WTO Panel Rules Against China's Export Restrictions on Raw Materials

In a high profile dispute over access to Chinese natural resources, a WTO panel on July 5, 2011 found that China violated international trade rules by restricting the exportation of nine raw materials, refuting Beijing's claim that these restrictions were based on environmental grounds. The panel sided in all key points with the EU, Mexico, and the US, which jointly initiated the case in 2009.

China maintains a system of export duties and quotas for a number of raw materials, including coke, zinc, and bauxite. These are essential for the global production of everyday items such as medicine, CDs, automobiles, and batteries as well as high technology products, such as computers and mobile phones. China greatly reduced its quotas in 2009 and 2010; the high global market prices that followed have been harshly criticised by important trading partners and their industries.

"China's extensive use of export restraints for protectionist economic gain is deeply troubling. China's policies provide substantial competitive advantages for downstream Chinese industries at the expense of non-Chinese users of the materials," US Trade Representative (USTR) Ron Kirk announced in a statement. "They have also caused massive distortions and harmful disruptions in supply chains throughout the global market place."

Western chemical, steel, and non-ferrous metal industries and their downstream clients rely heavily on imports from China, as several of the raw materials can only be sourced there.

When China joined the global trade body, it committed itself to disciplining its export duties for most natural resources, including the materials cited in the dispute; they also agreed to eliminate all quantitative restrictions including quotas.

The panel's decision was thus welcomed as a great victory by the EU, the US and other trading partners that have found themselves increasingly dependent on Chinese natural resources and face growing competition in the manufacturing sector.

"This is a clear verdict for open trade and fair access to raw materials. It sends a strong signal to refrain from imposing unfair restrictions to trade and takes us one step closer to a level playing field for raw materials," EU Trade Commissioner Karel De Gucht said in a statement issued on July 5, 2011.

Kirk joined this appraisal. "July 6, 2011's panel report represents a significant victory … The panel's findings are also an important confirmation of fundamental principles underlying the global trading system. All WTO Members - whether developed or developing - need non-discriminatory access to raw material supplies in order to grow and thrive," he commented.

Export restrictions cannot be justified on environmental grounds, panel finds

In an email statement sent to Bridges, Beijing expressed "regret that the panel finds that China's relevant measures regarding export duties and export quotas are inconsistent with China's obligations under its Accession Protocol and the WTO covered agreements."

China had argued in its defence that its export restriction policy was justified under WTO law, more precisely the general exception clause of Article XX of the WTO's General Agreement on Tariffs and Trade, for reasons of natural resource conservation and the protection of public health. "At the 2009 rate of extraction, only four and a half years of China's reserves remain," China noted in one of its submissions to the panel.

Moreover, the extraction of certain materials is harmful for the environment and health, Beijing had argued during the course of litigation. "The control of the export of high-energy-consumption, high pollution and resource-based products was utterly necessary for the [...] reduction of environmental pollution, freeing the economic development from the limitation by resource and alleviating the tense relations among coal, electricity, and oil," China submitted.

The panel disagreed with this position in their ruling. "Neither the measures implementing the export restrictions, nor the contemporaneous laws and regulations, convey in their texts that the export restrictions are contributing to, or form part of a comprehensive programme for the fulfilment of the stated environmental objective."

Furthermore, the panel found "no clear link between the way the duty and the quota are set and any conservation objective."

The panellists also criticised China for lacking corresponding restrictions on domestic production and consumption of these materials, which is a requirement under WTO law when claiming a GATT Article XX exemption.

In this regard, it noted that "export restrictions are not an efficient policy to address environmental externalities, when these derive from domestic production rather than exports or imports … The pollution generated by the production of goods consumed domestically is not less than that of the goods consumed abroad."

The EU, which has traditionally supported the GATT's environmental protection clause, welcomed this position. "The EU believes that export restrictions cannot and do not contribute to the aim [of promoting a cleaner and more sustainable production of raw materials]. There are much more effective environmental protection measures that do not discriminate against foreign industry."

Raw materials report might give support to EU position on rare earths

The environmental twist might have ramifications for another looming conflict between China and the EU over seventeen rare earth minerals that are vital for the high-tech industry. China maintains a quasi monopoly for these materials, but has introduced a number of export restrictions in recent years that have been seen as threatening the EU's position.

Though panel and Appellate Body decisions have no precedence effect at the WTO, the panel's ruling on the raw materials dispute is an important indicator of how WTO rules could be applied to such cases.

Importantly, the panel did not only reject China's conservation defence on the basis of insufficient evidence, but it found that "WTO Members cannot rely on Article XX (g)'s [conservation exception] to excuse export restrictions … if they operate to increase protection of the domestic industry." It noted that this would violate another provision of Article XX (paragraph (i)) and that "conservation" cannot be interpreted in such a way as to … allow a Member, with respect to raw materials, to do indirectly what paragraph (i) prohibits directly."

Finally, the panel stressed export restrictions' potential long-term negative effects on conservation efforts. "By reducing the domestic price, [an export restriction] works in effect as a subsidy to the downstream sector, with the likely result that the downstream sector will demand over time more of these resources than it would have absent the export restriction."

China now has sixty days to decide whether it will appeal or implement the decision. Otherwise it could face retaliatory actions from the EU, Mexico, and the US.