China quotas on metals violate world trade law, panel finds

Beijing says its regulatory measures “are perfectly consistent” with WTO objective.

China has broken international trade law by restricting the export of rare earth elements and other metals crucial to modern manufacturing, a World Trade Organisation panel has said. That conclusion opens the possibility that Beijing will face trade sanctions from the US, which initially brought the case, the European Union and Japan.

Members of a WTO panel considering the case in Geneva found that the export taxes, quotas and bureaucratic delays Beijing imposes on overseas sales of the minerals artificially raise prices and create shortages for foreign buyers. The panel concluded that “China’s export quotas were designed to achieve industrial policy goals” rather than to protect its environment, as Beijing had argued.

China produces more than nine-tenths of the global supply of the strategically important metals, which are essential to a host of modern applications including smart phones, wind turbines, industrial catalysts and high-tech magnets. Prices soared in 2010 after Beijing cut export quotas by about 40 per cent, to just over 30,000 tonnes, saying the restrictions were necessary because mining rare earths creates many environmental hazards.

The US and European officials hailed the ruling. Michael B Froman, the US trade representative, said the trade restrictions had bolstered Chinese industry at the expense of businesses in other countries, forcing them “to pay as much as three times more than what their Chinese competitors pay for the exact same rare earths.”

Karel De Gucht, the European trade commissioner, said “China cannot use export restrictions to protect its own industries or give them a helping hand on the global market at the expense of foreign competitors.”

The US, which is almost totally dependent on China for the metals, filed the case in March 2012, and the EU and Japan joined on Washington’s side soon after. They challenged the export restrictions on 17 rare earths, as well as two metals used in steel alloys: molybdenum and tungsten. An interim report by the WTO panel last October had indicated that the panel would rule against China.

In a statement Wednesday, the Chinese Commerce Ministry expressed its “regret” at the ruling, saying it believed its regulatory measures “are perfectly consistent with the objective of sustainable development promoted by the WTO.”

China has amply demonstrated the damage caused at each step of the production process, from mining and refining the metals to disposing of the waste, and Beijing has been shutting down some of the worst-offending producers, among them criminal enterprises. The soil in parts of China is scarred from the concentrated acids used to leach the ores, making farming impossible, while giant tailing ponds full of toxic - and sometimes radioactive - chemicals attest to the fact that the recovery of every pound of rare earth metals entails the creation of hundreds or thousands of pounds of waste.

‘Quotas justified’

China had also argued that the export quotas were justified under trade rules allowing exceptions where such steps “relate to the conservation of exhaustible natural resources.” But the complainants argued that the restrictions were inconsistent with China’s obligations under the rules of the WTO, which it joined in 2001, because they were handled “in a manner that is not uniform, impartial, reasonable, or transparent,” distorting the market in favour of China’s domestic industry.

Critics also argued that despite the claims of environmental protection, China was using its monopoly to create a cost advantage for companies operating within its borders; because the price was lower for domestic users, the arrangement induced foreign companies to set up shop in China to be competitive, creating local jobs and transferring technology.

The panel ruled against China’s arguments on all counts. While it did not rule that nations may not impose quotas to protect scarce resources, it argued that once a commodity is extracted from the ground, it should be treated in accordance with the global rules.

World trade rules do not prohibit export taxes. But the agreement China signed with other countries when it joined the WTO allowed for only a limited number of such duties and did not include rare earths, the panel noted. Beijing now has about two months to appeal the case, as do the complainants if they think the outcome is not entirely in their favour. Any challenge would be heard by the Appellate Body, the WTO’s permanent appeals tribunal. China’s statement Wednesday said Beijing “is currently assessing the panel report and will follow the WTO dispute settlement procedures to settle this dispute.” But it gave no indication of whether it planned to appeal.

WTO rules require that China be given a “reasonable” amount of time to comply with the final ruling and recommendations. If Beijing fails to do so, the US, Japan and the EU could begin to impose sanctions about 15 months after the appeals judgment, Bacchus said, and these would have to be proportional to the economic damage they claim to have suffered.

This is not the first case on export restrictions that China has lost at the world trade body. In 2009, the US, Mexico and the EU filed a successful challenge to Beijing’s restrictions on exports of raw materials including bauxite, coke and magnesium. China implemented the trade organisation’s recommendations, and many trade experts expect it to do so in the rare earths case.

Prices of neodymium, a rare earth necessary for a range of products including headphones and hybrid electric cars, soared to nearly $500 a kilogram by the summer of 2011, from less than $50 a kilogram at the start of 2010. In many cases, because rare earths are typically used only in trace quantities, consumers did not notice much difference - perhaps a few dollars added to the overall cost of a smart phone.
One exception is the Toyota Prius hybrid car, whose manufacture uses a kilogram of neodymium. Toyota said it was forced to raise Prius prices as a result of the Chinese quota cutback.

Pierre Neatby, vice president for sales and marketing at Avalon Rare Metals in Toronto, said that the current price stability should not be seen as a sign that the market was in balance. Demand for the metals will continue to grow, he said, and China will remain for some time the main supplier of heavy rare earths.
Even with a WTO victory in hand, China’s trading partners are wary about their vulnerability, a weakness highlighted in 2010 by China’s decision to block exports of rare earths to Japan in the midst of a dispute over the ownership of uninhabited islands in the East China Sea.

The 2010 quota shock has led companies to find innovations that reduce their needs, which include recycling electronic parts containing rare earths and finding ways of making products without them.

Higher prices have encouraged companies to begin developing new sources of rare earths elsewhere, including in the U.S. and Australia, that had been rendered unprofitable by cheaper Chinese supplies.

Kris Rawls, who follows the rare earths market at IHS Pricing and Purchasing in Washington, said that even with new sources being developed, China would probably still be producing 60 per cent of the world’s rare earths in 2020.