Argentina, Spain and the battle over biofuels

I had earlier blogged about a WTO dispute between Argentina and Spain (DS443) over the Ministerial order pertaining to biofuels that was promulgated in Spain.The main thrust of the complaint was:

"The operative part of Ministerial Order (OM) IET/822/2012 provides that computing for mandatory biofuel targets may only be conducted in relation to biodiesel produced entirely in plants located on the territory of Spain or of another EU Member State, and in line with previously allocated volumes, in accordance with the procedure established in the same Ministerial Order. 

The Argentine Republic has since 2007 developed one of the most efficient biodiesel production sectors in the world and has now consolidated its position as the world's leading exporter of the product. The European Union is the main export market, and Spain is the main buyer on that market. In 2011, Argentine exports of biodiesel amounted to US$2.1 billion, with more than US$1.9 billion going to the EU and more than US$1 billion of the latter figure representing purchases by Spain. 

Ministerial Order (OM) IET/822/2012 and the implementation thereof would create discrimination between the product of European origin and that of other origins, implying a de facto prohibition on imports of biodiesel from outside the Community, for purposes of computing compliance with mandatory biofuel targets. This would totally exclude the Argentine product from the market. 

It is Argentina's understanding that the Spanish Ministerial Order and its implementation would in principle constitute an infringement of obligations, including, but not limited to, the obligations of that country and of the EU under Articles III:1, III:4, III:5 and XI:1 of the GATT 1994. Argentina also considers that the Order would be inconsistent with Articles 2.1 and 2.2 of the Agreement on Trade-Related Investment Measures (TRIMS), and with Article XVI:4 of the Marrakesh Agreement. Argentina considers that Ministerial Order (OM) IET/822/2012 would nullify or impair the benefits accruing to it under the covered agreements."

The legal challenge was as follows: 

"The key measure challenged by Argentina is the Spanish Ministerial Order regulating allocation of quantities of biodiesel needed to achieve the mandatory target of renewable energy.  This measure is the national implementation of the European Union regulatory framework for energy from renewable sources.  

Argentina claims that the Spanish measure is inconsistent with:

• Articles III:1, III:4, III:5 and XI:1 of the GATT 1994

• Articles 2.1 and 2.2 of the TRIMs Agreement; and

• Article XVI:4 of the WTO Agreement."

News of Spain withdrawing the curbs on Argentinian biofuels was trickling in. Was it in response of the WTO complaint? Is this an example of the possible deterrent effect of the dispute settlement mechanism of the WTO? Do countries modify their national measures under the threat of a WTO action? Or is this more of a political move? In this case,on 6 December 2012, Argentina requested for the establishment of a panel. Will Argentina withdraw the WTO compliant now? With Spain having responded, many would say it is Argentina's turn to roll back some of its "protectionist" measures?

Argentina, Spain and Biodiesel - Tit for Tat?

Reports of Argentina challenging a Ministerial order of Spain at the WTO related to sourcing of biodiesel produced in EU based plants to satisfy the quota system are trickling in here, here here and here. In fact, this has been brewing for sometime now as reported here, here and here.

A Ministerial order issued in April 2012 by Spain which is at the heart of the controversy establishes a biodiesel production quota system. This Ministerial Order lays down the rules to allocate biodiesel production quotas to EU based biodiesel producers whose production would be eligible to meet consumption mandates. In other words, to meet the consumption targets of biodeisel, it would be essential to source the biodiesel from EU based biodiesel plants. This effects Argentinian exports of biodiesel which hitherto occupied about 90 % of the Spanish market.

The Biodiesel Magazine captures the contours of the dispute well here. A United States Department of Agriculture (USDA) report captures the implications of the Spanish measure in this study. It concludes:

"Impact on biodiesel production, raw materials use and trade The publication of this Ministerial Order would likely result in an increased domestic production –in Spain and possibly in other EU MS– as well as in increased imports needs of raw materials that would replace finished product imports.

In 2011, data available show that domestic consumption of biodiesel reached 1.5 million MT, about 30 percent of capacity installed. The quota allocation will ensure that domestic consumption is supplied by EU based plants, however, full capacity use of Spain’s based is not assured, unless biodiesel exports become grow, as other MS plants can participate in the quota system and the overcapacity installed compared to projected consumption in Spain."

The issue raises several interesting questions:

1. By mandating that biodiesel should be sourced only from EU based plants, is not the measure in violation of the national treatment principle enshrined in the GATT and TBT Agreements? Is the measure not treating imported biodiesel less favourably than domestically produced biodiesel? Which exception in the WTO rules would Spain try to utilise to justify this measure?

2. In recent times Argentina has been accused by several countries of becoming "protectionist" by mandating import licensing requirements that are inconsistent with the provisions of WTO rules. I have blogged about this issue here and here. Also, Spanish interests were affected by the nationalisation of Argentina's biggest oil firm. Is this Ministerial order in response to this? Was this Spain's tit for tat measure?

3. Is this another  example of a protectionist wave? Are inward looking measures being justified on the grounds that it is a general practice? Does this not indicate the futility of protectionist measures since protectionism is a double edged sword - while one's protectionist measure might be temporarily beneficial, an other country's protectionist measure is bound to have an impact on your exporters. Hence, to challenge another country's protectionist measure with a moral authority, one's track record would also play a role.

4. Are we going to see a rise in such reactionary protectionist measures and what impact would it have on the dispute settlement mechanism? Without sounding alarmist, is this a start of a trade war scenario or should it be considered as a normal progression of the longstanding tension between domestic policy making and multilateral trade rules? As Dani Rodrik predicted in his "The End of the World as We Know it" in the Project Syndicate piece will we be seeing trade wars?

"Over the next few years, the world economy slumps into what future historians will call the Second Great Depression. Unemployment rises to record-high levels. Governments without fiscal resources are left with little option but to respond in ways that will only exacerbate problems for other countries: trade protection and competitive exchange-rate depreciation. As countries sink into economic autarky, repeated global economic summits yield few results beyond empty promises of cooperation."

Will multilateralism prevail or will it be the days of protectionist, unilateral measures once again? Time will tell?