BLOG: China, Resource Protectionism & the WTO

Rare earth market watchers will want to pay attention to a report from the World Trade Organization on China’s export restrictions due out later this year. A WTO dispute settlement panel is scheduled to report its findings on whether China’s raw material export restrictions are in accordance with WTO regulations by the end of October. Although the case against Chinese export controls currently under review by the WTO does not make direct reference to China’s rare earth export restrictions, the implications are significant.

For those unfamiliar with the current case, China’s export controls regulating nine “raw materials” were brought to the attention of the WTO Dispute Settlement Body by the US, EU and Mexico in June of 2009. The nine raw materials identified by the complainants include bauxite, coke, fluorspar, magnesium, manganese, silicon carbide, silicon metal, yellow phosphorus and zinc. After negotiations were unsuccessful in resolving the issue, a panel was set-up on March 29th of this year and, according to WTO procedures, has six months to file a report on whether the export restrictions are acceptable under China’s WTO obligations. In an article published in the Wall Street Journal on May 19th of this year, former Chairman of the WTO’s Appellate Body, James Bacchus, outlined the relationship between the current case and China’s rare earth protectionism, as well as the threat of increasing global natural resource protectionism. Emphasizing the case against China’s export controls, Bacchus explained, “Export restrictions create economic inefficiencies by distorting the allocation of limited natural resources. They subsidize local producers by lowering the domestic prices of their inputs, and increase prices for foreign producers. That gives foreign producers an artificial incentive to move offshore to be closer to their raw material sources. For these reasons, and more, restrictions on exports are every bit as harmful as restrictions on imports.”

The Chinese, meanwhile, rest their defense of export restrictions on Article XX of GATT, which permits measures that would otherwise violate WTO rules if they are “relating to the conservation of exhaustible natural resources (and) if such measures are made effective in conjunction with restrictions on domestic production or consumption.” A deciding factor for the dispute settlement panel will likely be whether China’s export restrictions are found to be applied as a form of “arbitrary or unjustifiable discrimination”.

The WTO’s biennial trade policy review for China, which was released in June of this year, suggested that the WTO was not entirely satisfied with the application of China’s resource export controls, stating that they “constitute implicit assistance to domestic downstream processors of the targeted products and thus provides them a competitive advantage”. Confident in a favorable decision, reports in June suggested that the US has already begun preparing their case against rare earth export restrictions and has sought evidence from domestic rare earth end-users of financial hardship resulting from China’s price and market manipulation.

If the panel does find China’s raw material export controls not to be in accord with their WTO obligations, it will be interesting to see how China responds. A number of options would be available, including removing export restrictions, increasing production controls or negotiating a financial settlement, otherwise China would face the threat of the US, EU and Mexico all imposing countervailing duties on one of China’s export industries. A decision against China’s export restrictions may also simply be used as a bargaining chip by the US and EU to get China’s cooperation on areas of broader concern, such as currency revaluation or government procurement.

Rare earth market followers will want to watch how the raw materials case plays out, as it will likely heavily influence how Chinese RE export policies will unfold in 2011 and thereafter.