Indonesia’s recent decision to maintain its ban on exports of nickel ore despite a ruling by the World Trade Organization that the ban violates its rules is one more illustration of the proliferation of national export restrictions amid increasingly fierce competition for scarce natural resources.
For decades, international trade disputes were almost entirely about restrictions imposed on imports. No more. Today, disputes are just as likely to be about restrictions on exports, especially exports of minerals, metals and other natural resources, such as nickel ore.
Nickel is a vital material in the making of rechargeable batteries, which are needed for the electric vehicles that many believe are key to achieving a carbon-free future for the world.
Indonesia is the world’s largest producer of nickel ore and the home of the world’s largest nickel reserves. The Indonesians, hoping to diversify their developing economy by getting into EV production, have sought to secure more of the value added in nickel processing by imposing the export ban, which has been in place since 2020 and is part of a broader inclination to forbid the export of raw mineral commodities.
In the near term and the narrow view, the nickel export ban may seem to be succeeding for Indonesians. Nearly $14 billion has been invested in increasing the refining capacity of domestic nickel smelters. The value of Indonesia’s nickel-related exports has increased 30-fold.
The Indonesians appear confident that they can transform their country from an exporter of raw materials to an exporter of highly competitive products that are much sought in the global energy transition through the nickel ban and possibly other additional export bans on such products as tin and copper.
But there are consequences outside of Indonesia that will in due course also impact the Indonesian economy. Indonesia’s export ban has reduced the supply of nickel in the world market by millions of tons, creating a global shortage. This has led to a global increase in nickel prices and growing concerns about whether Indonesia is a reliable supplier of nickel for processing and production in other countries.
In addition, it has caused other countries to wonder whether Indonesia might try to leverage its position as a principal source of nickel to exact trade or other economic or geopolitical concessions from its trading partners.
The Indonesians face the likelihood of both legal and economic consequences in pursuing this policy of economic nationalism. Legally, their problem is that Indonesia is a member of the WTO, and its rules prohibit most export restrictions.
Claiming injury to its stainless-steel industry, which depends on imported nickel for inputs into its production, the European Union brought a WTO case against Indonesia challenging the export ban. Not surprisingly, the Europeans won. Ordinarily, this would mean that Indonesia would either have to end the export ban or face economic sanctions from the Europeans for choosing not to do so.
Indonesia, however, has been able to postpone compliance with this WTO panel ruling by exercising its right to appeal the ruling to the WTO Appellate Body, which cannot hear the appeal because it currently exists only on paper. Responding to protectionist sentiments domestically, the United States has blocked the appointment of new appellate jurists as vacancies have opened up on the tribunal.
Indonesia’s appeal of the panel ruling will be the 30th appeal that is pending in legal limbo before the vacant tribunal. It is unclear when — or whether — the appeal will be heard.
Frustrated by this calculated leap into the current legal abyss, the European Union may decide to go ahead and impose additional restrictions on Indonesian imports into the EU. Already, the Europeans have applied anti-subsidy duties and anti-dumping duties on imports from Indonesia of stainless steel that is produced using nickel. Indonesia is challenging these European measures in the WTO.
Generally, even as export restrictions keep proliferating, so too will trade-limiting responses by injured countries, and one of those responses may, in the near term, boomerang against the Indonesians in ways that will hurt their economy more than the nickel export ban seems to be helping it now.
In the near term, too, spurred by the higher world prices, Indonesia’s trading partners will also begin to invest in alternatives both to nickel and to Indonesia. This will undermine the value of its nickel reserves and the downstream products Indonesia produces from nickel. This is what happened when China imposed export restrictions that threatened the global supply of rare earth elements that are critical to high-tech production. In the face of the Chinese threat, many other countries found other sources for the rare earth elements.
Of more immediate concern to Indonesia than this legal stalemate or even the prospect of near-term retaliation by the EU (and possibly other countries) should be the long-term economic problems this ban will pose for its economy. What may seem a sound industrial policy to the Indonesians now may not seem so sound to them a few years from now.
WTO rules bar most export restrictions because they distort trade. Distortions in trade lead to inefficient allocations of limited natural and other economic resources that, in turn, constrain economic growth, including in the countries that impose such distortions.
Export restrictions lead to a decrease in export volumes, which has economic impacts on both domestic and foreign markets. Such restrictions may divert supply to the domestic market, thus leading to downward pressure on domestic prices, but they cause higher international prices due to reduced supplies in foreign markets. Through this supply-side effect, export restrictions can create a gap between the domestic price and the higher price charged to foreign customers. And Indonesia is not only a supplier to other countries; it is also a foreign customer of those same countries.
Despite talk of deglobalization and trends toward shortened supply chains, the global economy largely remains one place. Just as Indonesia can harm the economies of other countries with its nickel export ban, so too can those other countries harm the Indonesian economy if they impose similar trade restrictions.
Competitive advantage cannot be secured by seeking self-sufficiency through domestic production. Self-sufficiency is an illusion. No one person and no one country has a sufficient amount or combination of resources to be self-sufficient in everything.
This is true of every one of us as individuals and equally true of the countries in which we live. Thus, a country that decides, in a search for self-sufficiency, to impose restrictions on exports of one product will soon learn that, to meet all its domestic needs, it will have to import different products from the very countries it has harmed with its restrictions. Not only is there a reason for the WTO rules against export restrictions, but there is also a reason why countries have mostly had the good economic sense in the past to comply with them.
In today’s global economic turmoil, though, Indonesia is far from the only country imposing restrictions on exports of minerals, metals and other raw materials, including those critical to the global energy transition. Zimbabwe has banned the export of unprocessed lithium. Malaysia plans to ban exports of rare earth elements. China is restricting exports of graphite.
These and other WTO members — including the United States — that are increasingly turning to natural resource protectionism and other forms of economic nationalism are all seeking a limited short-term advantage at what will be the higher cost of more long-term economic growth, not least in their domestic economies.
Down this road are trade wars over natural resources that will ultimately harm everyone.
This road must not be taken.
James Bacchus is a professor of Global Affairs at the University of Central Florida and an adjunct scholar at the Cato Institute. His books include “Trade Links: New Rules for a New World” (Cambridge, 2022) and “Truth About Trade: Reflections on International Trade and Law” (World Scientific, 2023).