WTO and the raw mineral export ban Ronald Eberhard  ;   The writer works at the Foreign Ministry

JAKARTA POST,  04 Maret 2014

                                                                                                                        

                                                                                         

                                                      

The recently implemented regulation that bans raw mineral exports and imposes a tax on semi-processed mineral exports seems to be controversial. Two mining giants, Freeport and Newmont, have considered filing a lawsuit against the Indonesian government, arguing that the regulation infringed on their existing contract of work (CW), which does not include such an export tax. The mineral ore export ban is an implementing regulation of the 2009 Mining Law. The law itself has introduced quite controversial measures for investors in the mining business, specifically the shift from mining contracts to mining permits, divestment requirements, local content requirements, mineral export ban, as well as mineral and coal pricing. Violating those measures may result in sanctions, such as the revocation of a mining permit. Those measures were questioned at the Committee on Trade-Related Investment Measures in the World Trade Organization (WTO TRIMs) last June. Developed countries, such as the European Union and Canada have declared that those measures may violate the WTO TRIMs, especially the local content requirements. Arguably, the mineral export ban is a local content requirement because mining firms are required to build smelters in Indonesia. If they still want to export unprocessed minerals, they have to pay higher taxes. Japan has also raised concerns and has threatened to take Indonesia to the WTO dispute settlement body. Nevertheless, those above measures also potentially violate Indonesia’s obligation under many bilateral investment treaties (BITs). In many BITs, Indonesia is subject to the investor-state dispute settlement (ISDS) provision. This provision is the gateway for private investors to sue the state. With the gate open through ISDS provision, there are at least five provisions in many BITs through which investors have the possibility to sue the host state. Those provisions include expropriation, treatment of investment, most favored nation, national treatment and prohibition of performance requirement. Under the expropriation provision, a host state shall not nationalize a foreign investor’s company, unless it is pertinent for public purpose, non-discriminatory in nature and shall be accompanied with fair compensation. The mineral export ban may not qualify as direct expropriation but its duties/taxes for companies that export mineral ores may qualify as indirect expropriation. However, there are problems with indirect expropriation since there is no definition of it in BITs. It will be primarily be up to the arbitrators to rule which measures could be considered indirect expropriation if there are any disputes under this provision. Under the fair and equitable treatment provision, investors may sue a host state if it fails to create stable, equitable and transparent conditions for investment based on “legitimate expectation”. The raw mineral export ban may implicate existing investments in the mining sector. Investors might argue that before the raw mineral export ban was enacted, they had predicted that their investments would result in a certain amount of profit. However, after the ban came into force, they face a different situation that may change their profit predictions. An example of an investment dispute with this provision is the Tecmed v. Mexico case, in which the arbitrator ruled in favor of Tecmed over the failure of Mexico to provide fair and equitable treatment. Under the Most-Favored Nation (MFN) provision, investors may sue the host state based on the rights of investors in other countries. In EDF v. Argentina, EDF used the MFN provision to refer to the umbrella provision in other BITs in which Argentina is a party. An Umbrella provision is a provision that obliges the host country to observe all obligations that it has entered into with an investor or an investment by an investor of another Contracting Party. It is possible that Indonesia might be brought to a dispute by investors with regard to the obligations in other BITs. Such possibility might be opened up, especially if there is a specific provision not found in any other BITs, such as the prohibition of performance requirement found in Indonesia-Japan Economic Partnership Agreement (IJEPA). Under Article 63 of the IJEPA regarding the Prohibition of Performance Requirement, Indonesia is prohibited from giving certain requirements for investors to achieve a given level or percentage of domestic content. The mineral export ban’s goal is to obligate investors to build smelters in Indonesia. Under the National Treatment Provision, the host state must guarantee that the foreign investor is accorded treatment no less favorable than what the host state accords to its own investors. According to Article 125 of the Mineral and Coal Law, the Indonesian government favors its national mining company over its foreign counterpart. By definition of this article, Indonesia treats foreign investors less favorably than its national counterparts. A state has sovereignty and sovereign rights over its natural resources, and therefore it is legitimate for a state to use its natural resources for the betterment of its own people. By introducing the new Mining Law vis-á-vis the mineral export ban, Indonesia is using its sovereign rights to regulate its own natural resources. This is also in accordance with Article 33 of the 1945 Constitution. However, the question lingers on whether the regulation may create conflict with Indonesia’s obligation under international agreements. One could argue that Indonesia could invoke the defense of necessity. Necessity is a defense doctrine that excuses a sovereign state for violating a preexisting obligation. Argentina has invoked necessity in two investment disputes, LG&E Energy Corporation v. Argentine Republic and Continental Casualty Co. v. Argentine Republic. Argentina won in these cases. The necessity doctrine justifies state action to breach an international obligation by presuming that the state’s actions were intended to protect an essential interest of a higher value than the obligation itself. The WTO has formulated its own approach to the necessity doctrine. The first formulation of necessity in WTO law appears in Article XX of the General Agreement on Tariffs and Trade (GATT), which is the General Exception provision. This provision, if it is applied to investment, may create a strong reason for necessity defense in an investment dispute. Under paragraph (i), it is acceptable for states to adopt measures involving restriction on exports of domestic materials necessary to ensure essential quantities of such materials to a domestic processing industry during periods when the domestic price of such materials is held below the world price as part of a governmental stabilization plan; as long as it is non-discriminatory. Furthermore under paragraph (d), states could adopt measures necessary to guarantee compliance with its own national law. Therefore, it is important for Indonesia to review all its BITs and make necessary adjustments on the exception clause to avoid future disputes. ●

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