent export restraints that are very similar in nature to the restraints imposed by the U.S. on crude oil (as well as natural gas). Moreover, the U.S. is currently pursuing other comparable export restraints and appears highly likely to win its pending actions as well. There is, therefore, no reason to believe that the U.S. is unaware of the legal infirmities of the current export restraints on crude oil. These legal infirmities could invite a challenge by one or more of the energy-hungry countries that have binding enforceable agreements with the U.S. that prohibit exactly the type of export restrictions the U.S. now imposes on exports of U.S. crude oil (as well as on natural gas). Such challenges could be brought before one or more authorities including a: WTO DSU panel brought by any WTO member country seeking to import oil (or natural gas) from the U.S. International arbitral body by any private sector party qualifying under a Free Trade Agreement or a Bilateral Investment Treaty with the U.S. U.S. Courts brought by any party (domestic or foreign) that meets U.S. jurisdictional requirements and is adversely affected by export restrictions on gas For all of these reasons, the current U.S. policies and procedures restricting exports of U.S. crude oil are highly vulnerable to legal challenges. * * * * Alan Dunn served as Assistant Secretary of the U.S. Department of Commerce during the Administration of George H. W. Bush and as one of the lead U.S. negotiators in the multilateral GATT Uruguay Round negotiations, which established the World Trade Organization (WTO). He also served as a lead negotiator in the North American Free Trade Agreement (NAFTA) negotiations with Mexico and Canada and was among the senior U.S. officials responsible for forming and implementing trade-related policy. He is a partner at Stewart and Stewart and has been practicing international trade law for 30 years. 9