On 13 March 2012, the United States, European Union and Japan filed separate but coordinated complaints against China to the World Trade Organization over alleged export controls on rare earth metals and non-rare earth metals such as tungsten and molybdenum.
According to an OECD report, China had started to regulate the industry since 2008 to place greater controls over the rare earth resources. To control the supply, China has introduced a number of measures such as imposing a 15 percent tax on light rare earths oxides like neodymium and a 25 percent tax on heavy rare earths, and 41 rare earth products have been listed in the category of prohibited trade. In 2007, China withdrew the refund of VAT (16%) on exports of unimproved rare earths, while the refund on higher value-added exports, such as, magnets and phosphors remains in place. The effect of this decision, combined with the export tax regime above, is that non-Chinese rare earth processors, such as cerium polishing powder producers and rare earth magnet producers, pay 31% more for rare earth raw materials (plus transport and storage costs) than their Chinese counterparts. These measures will have short to medium term repercussions in the international market and industrial applications.
The request for consultations with the Government of the People’s Republic of China pursuant to Articles 1 and 4 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (“DSU”) and Article XXII of the General Agreement on Tariffs and Trade 1994 (“GATT 1994”). The request is the first step in the WTO dispute settlement process. Should the parties to the dispute be unable to reach a resolution after 60 days of talks, the EU, US, and Japan will have the right to ask that a WTO panel be established to hear the complaint. It is very likely that both sides will not be able to reach an agreement during the period. Sanctions against China are a possible outcome of the process.
The complainants identify the following restraints that China imposes on the exportation of various forms of rare earths, tungsten and molybdenum: (1) export duties; (2) export quotas; (3) export licensing; and (4) minimum export price requirements. The complainants challenge the existence of these restraints as well as aspects of the allocation and administration of export quotas, export licenses and minimum export prices, and the alleged non-publication of certain measures. The three complainants further contend that the Chinese measure is to meet the domestic demand first and control the prices of those minerals in the international market which are in violation of WTO rules.
The WTO case reveals that China’s measures appear to be inconsistent with the following provisions: Articles VII, VIII, X, and XI of the GATT 1994; and Paragraphs 2(A) 2, 2(C) 1, 5.1, 5.2, 7.2, 8.2 and 11.3 of Part I of the Protocol on the Accession of the People’s Republic of China (WT/L/432) (“Accession Protocol”), as well as China’s other obligations.
There is no single GATT/WTO article dealing exclusively with export restrictions. Still, Article XI of the GATT 1994 is the key provision regarding export restrictions. It prohibits the use of quantitative restrictions and export duties are in principle not subject to Article XI and thus not prohibited under this article. Regarding quantitative restrictions which are generally prohibited, the issue is whether these measures can be exceptionally allowed under Article XI: 2 (a) (critical shortage of foodstuffs), Article XX (General Exceptions) and Article XXI (Security Exceptions). Article XX allows exceptional quantitative restrictions for policy objectives under “certain qualifications”. GATT Article XX (g) allows trade-restricting measures for the purpose of conserving exhaustible natural resources only if such measures are made effective in conjunction with restraints on domestic production or consumption. None of the restrictions described above have been combined with such limits on Chinese domestic production or consumption.
This move comes just over a month after the WTO Appellate Body (AB) ruled in January that Beijing violated WTO law and its accession protocol by restricting the exportation of nine other raw materials including zinc, coke and magnesium. The body concluded that there is no basis in the China Accession Protocol (the Protocol) to allow the application of Article XX of GATT to Paragraph 11.3, the WTO-plus provision of the Protocol requiring Beijing to eliminate export duties. WTO observed that price and quantity controls that primarily targeted foreign entities were not a reasonable implementation of a conservation policy. Since the ruling it has been reported that China has been increasing the supply of these minerals.
On both cases China insists that its export restrictions fall within the WTO rules because the purpose of these measures is on environmental grounds. For conservation and environmental protection purposes, regulation on production itself rather than on trade is the best option. In such a case China could also avoid complaints of violating its obligations under the accession protocol to WTO. As part of a reconciliation process China has started negotiation with parties and Chinese government has been advocating for larger participation of companies from U.S, Japan and Europe to team up with local firms on rare-earth technology ventures, particularly on environment-friendly projects such as in environmental management, recycling, technology research and development of high-end applications. However none of these measures guarantee an ultimate resolution of the core problems.
Most of the analysts argue that the shortage of rare earths will be a temporary phenomenon, since the rising prices for rare earth elements will serve as an incentive for others to enter the market, leading to greater supply. The United States, for example, has 13 percent of known rare earth reserves and could get back into the production and refining business. Indeed, for all China’s efforts to impose more order and exert price leverage, it has unintentionally driven a revival of global rare-earths production. Over time, China will likely be just one of many global suppliers. Its efforts to monopolize the sector will backfire since the nation’s policy makers seem to have failed to realize that such high-handed measures are uniting the rest of the world to formulate alternate strategies.
At the same time, businesses and policy makers alike are concerned by the increasingly restrictive and unpredictable environment of international trade in industrial raw materials. Multilateral disciplines governing the use of export restrictions are ambiguous. This creates uncertainty for industries that depend on supply of these materials and raises the risk for investment in both mining and processing facilities worldwide.