WTO condemns China’s rare earths export restrictions

By Antonio Torrisi
Published: Monday, 28 April 2014

EU, US and Japan welcome verdict, however China says quotas needed to conserve resources and lodges appeal within weeks of ruling.

The World Trade Organization (WTO) ruled against China’s rare earths export restrictions on 26 March, saying that the quotas are not justifiable measures to protect natural resources and the environment.

China considers the WTO ruling against its export restrictions unfair and the verdict is likely to increase tensions with global trading partners, particularly with the US, which is currently in the process of negotiating a new free trade agreement with Asia-Pacific nations but excluding China.

The WTO dispute resolution panel said that China’s quotas were “designed to achieve industrial policy goals rather than conservation [of natural resources]” and were inconsistent with the rules established by the General Agreement on Tariff and Trade (GATT) in 1994, also acknowledged by China.

The WTO’s verdict was welcomed by the US, the EU and Japan, which complained about China’s rare earths exports restrictions in 2012, following a surge in rare earths prices in 2011 as a consequence of the Chinese quotas.

“China’s decision to promote its own industry and discriminate against US companies has caused US manufacturers to pay as much as three times more than what their Chinese competitors pay for the exact same rare earths,” Michael Froman, US Trade representative, said in a statement.

Environmental claims

China argued that export restrictions were motivated by its necessity to conserve natural resources and reduce pollution in its rare earths industry, which accounts for the 95% of global rare earths supply.

The WTO recognised the merits of China’s defence as the country is trying to tackle the environmental problems within its rare earths industry, such as the radioactive thorium content in tailings.

However, the panel decided that China’s export duties were not necessary to protect human, animal and plant life from pollution and that export quotas were not needed for the protection of its natural resources.

On the contrary, the panel found that export quotas did not complement measures to restrict China’s domestic use of rare earths and had the overall effect of encouraging domestic exploitation and securing preferential use of the minerals by local manufacturers.

“Neither the complainants nor the panel contest China’s right to put in place environmental and conservation policies,” the European Commission said, commenting on the verdict.

“However, as unequivocally confirmed by the WTO panel, the sovereign right of a country over its natural resources does not allow it to control international markets or the global distribution of raw materials,” it added.

China appeals

Following a pause of three weeks, on 16 April, China announced it would appeal against the WTO ruling.

Shen Danyang, a spokesman of the Ministry of Commerce, said: “China will make the utmost efforts in the appeals process.”

“Regardless of the appeal’s outcome, China’s policy objectives to protect the environment and natural resources will not change,” Shen added.

Timothy Webster, professor at the Case Western Reserve University School of Law, said that China had already appealed unfavourable decisions in the past, even when the appeal lacked merit.

He thinks this is a strategy to postpone revising the offending regulations and to gain time for changing policies before WTO’s decision becomes final.

However, he believes that China is “at base, a system maintainer, not a system challenger”.

Timeline of events

2003: China’s REE export quota set at 40,000 tonnes

2007-2010: China’s REE export quota cut from 40,000 to 20,000 tonnes

July 2010: China restricts REE exports by 75%, increasing prices six-fold

Sept 2010: China imposes ban on REE to Japan

Dec 2010: Molycorp starts redeveloping REE deposit at Mountain Pass, California

Mar 2012: US, EU and Japan file complaints with WTO against China’s REE exports

June 2012: China issues first white paper regulating REE

July 2012: WTO opens investigation on Chinese REE export quotas

Aug 2012: Molycorp starts REE production at Mountain Pass, California

Sept 2012: REE prices fall to pre-2010 levels

Dec 2012: China tightens REE exports by 27%, following low overseas demand

Oct 2013: WTO rules China’s REE export quotas are against free market rules

Dec 2013: China cuts H1 2014 REE export quota by 400 tonnes to 15,110 tonnes

March 2014: WTO rules against China’s exports quotas

March 2014: China opens Baotou Rare Earths Products Exchange

April 2014: China announces it will appeal against WTO ruling