William Mwanza, tralac Researcher, comments on the WTO’s recent dispute panel reports concerning rare earths exports from China and the implications of the case for African countries

On 26 March 2014, a WTO panel report was circulated in a case where three complainants, namely the United States (US), European Union and Japan were challenging certain measures related to the export of rare earths, tungsten and molybdenum imposed by China. These minerals are raw materials used in the production of a wide range of electronic and green technology goods, among others.

A number of countries including Brazil, Canada, Colombia, India, Japan, Korea, Norway, Oman, Saudi Arabia, Taiwan and Vietnam reserved their rights as third parties in the case. The measures at issue were those that impose restrictions on exports of the aforementioned products from China. These include export duties (taxes) imposed on the different forms of the materials; export quotas on the amount of the materials that can be exported in a given time period; and limitations on trading rights for enterprises permitted to export the materials.

China argued that the restrictions are implemented with the aim of conserving its exhaustible natural resources and also to reduce pollution associated with the mining of these materials. It invoked Article XX of the GATT to justify these claims. The complainants, on the other hand, argued that the restrictions are implemented with the aim of providing Chinese producers of downstream goods with protected access to these materials. They specifically contended that the measures are inconsistent with Articles VII, VIII and X (on valuation, fees and formalities, and publication and administration of trade regulations respectively), and Article XI (general elimination of quantitative restrictions) of the GATT 1994, as well as specific paragraphs of China’s Protocol of Accession. The arguments of the parties and the Panel’s findings are summarised as follows:

1. Export duties: The complainants highlighted the fact that in its Protocol of Accession, China undertook to remove all export duties except for those that are maintained on selected products provided for in Annex 6 of the Protocol. They noted that apart from tungsten ores (which they did not include in their claim), none of the other materials at issue are included in the Annex and so China is not permitted to impose export duties on them. China acknowledged that the products are not included in Annex 6, but held that Article XX (b) of the GATT allows it to maintain measures that are otherwise inconsistent with GATT 1994 if they are necessary for the protection of human, animal or plant life or health. It argued that the export duties were imposed for this purpose as they were aimed at addressing the pollution that is associated with mining the products. In its ruling, the Panel concurred with the complainants view that the exceptions provided for in Article XX of the GATT cannot be used to justify breaches of its obligations provided for in its Accession Protocol. The Panel further found that even if Article XX (b) was available to justify the export duties that China imposes, these duties were not “necessary to protect human, animal or plant life or health” as required by Article XX (b). In view of the foregoing, it found that China’s imposition of the export duties was inconsistent with its WTO obligations.

2. Export quotas: China acknowledged that the export quotas it imposes are not consistent with the GATT 1994. However, it relied on Article XX (g) to justify their implementation, contending that they were implemented with the aim of conservation of an exhaustible natural resource. The Panel held a contrary opinion. It was of the view that the export quotas were designed for industrial policy purposes, particularly to control the international market of the resource for the benefit of downstream producers, rather than for conservation. Further, the quotas were not seen to be implemented in conjunction with measures to restrict the domestic use of the materials in question as required by Article XX (g). Hence the Panel found that the export quotas were inconsistent with WTO rules and could not be justified under Article XX (g).

3. Trading rights: As with its export duties, China had also committed to eliminate certain limitations it imposes on trading rights in its Protocol of Accession. In spite of this, it argued that these restrictions could again be justified under Article XX (g) as they also relate to the conservation of exhaustible natural resources. The Panel however held that China had not demonstrated in a satisfactory manner, why these limitations were justified under the said Article, and so found that they were inconsistent with its WTO obligations.

This case is important for two main reasons. First, and specific to the issues raised in the case, it reintroduces a test on the status of WTO-plus obligations in the WTO system, such as that undertaken by China through its Accession Protocol, to eliminate export duties except those specified in Annex 6 of the Protocol. There exists no provision in the GATT 1994 that disallows the implementation of export duties by WTO members. Their elimination has only become an obligation for China through its Accession Protocol, which is part and parcel of the GATT Agreement, particularly as it relates to China. Since it is an obligation that is part of the Agreement, some would hold the view that the “General Exceptions” contained in Article XX do apply to such (WTO-plus) obligations as well. Indeed this is the view held by China as it argues that the obligation in the Accession Protocol is an integral part of the GATT 1994, an argument that it had until this point not put forward in other prior cases of a similar nature. It is also the view held in a separate opinion registered by one of the panellists, in which they argued that since the obligation in the Accession Protocol does not explicitly rule out the possibility of recourse to Article XX, then it is possible for China to justify the breach of its Accession Protocol obligation using this article. A similar question on justifying export duties using Article XX of the GATT was considered by the Appellate Body of the WTO in other prior cases, including China – Raw Materials, in which it held (as has the Panel in the present case) that Article XX cannot be used to justify a breach of the commitment to remove export duties in China’s Accession Protocol. The possibility of relying on Article XX to justify such a breach would counteract the original intentions of parties as China was acceding to the WTO, and so it will be interesting to see how this question will now be resolved by the Appellate Body when China appeals the present ruling (using this new argument that the Accession Protocol is an integral part of the GATT Agreement) as is expected to be the case.

Second, and more generally, this case casts renewed light on the structure of the global rare earths market, and how it will continue to change in the short to medium term, whether China’s export restrictions continue or not. Jepson (2012) gives a good account of the different elements of rare earths and the end products with which they are associated including catalytic converters; permanent magnets which increase efficiency in electronic consumer goods such as laptops, tablets and smartphones; magnets for use in green technology such as electric vehicles and wind turbines; and semiconductors for use in solar panels, among others. As will be noted, some of these products are right in the mix of the rapid technological progress that is currently prevailing globally. Others are also related to clean technologies that will continue to rise in prominence in the near future. This makes it clear the extent to which rare earths are an important strategic resource. Jepson (2012) also gives a historical narrative on how China’s dominance of the global market of rare earths is as a result of systematic measures implemented since the 1980s. These have seen it go from having a 27% share of global production in 1990, to 97% presently. The export restriction measures that China is imposing have had the effect of forcing some companies from countries such as the US and Japan to relocate parts of their businesses to China. At the same time, there is currently an active effort to explore other supply chains outside of China, and this has seen some African countries emerge as potential suppliers of rare earths. Efforts to reopen mining and processing operations are currently underway in South Africa. Some projects have also commenced in countries such as Tanzania, Malawi, Mozambique, Zambia, Namibia, Burundi, Kenya, Angola, Botswana and Madagascar. The current proceedings at the WTO and the continued changes in the global demand and supply dynamics of rare earths and their associated end products have direct industrial policy implications for these countries, some of which include:

• What strategies will be most effective in ensuring that these countries integrate themselves effectively into the global value chain of rare earths and their associated end products?

• Will such strategies include processing of rare earth ores and if so how will these be implemented in view of financial, technical, and human capital requirements, as well as environmental issues associated with extraction and processing of rare earths?

• If processing cannot be seen as viable within individual countries, can regional value chains be constructed in a way that optimises benefits for the different countries?

• What WTO-consistent trade policy tools will be used in the process of effectively developing the rare earth sector both within the countries and at the regional level? For example, China’s obligation to remove export taxes is one that comes specifically through its Accession Protocol. This is not necessarily the case with these African countries. How then can export taxes, among other tools, be effectively used in the development of the rare earths sector and of their national economies at large?

Tell us what you think.

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Sources:

Jepson, N. (2012). A 21st Century Scramble: South Africa, China and the Rare Earth Metals Industry. [Online]. Available at: http://www.saiia.org.za/occasional-papers/a-21st-century-scramble-south-africa-china-and-the-rare-earth-metals-industry

Qin, J. Y. (2003). “WTO-Plus” Obligations and Their Implications for the World Trade Organization Legal System. [Online]. Available at: http://www.worldtradelaw.net/articles/qinwtoplus.pdf

WTO. (2014). China – Measures Related to the Exportation of Rare Earths, Tungsten and Molybdenum, Panel Report. [Online]. Available at: http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds431_e.htm