China’s hold on the global supply of rare earths
Paul Kruger, tralac Researcher, discusses China’s hold on the global supply of rare earths
In March 2012, the United States (US), the European Union (EU) and Japan requested consultations with China regarding restrictions on the exportation of various rare earths, tungsten and molybdenum. These rare earths which have unique magnetic, heat-resistant and phosphorescent properties are key inputs into high technology manufactures such as mobile phones, flat screens, wind turbines, energy efficient lightning, hybrid car batteries, military technology and other advanced electronics. As expected, the consultations failed to resolve the dispute, and on June 27 the coalition of developed countries formally requested the establishment of a dispute settlement panel at the WTO to adjudicate the matter. They claim that the export restrictions employed by China are significantly distorting the market to protect the Chinese domestic industries at the expense of foreign companies and consumers. China on the other hand argues that the mining of rare earth materials is particularly destructive to the natural environment and insists that its use of export quotas, higher taxes, production limits and tougher emission standards are necessary to protect China’s natural resources and the environment. This dispute follows a successful WTO challenge brought by the US, EU and Mexico against China on similar types of export restrictions for other raw materials earlier this year (see an earlier tralac discussion here).
China’s defense is likely to revolve around the conservation of its natural resources, as it has a strong regulatory framework aimed at addressing environmental concerns. It remains to be seen under what circumstances an exception on environmental grounds will succeed, since the use of any conservation programme will be carefully scrutinised by the WTO Panel. This was evident from the earlier China – Raw Materials decision which can be seen as the most relevant WTO dispute settlement case in the field of exhaustible resource protection through the use of export restrictions. In this case, China requested the Panel to find that the application of temporary export duties and export quotas applied on certain raw materials is justified under the environmental exception listed in GATT Article XX(g). Although China’s invocation of the GATT Art. XX is limited by its Accession Protocol, the Panel nevertheless found it useful to pursue anarguendo (for the sake of argument) analysis since all parties have extensively debated the application of GATT Art. XX.
China’s argument is that the raw materials bauxite and fluorspar are exhaustible natural resources; they are scarce, are not easily substitutable, and thus need to be managed and protected. It also referred to the need for developing countries to make optimum use of their resources for their development as they deem appropriate, including the processing of their raw materials. According to the Panel, in order for a measure to be justified under Article XX(g), the measure at issue must: (i) “relate to the conservation of an exhaustible natural resource”, and (ii) be “made effective in conjunction with restrictions on domestic production or consumption”. The Panel observed that although the parties agree that the raw materials covered by the dispute are exhaustible natural resources, they disagree as to whether the challenged export restrictions ‘relate to’ a conservation programme.
China argued that pursuant to the principle of sovereignty over natural resources, countries should be allowed to manage the supply and use of those resources through conservation-related measures that foster the sustainable development of their domestic populations. In this context, China denied that the phrase “made effective in conjunction with domestic restrictions on production or consumption” requires the identical treatment of foreign and domestic actors. The developed countries opposing the restrictions agreed that identical treatment is not necessary but instead advanced the principle of ‘even-handedness’, and argued that a measure would not meet the requirements of the ‘even-handedness’ if it was at the end of the spectrum where only foreign interests were being negatively affected and domestic interests suffered no negative impact. The Panel agreed and noted that “if a WTO Member is not taking steps to manage the supply of natural resources domestically, it is not entitled to seek the cover of Article XX(g) for the measures it claims are helping to conserve the resource for future generations.”
GATT Article XX(g) can therefore not be invoked for GATT inconsistent measures if the objective is to insulate domestic producers from foreign competition in the name of conservation. In light of the evidence submitted to it, the Panel said it is clear that there is a substantial increase in the domestic consumption of bauxite and fluorspar, while exports do not appear to have grown at the same pace. For the Panel, this evidence does not support China’s claim that it has put in place a comprehensive plan to conserve bauxite and fluorspar given that domestic extraction has in fact increased. In particular, it found that a policy of restricting extraction would be more appropriate than export controls, because what matters is the pace of extraction and not whether the product is consumed domestically or abroad.
One can’t help but wonder if the newly enacted regulations limiting the production of Chinese rare earths according to a strict quota system were imposed to strengthen China’s argument (China Securities Journal, 2 July 2012). What is clear, however, is that China is implementing a long term strategy to reduce the quantity of the rare earths it mines; something which could have a significant impact on global supply chains in the technology sector. According to a recent white paper released by the Chinese government (available here), China produces more than 90 percent of the total rare earths output, even though it only holds 23 percent of the global reserves. Deposits of rare earth minerals are found in the US, Canada, Australia and other developed countries, but high labour costs and strict environmental standards make the production too expensive. It is expected that the evidence put forth in this policy paper will form the basis of China’s defense in the WTO dispute.
In the meantime, China resorted to stockpiling these precious minerals, at a time when the average prices for rare earths have fallen by more than half from their record levels in 2011. This move may raise further concerns over China’s tight control of the rare earth industry. Coupled with its range of export and quantitative restrictions, which is likely to remain in place for sometime regardless of the outcome of the WTO dispute, China is set to remain one of the most influential players in the high technology manufacturing sector.
WTO Panel Report. 2011. China – Measures relating to the exportation of various raw materials. [Online]. Available: http://www.worldtradelaw.net/reports/wtopanels/china-rawmaterials(panel).pdf