The WTO and China's Raw Material Export Restrictions: What's Next?

As those following the rare earth element saga are now aware, the WTO Dispute Settlement Panel (DSP) made recommendations on July 7 regarding US and EU complaints about China's use of export restrictions on a number of raw materials. Although the list of raw materials submitted by the complainant countries did not include any REEs, many have equated the DSP's conclusions with a judgment on China's REE export restrictions.

The DSP found China's application of export duties and quotas on various raw materials inconsistent with both the country's obligations under its accession to the WTO as well as with Article XI of the General Agreement on Tariffs and Trade (GATT). However, details of the DSP decision highlight the fact that export restrictions are not entirely precluded by the WTO, only that China's methods of application were not in accordance with the country's WTO obligations. The DSP's recommendations - along with China's response - may be the best indicator of what export policies are to come, not only for REEs, but also for many other strategic and minor metals, including antimony, indium, tungsten and germanium.

Export Duties:

In defense of its application of export duties on bauxite, coke, fluorspar, magnesium, manganese, silicon metal and zinc, China argued that Article XX (b) and (g) of the GATT allow for such export restrictions, as limiting exports was deemed as "necessary to protect human, animal or plant health" and "relat(ed) to the conservation of exhaustible natural resources…"

The panel's finding here was relatively clear-cut; That is, paragraph 11.3 of China's Accession Protocol - the terms governing China's entry to the WTO - does not allow China from invoking Article XX as a defense for violations of any obligations under its accession protocol.

Paragraph 11.3 from China's Accession Protocol:

"China shall eliminate all taxes and charges applied to exports unless specifically provided for in Annex 6 of this Protocol or applied in conformity with the provisions of Article VIII of the GATT 1994."

None of the raw materials listed in the dispute are included in Annex 6 of China's Accession Protocol.

In other words, save for those applied in accordance with GATT XXIII, all export duties are unacceptable. In the panel's words:

"the Panel concludes that there is no basis in China's Accession Protocol to allow the application of Article XX of the GATT 1994 to China's obligations in Paragraph 11.3 of the Accession Protocol. To allow such exceptions to justify a violation when no exception was apparently envisaged or provided for, would change the content and alter the careful balance achieved in the negotiation of China's Accession Protocol."

Export Quotas:

As in the case of export duties, the DSP noted that China's attempt to justify its export quotas on bauxite, coke and silicon carbide could not be justified with Article XX. However, in the case of bauxite, China argued that its export quota's were also justified under Article XI:2(a), which allows for restrictions on the export of materials "if such measures are made effective in conjunction with restrictions on domestic production or consumption". Yet, the DSP did not agree that China's application of export quotas on bauxite met the exclusion's qualifications.

"In the Panel's view, an interpretation that Article XI:2(a) permits the application of a measure for a limited time under limited circumstances would be in harmony with the protection that may be available to a Member under Article XX(g), which addresses the conservation of exhaustible natural resources. To conclude otherwise would allow Members to resort indistinguishably to either Article XI:2(a) or XX(g) to address the problem of an exhaustible natural resource."

Quota Allocation System:

In response to the EU's complaints, the report also identified China's export quota application and allocation system as inconsistent with the GATT. The panel noted that the allocation system, which is dependent on vague and undefined business requirements, "will result in unreasonable and non-uniform administration of this criterion inconsistently with Article X:3(a) of the GATT 1994." As such, China's Export Licensing Measures system as imposed on bauxite, fluorspar, silicon carbide, coke and zinc, as well as on all other goods subject to export licensing - and here one can infer REEs and minor metals - "amount(s) to an additional restriction inconsistent with Article XI:1."

China did not seek to justify any aspect of its export licensing system under any provision of the GATT 1994.

As we suggested in our previous report, this leaves the door open for China to apply export quotas, in conjunction with production restraints or other environmental measures, in a method that is more clearly aimed at conservation of resources than at providing a trade advantage to domestic consumers. Considering the panel's conclusion that China could apply less trade restrictive WTO-consistent alternatives by "enhancing and implementing existing environmental measures as well as establishing new ones where none exists", it is highly likely that China will explore such restrictive policy measures, which will ensure a balance between resource depletion, compliance with its WTO obligations and attainment of domestic industrial policy goals.

The reality is that China will continue to tinker with its export quota system in order to bring them in line with WTO requirements. Export duties on those raw materials identified in the current dispute will likely be reduced, but this does not mean that production quotas will cease or will not become more restrictive. As for REEs, antimony, indium, tungsten, germanium and other minor metals that are still subject to export restrictions, do not expect any major change of policy from China anytime soon. Until a WTO dispute panel reviews the export restrictions placed on these materials, there is no requirement - or incentive - for China to begin making these adjustments. 

 

Comments

[SMI Ltd.]

China wants to keep rare mineral export restrictions
Frik Els | August 30, 2011

China said on Wednesday that it would appeal against a World Trade Organisation ruling that it illegally restricted exports of certain rare and speciality metals and minerals including bauxite, fluorspar, magnesium, manganese, silicon metal, silicon carbide, yellow phosphorus and zinc.

http://www.mining.com/2011/08/30/china-wants-to-keep-rare-mineral-export-restrictions/

[SMI Ltd.]

WTO slapdown: China told to lift restrictions on mineral exports
Michael Allan McCrae | January 30, 2012

...“The Appellate Body found that the term ‘critical shortage’ refers to those deficiencies in quantity that are crucial and of decisive importance, or that reach a vitally important or decisive stage,” wrote the WTO explaining its decision.

“On the basis of these findings, the Appellate Body upheld the Panel’s conclusion that China did not demonstrate that its export quota on refractory-grade bauxite was’ temporarily applied’ to either prevent or relieve a ‘critical shortage’.”...

http://www.mining.com/2012/01/30/wto-slapdown-china-told-to-lift-restrictions-on-mineral-exports/

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