Are Trade Restrictions an Effective Means of Resource Conservation?

Faculty Fellow, RIETI

In late May this year, the Russian government announced a ban on the export of live crabs. There is concern that the move will significantly impact the Japanese market, which depends on Russia for around 60% of its total domestic supply of crabs. The actual degree of impact, however, has yet to be known. Russian President Vladimir Putin said the primary purpose of the measure is to halt poaching and smuggling, explaining that Russia is only banning part, not all, of its crab exports. But will this measure decrease the poaching and smuggling of crabs as intended? And is it consistent with international trade rules?

Trade restrictions would increase incentive for poaching

As a means to conserve "renewable resources" by preventing illegal extraction, exporting and/or importing countries often implement trade restrictions such as the one taken by the Russian government1. One concern, however, is that the restrictions may backfire; the crab export ban may end up increasing poaching operations. A decrease in the volume of crab imports will push up crab prices in Japan and crab smugglers - should they be successful under tighter control - would be able to make far greater profits than ever. Thus, the crab export ban, contrary to its intended goal, would raise the incentive for poaching.

Restrictions on wood imports may provoke illegal logging

Just like crab poaching has been seriously affecting crab resource management, illegal logging has been contributing to expanding deforestation worldwide. In response, the international community has been stepping up efforts to address the problem. Yet seeking to prevent illegal logging by restricting wood imports may work the wrong way and instead provoke further illegal logging2. When a major wood importer, such as Japan, imposes restrictions on imports of wood and wood products, it no doubt measurably depresses international wood prices. Lower wood prices translate into shrinking profits, and therefore less incentive, for illegal logging. At the same time, however, this also affects forest owners and managers. For them, lower wood prices mean a decrease in the value of their assets, that being forests. Thus, when wood prices fall, forest owners and managers may reduce their expenditures for forest management. This also means that they may reduce expenditures on the protection of their forests from illegal logging, making it easier for the illegal loggers. Therefore, declining wood prices result in an increase in illegal logging if the impact of reducing the incentive for forest management is greater than that of reducing the incentive for illegal logging. Yet this problem, which may arise when restrictions are imposed on wood imports in general, can be avoided when restrictions are only placed on illegally logged wood.

Determining legality and potential inconsistency with WTO rules

One example of attempts to apply restrictions only to illegally logged wood is the European Union's Forest Law Enforcement, Governance and Trade (FLEGT) initiative. Under FLEGT, the EU seeks to conclude bilateral partnership agreements with wood exporting countries affected by illegal logging, such as Indonesia, by demanding the partner country excludes illegally logged wood from its exports to the EU. In return, the EU provides necessary technology and other support to help the partner country achieve that goal. For this system to work properly, it is crucial to distinguish between illegal and legal wood. A typical bilateral agreement under the FLEGT initiative mandates the exporting country to attach a certificate confirming the legality of its wood exports to the EU. Determining legality is a problem that can be solved by utilizing a forest management certification system, under which a third-party organization certifies "sustainable forest management." Likewise, in order to prevent the poaching of crabs effectively by means of export restrictions, poached crabs must be distinguished from legally caught crabs.

It may appear that the problem of illegal logging can be solved by applying import restrictions only to illegally logged wood as long as it is feasible to distinguish between legal and illegal wood. But it is not that simple, because these measures may conflict with the World Trade Organization (WTO) rules. The WTO rules, founded on the principle of non-discrimination, prohibit discrimination in the treatment of goods traded between member countries based on differences in their means of production - so-called PPMs (process and production methods) - provided there is no difference in physical characteristics. The physical characteristics of wood are not affected by its being logged legally or illegally. Therefore, when import restrictions applicable only to illegally logged wood are imposed by one WTO member on another, and if the latter brings a complaint to the WTO Dispute Settlement Body, there is a good possibility that the measures will be found in violation of the WTO rules. This problem will not arise when such measures are implemented under a bilateral agreement. The FLEGT initiative, an attempt to eliminate illegally logged wood by way of bilateral arrangements, can be defined as a device for circumventing this problem of inconsistency with WTO rules.

Risk of such WTO inconsistency is not limited to primary commodities such as wood and fishery resources. In this regard, the WTO Dispute Settlement Body has shown some flexibility in interpreting the relevant text in some of the recent cases, gradually shifting away from its earlier stance of strict interpretation and not differentiating between products merely based on differences in PPMs. More detailed studies will be needed in order to examine the extent of economic benefits and costs attainable by allowing greater flexibility in interpretation.

Trade restrictions are only a "second best" policy

From an economic standpoint, imposing trade restrictions as a means of eliminating illegal logging or poaching is merely a "second best" policy. The first best policy would be for each country to crack down on illegal practices - whether logging, poaching, or something else - while engaging in free trade. As a means of protecting endangered wildlife and plants, the Washington Convention on International Trade in Endangered Species of Wild Fauna and Flora restricts certain international transactions. But even this convention is only second best.

The first best policy, however, would require resource countries to bear the cost of crackdown measures. Thus, in cases where a resource country is a developing country and if the country lacks the financial and technical capability to crack down, it is imperative for consuming, developed countries to provide necessary support and cooperation. The protection of crabs as marine resources is no exception. Russia's efforts alone will not be enough to deliver results and the question being asked is how Japan can cooperate to help Russia achieve its end. It is important to establish and share the recognition that ensuring the controlled use of renewable resources by eliminating illegal exploitation will lead to long-term benefits for both producing and consuming countries.

July 17, 2007
  1. The crab export ban imposed by Russia is applicable only to live crabs and does not affect the export of frozen crabs and crab products.
  2. For more detailed theoretical analysis, see Naoto Jinji, "Illegal Extractions of Renewable Resources and International Trade with Costly Enforcement of Property Rights," RIETI Discussion Paper 07-E-011.

July 17, 2007

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