By Daniel Pruzin
March 26 — China violated global trade rules by imposing export restrictions on rare earths, key inputs in a range of high-tech products, the World Trade Organization ruled March 26.
A WTO dispute panel backed a complaint filed by the U.S., the European Union and Japan that the Chinese restrictions, which take the form of export quotas, export duties and other measures, ran counter to commitments China made when it joined the WTO in 2001.
Attorneys with the Office of the U.S. Trade Representative described the ruling as a major win for the complainants, noting that none of the legal claims against the Chinese measures were rejected by the panel.
The ruling was first issued to the parties on a confidential basis Dec. 13, 2013. China now has 60 days, or until May 25, to decide whether to appeal the panel's findings.
China is the world's leading producer of rare earths, a set of 17 chemical elements in the periodic table that include 15 lanthanides (lanthanum, cerium, praseodymium, neodymium, promethium, samarium, europium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, ytterbium, lutetium), as well as scandium and yttrium.
In addition to the restrictions on rare earths, the three complainants also successfully challenged Chinese export restrictions on the metals tungsten and molybdenum.
Rare earths are used in a range of products, including advanced electronics, hybrid car batteries, flat-panel displays, mobile phones, disk drives, wind turbines, energy-efficient lighting, steel, medical imaging equipment, automobiles, petroleum and chemicals.
According to industry estimates cited by U.S. officials, downstream companies in the U.S. using rare earths account for more than $300 billion of economic output. The U.S. steel industry, which accounts for $75 billion in annual sales, relies heavily on tungsten and molybdenum, the officials added.
The WTO has already condemned similar Chinese export restrictions on eight raw materials used as inputs in the steel, aluminum and chemicals industries. China told the WTO early last year that the export restrictions on the raw materials had been removed, bringing it in line with the WTO ruling.
U.S. Trade Representative Michael Froman said that the U.S. hopes the panel's ruling “will discourage further breaches of WTO rules that hurt American manufacturers.”
“China's decision to promote its own industry and discriminate against U.S. companies has caused U.S. manufacturers to pay as much as three times more than what their Chinese competitors pay for the exact same rare earths,” Froman said. “WTO rules prohibit this kind of discriminatory export restraint and this win today, along with our win two years ago in an earlier case, demonstrates that clearly.”
“Both established and emerging sectors are touched by this decision, as is our current and future ability to grow our economy and create jobs,” Froman added. “U.S. manufacturers have faced pressure to scale back their operations or relocate their facilities, their jobs and their technology to China. We will not allow that type of pressure, in breach of WTO rules, to go unchallenged.”
The European Commission said in a statement that the WTO ruling would help secure nondiscriminatory access to raw materials.
“The verdict is clear: Export restrictions cannot be imposed supposedly to conserve exhaustible natural resources if domestic use of the same raw materials is not limited for the same purpose,” the commission said.
The commission said that China's export restrictions have a global impact and affect a significant share of EU trade, limiting the availability of components for EU industry and increasing their price.
“In some cases, the raw materials at stake can amount to a considerable share of the total production cost,” the commission said. “Rare earths represent, for example, more than 50 percent of cost for wind turbine components and 50 percent to 60 percent for an LCD display. Therefore, the price difference can carry a decisive competitive disadvantage for components' makers outside China.”
China's Ministry of Commerce (MOFCOM) expressed disappointment with the ruling. A MOFCOM official said that China is “currently assessing the Panel report and will follow the WTO dispute settlement procedures to settle this dispute.”
Michael Silver, chief executive officer for American Elements, a manufacturer of rare earths-based materials, said that the WTO ruling was “extremely important” in addressing the practices of what he described as “sovereign monopolies,” or countries that account for a large share of production and trade in a given commodity.
These sovereign monopolies aren't being used to make money but, rather, to ensure domestic production in a broad array of high-tech sectors, he said.
“The big differential between the price of rare earths inside of China and minerals sold abroad is to ensure that companies like General Electric put their production facilities in China,” Silver said.
China currently accounts for 97 percent of rare earths production and 85 percent of mineable rare earths resources, Silver noted. Other examples of sovereign monopolies include Russia's dominance in the nickel market and Brazil's control over the market for niobium, which is used mainly in special steel alloys.
Russia, he noted, has agreed to invest billions of dollars in smelters in Indonesia in exchange for the latter maintaining its export ban on nickel ore. “This kind of behavior by sovereign monopolies needs to be regulated globally,” Silver said.
As in the earlier ruling on China's raw materials export ban, the WTO panel found that the export restrictions on rare earths violated provisions of China's 2001 WTO accession agreement.
In particular, the imposition of export duties violated Paragraph 11.3 of China's accession protocol requiring the country to eliminate all taxes and charges applied to exports unless specifically provided for in Annex 6 of the protocol.
Annex 6 allows China to impose export duties on 84 tariff lines up to a specified limit; none of the rare earths or metals at issue in the dispute are on the Annex 6 list.
Also like in the earlier ruling, the panel rejected China's claims that the export restrictions could nevertheless be justified as an exception to WTO rules under Article XX of the WTO's General Agreement on Tariffs and Trade (GATT). China said that the export restrictions qualified for the exceptions under Article XX(b) and (g) because they were needed to protect human health and conserve exhaustible natural resources.
The majority of the three-member panel agreed with the complainants that Paragraph 11.3 expressly precludes the possibility of China invoking an Article XX(b) defense for its export duties. The two panelists agreed with the reasoning of the WTO panel in the earlier ruling on China's raw materials export restrictions that the accession protocol is an integral part of the 1994 Marrakesh Agreement establishing the WTO, not the agreements annexed to the Marrakesh agreement, including the GATT.
“If China's export duties commitments were part of China's GATT 1994 Schedule, the general defenses of Article XX of the GATT 1994 would be available to justify potential violations,” they argued. “However, this is not what China and WTO Members chose to do.”
One WTO panelist dissented, saying that “in my view, unless China explicitly gave up its right to invoke Article XX of GATT 1994, which it did not, the general exception provisions of the GATT 1994 are available to China to justify a violation of Paragraph 11.3 of its Accession Protocol. I see nothing in China's Accession Protocol that clearly indicates such a waiver.”
The three panelists, however, went on to agree that China was nevertheless not entitled to claim an Article XX(b) exception because it failed to demonstrate that its export duties were designed and structured to protect human health.
The Chinese measures imposing export duties on rare earths, tungsten and molybdenum “indicate no link between the duties and any environmental or health objective,” the panel declared. “Furthermore, some of the evidence submitted by the complainants seems to indicate that, contrary to China's assertions, the export duties at issue are designed and structured to promote increased domestic production of high value-added downstream products that use the raw materials at issue in this dispute as inputs.”
The three panelists also went on to agree that China's export quotas on rare earths, tungsten and molybdenum violate China's accession agreement, as well as Article XI:1 of the GATT prohibiting export restrictions other than permitted duties, taxes or other charges.
The panelists rejected China's claims that the export quotas could nevertheless qualify as an exception to WTO rules under Article XX(g) because they were necessary to conserve exhaustible natural resources. China failed to demonstrate that the export quotas were not applied in a manner that constitutes arbitrary or unjustifiable discrimination or were not a disguised restriction on international trade, as required by the “chapeau” of Article XX.
The panel found that several aspects of China's export quota on rare earths, including its structure, design and operation, disfavor and discriminate against foreign users.
“(M)ore than 80 percent of rare earths extracted in China are consumed in China,” the panel said. “In our opinion, it is difficult to understand the function of an export quota in a situation where the first threat to conservation is domestic.”
The “manner in which (China) operates its rare earths export quota system seems to indicate that its export quota doesn't relate to conservation considerations but is aimed rather at controlling the amount of rare earths that leaves the country,” the panel added.
The panel also went on to rule that China's restrictions on the trading rights of enterprises exporting rare earths and molybdenum are in violation of China's accession agreement. While these restrictions on trading rights could in principle be justified as exceptions from WTO rules under Article XX(g), China failed to make its case for the exception.
Chinese measures requiring a firm to demonstrate prior export performance and to meet minimum capital requirements, while intended to ensure commercial expertise, financial soundness and the ability to participate in complex international transactions, “are not conservation-related concerns,” the panel declared.
Among many others, companies such as Philips Lighting, Osram Sylvania, and General Electric Lighting rely on the commodities at issue in the dispute.
MolyCorp in Mountain Pass, Calif. is currently the only rare earths mine operation in the U.S., according to the United Steelworkers.
U.S. lawmakers as well as industry representatives welcomed the WTO decision. In a statement, Senate Finance Committee Chairman Ron Wyden (D-Ore.) said that the ruling sends a “strong message to China that its mercantilist trade restrictions on rare earth elements have no place in the 21st Century.” Wyden said he planned to ensure that enforcement of trade rules continues to be a U.S. priority.
Similarly, Sen. Rob Portman (R-Ohio)—a former USTR and currently a member of the Finance Committee—and Sen. Sherrod Brown (D-Ohio), also a Finance Committee member, applauded the decision and said that China's policies hurt Ohio and U.S. manufacturers. In 2011, the two senators wrote to then-USTR Ron Kirk urging him to initiate a WTO case against China's export restraints on rare earth materials, tungsten, and molybdenum.
Senate Agriculture Committee Chairman Debbie Stabenow (D-Mich.) characterized the decision as “great news” for U.S. manufacturers and researchers working on advanced technologies. She reiterated her call to crack down on anti-competitive practices, such as currency manipulation.
On the House side, Ways and Means Committee ranking member Sander Levin (D-Mich.) said that holding China accountable and enforcing international trade rules are “vital to U.S. businesses and workers and key to trade expansion efforts.”
“China must get the message that our government, backed by our workers, won't stop pressing until China abandons its penchant for promoting its domestic industries at the expense of those of its trading partners,” he added.
Leo W. Gerard, president of the United Steelworkers, said that China's policies have directly impacted U.S. production and employment as companies have had to locate production in China as a result of its protectionist policies. Gerard said that the Interagency Trade Enforcement Center (ITEC)—established by President Barack Obama— has helped to monitor China's actions. The ITEC as well as USTR need additional resources “coupled with mandatory implementation requirements in trade agreements, an enhanced early warning system to identify trade violations, and new enforcement tools to make sure that if you break the rules, there will be swift and certain consequences,” he said.
The decision shows that China cannot “continue to manipulate the global trading system by promoting its own industry to the detriment of U.S. and other global manufacturers,” the American Iron and Steel Institute said. The export restrictions clearly favored Chinese producers already dealing with massive steelmaking overcapacity, the AISI said.
National Electrical Manufacturers Association President and Chief Executive Officer Evan R. Gaddis said that NEMA backs non-discriminatory national policies in raw materials and minerals trade and believes the decision is consistent with that principle. While NEMA understands China's interest in the environment, “trade measures such as export quotas and export tariffs do not appear to be particularly suited to protecting the environment” and such measures tend to support economic protectionism, he said.
NEMA is an association of electrical equipment and medical imaging manufacturers.
With assistance from Rossella Brevetti in Washington.
To contact the reporter on this story: Daniel Pruzin in Geneva at firstname.lastname@example.org
To contact the editor responsible for this story: Heather Rothman at email@example.com
The NEMA release can be accessed at http://www.nema.org/News/Pages/NEMA-Comments-on-Recent-WTO-Rare-Earth-Decision-.aspx. Sen. Brown's statement is available at http://www.brown.senate.gov/newsroom/press. The USW statement can be accessed at http://www.usw.org/news/media-center/releases/2014/usw-applauds-long-awaited-wto-decision-calling-on-china-to-end-controls-of-rare-earth-exports. Sen. Stabenow's statement is available at http://www.stabenow.senate.gov/?p=press_release&id=1297. The AISI release is available at http://www.steel.org/en/sitecore/content/Steel_org/Document%20Types/News/2014/Steel_Institute_Applauds_China_Trade_Dispute_Settlement.aspx.
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