Legal Strategies for International Trade Problems: The Case of Food Shortages

Since 1947, multilateral trade negotiations have been tackling the reduction of tariffs with the objectives of regulating, liberalizing and stimulating trade. To that end, WTO Members had to adjust and report their industrial policies, convert all quotas into tariffs, bind their tariffs, and refrain from blocking imports by means of high tariffs – actions devised to foster trade through the removal of import barriers. Despite eight negotiation rounds, no one could have anticipated the current obstacle for trade developed by creative minds: export restraints.

 

“Export taxes”, “suspension of exports”, “price surges” and “food shortage” are the buzzwords most heard nowadays in the international trade scenario. Globalization creates excellent grounds for a boost in countries’ exports as it increases demand. Conversely, the positive scenario produced by this growth is now provoking price peaks, affecting domestic supply and causing inflation. Countries are once again concerned with the rise of worldwide demand for commodities, as well as their prices, which, combined with substantial higher oil prices and freight rates, is exacerbating the inflation phenomenon even more. Governments, therefore, are creating barriers to their exports, not their imports, in order to level these internal distortions.

 

This situation may evoke the rebirth of postwar protectionism, in which countries raised trade barriers to make it economically feasible to domestically produce the main agricultural products needed and prevent food shortages. Blocking exports and imports can overcome internal problems faced by one country, but, then again, they can cause major disruptions in other markets. Food processing industries and end-consumers are the most affected, but they are also the ones that would less resort to the legal solutions available to solve this kind of economic dilemma.

 

As an example, the price of wheat this year reached the highest level since 1997. Among the biggest wheat producers and exporters, Russia and Argentina felt that the boom in wheat prices could affect their domestic economies. The Russian government enacted, on October 10, 2007, Resolution 660, which imposed an export tariff for wheat of 10%; subsequent Resolution 934, of December 28, 2007, raised the duty to 40%. Argentina, in turn, applied an export tax of 20% on wheat and wheat flour in 2002. In 2006, Argentina differentiated their export tariffs, trying to stimulate the sales of products with higher value-added, by imposing an export tariff of 20% for wheat and 10% for flour. On November 9, 2007, Argentina issued Resolution 369/2007, which increased the custom duty for wheat exports to 28%, and, recently, Resolution 125, of March 10, 2008, which changed the scheme to a flexible regime with export taxes that are adjusted to the FOB price of wheat and flour, raising the export tax (“retención”) as the crop prices increase.

 

Brazil is suffering from the main consequences of the decision of its neighbor. Approximately 60% of all Brazilian wheat imports used to come from Argentina, but after the series of factors mentioned above the balance of this trade flow has been changed, resulting in a drastic shortage in the Brazilian market. Moreover, because wheat flour exports became more economically viable than the exports of wheat, the Brazilian wheat flour manufacturers, which could not predict or avoid these sovereign decisions, had to face the consequences of the newly imposed protectionist trade policy alone.

 

Export taxes, as well as regulated or supervised exports, are not on the radar of international trade legislation, nor are they being addressed in the Doha negotiations. WTO Agreements only foresee export prohibitions as an Article XI:1 violation, but do not forbid the use of export tariffs. For this case, the only restriction is Art. 12 of the Agreement on Agriculture, which requires WTO Members to notify such export prohibitions or restraints to the Committee on Agriculture and be vigilant with the constraint effects on the food security of importers. Apart from the WTO, regional agreements are more emphatic in making export restraints illegal, such as the Mercosur, which prohibits trade limitations amongst its member countries.

 

On the way to overcome the consequences produced by this new economic scenario, and despite the lack of international regulation and jurisprudence on the matter, the Brazilian wheat industry developed a successful legal and political strategy. From the alternatives available, the first solution sought together with the Brazilian government was the reduction of the applied tariff, enabling the importation from other suppliers (i.e., USA and Canada). Together with this initiative, and with the objective of lowering the prices of the grain to the food chain and end-consumers, internal taxes were reduced for the commercialization of wheat, flour and bread. Other options are still being evaluated. With this successful legal and political strategy, the Brazilian wheat industry managed to gain precious time to survive – for the moment – and counteract the imbalance produced by the changes in the domestic policy of its alleged “hermano”.

 

The real motives for the imposition of export prohibitions may vary: governments might want to avoid price volatility, increase government revenue with additional taxes, or stimulate exports of higher valueadded goods. Regardless of their reasons, the effects are well known: the encouragement of inefficiencies in the world economy, distortion of prices and disruption of business.

 

Delegates in the Doha Round are only focusing on gaining access to other markets, but the real problem, in the future, might very well be how to access essential and strategic foreign goods.

 

Meanwhile, private companies should seriously consider, as part of their business strategy, starting to develop approaches to overcome economic problems that hinder their day-to-day business.

 

International trade practices and resolutions have to become part of the solution and have to be taken  into consideration when defining corporate plans. The case of the wheat shortage in the Brazilian market is a good example to private companies that legal strategies, despite not widely known as alternatives to commercial and economical problems, can compose an interesting option to remedy an unfavorable scenario to business, creating, in this case, an alternative to price surges, food shortage and export taxes.