China loses WTO appeal over raw material export restrictions

By Jessica Roberts
Published: Tuesday, 28 February 2012

No further appeal routes; China must conform to WTO obligations; Export system overhaul likely

 Keith Nuthall

The appellate body of the World Trade Organization (WTO) has dismissed the bulk of China’s appeals against a panel which ruled its export duties and quotas on key steelmaking raw materials illegal.

The Chinese government will now have to remove these charges and restrictions, which the European Union (EU), Mexico and the US were claiming had unfairly restricted the flow of these industrial minerals onto world markets.

The effect, they said, was to inflate global prices, while reducing prices in the Chinese market, giving Chinese companies consuming these materials an unfair advantage against foreign competitors.

The EU, Mexico and the US had argued these export restrictions broke China’s commitments on trade liberalisation, made when it joined the WTO in 2001 and also the WTO’s General Agreement on Tariffs and Trade (GATT).

The appellate body said in a communique, it had “upheld the panel’s recommendation that China bring its export duty and export quota measures into conformity with its WTO obligations...”

However, the ruling was not all bad news for China. The appellate body said the EU, Mexico and US and had not proved another set of complaints that a bundle of red tape restrictions, such as export licensing requirements and minimum export price requirements, were so onerous, they broke WTO trading rules.

Here, the body reversed a decision by the disputes panel that these were illegal restraints of trade.

No appeal route

The appellate body was China’s final tool to overturn the dispute panel’s earlier recommendations, leaving the country with no further avenues for protecting its current export licence and quota system, John Whittaker, partner at UK law firm Clyde & Co. LLP, told IM.

“There will be no appeal from the award. The recommendations of the appeal body are broadly in line with those of first instance which means that China needs to take action so that [it conforms] within a ‘reasonable period of time’ to [its] WTO obligations,” Whittaker explained.

In addition to upholding the panel’s central finding that a ‘series of measures’ had collectively imposed export duties and export quotas on the materials in question, the appellate body found that exceptional circumstances could not be applied to China’s imposition of export duties.

“The critical point on export duties is that China had restricted itself by its Accession Treaty and in effect had foregone the opportunity to rely upon the exceptions contained in Article XX of GATT 1994,” Whittaker explained.

In the case of refractory grade bauxite, the appellate body found that China failed to demonstrate the application of an export quota was necessary to prevent or relieve a critical shortage and that the measures were temporarily applied.

“[Export quotas] could not be justified on the grounds of a critical shortage or on environmental grounds or conservation,” Whittaker told IM, adding “though there was some reversal in relation to the exception relating to the conservation of exhaustible natural resources which at first instance had been interpreted too narrowly to China’s detriment.”

While some parties have argued that the WTO recommendations are unlikely to be of any “great consequence” to China’s overall trend of decreasing exports, one bauxite producer told IM that the fallout from the appeal ruling would cause a “sea change” in business for every mineral exporter in China.

It remains to be seen what shape China’s new export system will take, but there seems little chance that the country will return to its former ‘doors open’ policy.

Timeline of WTO complaint

29 June 2009

The European Union and US jointly request consultations with China over the latter’s restraints on the export of various forms of raw materials used in steelmaking, including fluorspar, refractory bauxite and silicon carbide. The countries cite 32 measures through which China allegedly imposes restraints on the exports in question.

6 July 2009

Canada, Mexico and Turkey request to join the consultations.

4 November 2009

The parties request the establishment of a dispute settlement panel. A single panel is established on 21 December 2009 to examine the dispute, which is now backed by Argentina, Brazil, Canada, Chile, Colombia, Ecuador, the European Union, India, Japan, Korea, Mexico, Norway, Chinese Taipei, Turkey, and subsequently, Saudi Arabia.

5 July 2011

The panel report is circulated to members. A key finding by the panel is that “China’s export duties were inconsistent with the commitments that China had agreed to in its Protocol of Accession”. The panel also finds that export quotas imposed by China on some of the raw materials are “inconsistent with WTO rules”.

31 August 2011

China informs the dispute settlement body that it will appeal certain “issues of law and legal interpretations” of the panel report.

30 January 2012

The appellate body report is circulated to members, with the bulk of China’s appeal dismissed. However, China successfully argues that certain measures relating to export licensing requirements and minimum export prices are not WTO violations.