China Loses WTO Rare Earth Dispute and What’s Next?

By Senmiao (Tina) Qiu

On March 26, the World Trade Organisation ruled that China’s restriction on the export of rare earth and tungsten, molybdenum has breached the international trade law, which means a victory for Unite States and Europe in this trade dispute. “Today’s ruling by the WTO on rare earth shows that no one country can hoard its raw materials from the global market place at the expense of its other WTO partners,” commented by EU Trade Commissioner Karel De Gucht. However, China insisted that the purpose of its export limits was to prevent overexploit and protect the environment. China has 60 days to appeal for the ruling.

Rare earth is a crucial element for electronic productions. Its vast use ranges from military defence use, satellite communications to smart phones. Leading players in a variety of industries, such as General Eclectics, Toyota and Apple, all rely on rare earths. It is estimated that industries using rare earths contribute more than $300 billion to the U.S. economy. The locations of rare earth in the world are few and most of the places are not concentrated enough to be mined economically. More than 90% of the rare earths in the world market are provided by China. Therefore, China’s export restrictions will have significant impact of the world price of rare earths. For example, China reduced its export quotas for minerals by 72% for the second half of 2010, and the world price of rare earth increased by 300% on average between January and August 2010.

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According to WTO’s dispute settlement, China imposed three types of export restrictions: export taxes, export quotas and export rights of companies who can be eligible for rare earths export. Since all these three types of trade restrictions will increase the cost of suppliers, the total supply of rare earths and some other metals will decrease. Consequently, the world price will be driven much higher, given China’s almost monopolistic position in the world market. China started to launch the trade restrictions in 2010, and the supply of the world’s rare earth decreased by 11%, as a result. Because the mining activities will bring about severe contaminations, the main purposes of China’s trade restriction are from the perspectives of reducing pollutions, protecting the environment from exhausting and preserve natural resource.

However, the European Union, United States and Japan, three major complaints of the dispute, disagreed with China’s argument. They said China’s trade restrictions are mainly designed for the benefit of domestic productions. Critics maintained that export taxes and quotas will provide unfair advantages for domestic Chinese companies and factories, because the export restrictions can help Chinese producers to increase domestic supply of rare earths. As a result, Chinese economy will be benefited due the acceleration of value-added industrial production. At the same time, however, foreign competitors are being discriminated. Mike Froman, a US trade representative, stated that China’s trade restrictions has “caused US manufacturers to pay as much as three times more than what their Chinese competitors pay for the exact same rare earths.” The three complaints jointly field the trade case against China to WTO in March, 2012, and after two years, China was deemed against international trade rules by WTO.

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A question that is worth discussing is that why China can dominate the rare earths world supply. With regard to resources, China only owns about 50% of total rare earth reserve in the world, however, it is now responsible for more than 90% of the world supply. The above picture shows that China’s rare earth production took off in 1980s and started to dominate the industry. The rise of China’s production is due to the cheap labor and soft environmental laws. In pursuing the profit from rare earth production, Chinese factories have long been overlooked the side effects of the mining activities. In addition, there were thousands of small illegal mines that contribute to the boom of China’s supply. Being aware of the over supply of rare earth and serious pollution, China began to close illegal mines, restructure the industry and impose export taxes and export quotas on rare earths. During the recent WTO dispute, China argued that they have the right to limit the export under the exception in Article XX(g) of the GATT 1994 to preserve exhaustible natural resource. However, there is no measure restricting domestic Chinese use of rare earths, as required by the second part of Article XX(g), which is why the US, EU and Japan insisted that China breached the trade laws.

Given China’s intention and policies on restructure the industry and control the production, the impact of the WTO case might not be material on the market. In the short term, it is unlikely that China will change its trade policy significantly. Even if China is willing to change, it would still take years, by which time Western and Japanese companies might already moved a lot of their factories to China for the excess of raw materials. Therefore, in the future, more other countries might work on rare earths mining in order to gain independence from China. However, in a short time, it is still hard to for any country to catch up with China’s market power. One thing that can be sure is that China will definitely appeal for this ruling.

Source:

http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds431_e.htm

http://www.reuters.com/article/2014/03/26/us-china-wto-rareearths-idUSBREA2P0ZK20140326

http://www.bbc.com/news/business-26743299

 

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