Two years after the United States, the European Union and Japan filed a complaint in the World Trade Organization (WTO) against China’s export restrictions on rare earths, the WTO issued a panel report last month which determined that the Chinese actions were inconsistent with the world body’s trading rules.
This is the second such defeat for China. Three years ago, the US, the EU and Mexico won a WTO case against China which had applied export quotas on nine industrial raw materials.
The Chinese Ministry of Commerce responded to the latest ruling by saying: “China regrets that the panel ruled that China’s export duties, export quota and related administration measures were inconsistent with WTO rules and China’s WTO obligation.”
China has 60 days to appeal against the March 26 ruling. However, in view of its defeat in the 2011 case, the chances of a successful appeal are slim.
But this doesn’t necessarily mean China won’t appeal. The record shows that since joining the WTO in 2001, the Chinese government has become quite sophisticated and adept at legal maneuvers that may gain it time, even if the outcome is unchanged.
“China has appealed unfavorable decisions, even when the appeal lacks merit,” Prof. Timothy Webster of the Case Western Reserve University School of Law said in January while testifying before the US Congressional-Executive Commission on China.
“Presumably,” he said, this was “to postpone revising the offending regulation. In so doing, China has bought itself a year or two of time before the decision becomes final.”
China, he said, “has a strong but increasingly imperfect record of implementing” decisions by the dispute settlement body of the WTO. But he concluded that China is “at base, a system maintainer, not a system challenger”.
In defending its restrictions on rare earths exports, the Chinese government explained that they were designed to conserve natural resources and protect the environment.
There is no question that mining of rare earths is a heavily polluting exercise and is gravely damaging to the environment.
The question is whether China’s restrictions on exports were designed to protect the environment or to enhance the position of its manufacturers and exporters.
China supplies about 90 percent of the world’s rare earths each year. Rare earths are a group of 17 elements used in such high-tech products as smartphones, flat-screen TV sets and hybrid cars.
In a commentary, the state news agency Xinhua said: “China’s domination of the global rare earth market is an unwanted gift from some developed countries led by the United States.” It said the US has the world’s largest rare earth reserves but closed down its mines some years ago, citing environmental and resource costs.
In fact, because China was selling rare earths at much lower prices, other countries could not compete. Recent Chinese restrictions, however, have led other countries including the US and Japan to seek other sources of supply, including domestic production.
While the WTO panel report recognized the environmental damage stemming from the production of rare earths such as tungsten and molybdenum, it said China had not proved its position that export duties and quotas were for the protection of the environment rather than for its own trade advantage.
For one thing, there was no duty on rare earths produced for domestic consumption. This meant that Chinese products with rare earth components enjoyed a competitive advantage over similar foreign products that contained rare earths procured at higher prices.
Thus, the WTO panel found that the export quotas constituted “arbitrary or unjustifiable discrimination” and “a disguised restriction on international trade”.
The panel found that China’s export quotas were “designed to achieve industrial policy goals rather than conservation”.
Moreover, the panel held that “conservation” does not allow countries “to adopt measures to control the international market for a natural resource, which is what the challenged export quotas were, in the view of the Panel, designed to do”.
Most damaging was the panel’s conclusion that “the overall effect of the foreign and domestic restrictions is to encourage domestic extraction and secure preferential use of those materials by Chinese manufacturers”.
This suggests that, if China wants to justify export duties and export quotas, it must at the same time adopt measures to limit domestic consumption of rare earths so as to reduce environmental damage, including threats to animals and plants, and to conserve supplies.
Severely reducing exports without at the same time taking action to ensure limitation of domestic use creates the impression that the country is simply enhancing its own trade position.
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