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WTO rules Chinese rare earth minerals export limits breach the GATT 1994



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WTO rules Chinese rare earth minerals export limits breach the

GATT 1994

Posted 19/06/2014 by Jaan Murphy

In March 2014 a Panel established by the Dispute Settlement Body of the World Trade

Organization (WTO) ruled that export controls on rare earth mineral put in place by China

contravened the General Agreement on Tariffs and Trade 1994 (GATT).

Background

In 2012, the United States (US), European Union and Japan (complainants) requested

consultations with China about its rare earth mineral (tungsten and molybdenum) export

restrictions which included export duties, export quotas, minimum export price

requirements, and export licensing requirements. The complainants argued that they were

inconsistent with various articles of the GATT.

The consultations were unsuccessful and a panel was established to resolve the dispute.

Australia, as a third party, made submissions to the panel regarding the interpretation of

Article XX(g) of the GATT.

Importance of rare earth minerals

Rare earth minerals refer to elements that have special optical and magnetic properties, and

hence are used in a wide range of modern technology including smartphones, weapons

systems, and computers. It has been argued that modern technology would be impossible

without rare earth minerals.

Whilst not particularly rare (compared to other minerals) concentrations in commercially

mineable quantities are very uncommon. In addition, exploration efforts have been lacking

for many years. From the mid-1960s through to the 1980s, the US was the world’s

dominant source of rare earth minerals. However, as noted by the US Congressional

Research Service:

…by 2000, nearly all of the separated rare earth oxides were imported, primarily from

China. Because of China’s oversupply, lower cost production, and a number of

environmental… and regulatory issues… the United States has lost nearly all of its capacity

in the rare earth supply chain, including intellectual capacity.

China is now responsible for approximately 95% of the world’s rare earth mineral

production, and has at least half of the world’s reserves. In contrast, Australia, the third

largest producer of rare-earth minerals, is responsible for 2.0% of world production and has

3.9% of the world’s reserves.

With so much of the world’s rare earth mineral production capacity located in China, any

restrictions on exports from China would have significant impacts on industries that use

them.

The GATT and export controls

Generally speaking, the GATT prohibits measures that limit or discourage exports. For

example, Article XI, subject to certain exceptions, prohibits quantitative restrictions:

No prohibitions or restrictions… whether made effective through quotas, import

or export licences or other measures, shall be instituted or maintained by any

contracting party on the … exportation or sale for export of any product destined

for the territory of any other contracting party.

The dispute centred on the view that the measures imposed by China were designed to

provide Chinese industries that use rare earth minerals with protected access to them, thus

conferring on them a competitive advantage vis-à-vis foreign industries.

The Chinese export control measures

The export control measures in question included export duties, export quotas and

restrictions on trading rights.

The complainants argued that the export duties applied on rare earth minerals were

inconsistent with China’s WTO obligation to eliminate all export duties (except for those

imposed on a number of specifically listed products). As the rare earth minerals in question

were not listed, it was argued that China could not impose the export duties on them.

China argued that the duties were permitted on the basis of Article XX(b) which allows the

maintenance of measures that are inconsistent with the GATT if they are necessary to

protect human, animal or plant life or health, which China argued they were (given the

pollution caused by mining the rare earth minerals in question).

The complainants argued that the export duties were not necessary for the protection of

human, animal or plant life or health.

China also imposed quantitative export limits (quotas) on rare earth minerals and

restrictions on the right of enterprises to export them, arguing that whilst inconsistent with

the GATT, they were justified under Article XX(g), since they relate to the conservation of an

exhaustible natural resource.

The decision

The panel upheld the complaints. It found the export duties were not necessary for the

protection of human, animal or plant life or health and were inconsistent China’s WTO

obligations.

The panel concluded that the export quotas were designed to achieve industrial policy goals

rather than conservation goals and overall the effect of the measures was to encourage

domestic extraction (and secure preferential use) of the rare earth minerals by Chinese

manufacturers, and hence could not be justified under Article XX(g). In relation to the

trading right restrictions, the Panel found that China had not satisfactorily explained why its

trading rights restrictions were justified and hence breached its WTO obligations.

In April 2014, China appealed the decision.

Why is the case important?

The case is important for a number of reasons. First, from a legal perspective it contains

useful analysis of the application of Article XX(b), an exception Australia may seek to rely

upon in relation to WTO disputes concerning its plain cigarette packaging laws. Second, the

decision (if upheld) will prevent the perceived misuse of a near-monopoly by China to favour

its domestic industries. Finally, as Australia is one of the few alternative suppliers of rare

earth minerals, the decision effectively increases competition for export markets.