WTO Rules Against China in Quotas Complaint

The WTO ruling that I wrote about yesterday (by way of the WSJ) was, in fact, officially handed down today, as anticipated. 

WTO Dispute DS398, China – Measures Related to the Exportation of Various Raw Materials officially responded to the complaint made by the United States, the European Union, and Mexico, and ruled that China was violating WTO rules by placing restraints (read: quotas) on the exports of certain raw materials. 

In the published Summary of Key Findings, the WTO struck down China’s defence that their quotas and duties were due to environmental concerns, or fear of exhausting supply of limited natural resources, saying: “In particular, China had argued in its defence that some of its export duties and quotas were justified because they related to the conservation of exhaustible natural resources for some of the raw materials.  But China was not able to demonstrate that it imposed these restrictions in conjunction with restrictions on domestic production or consumption of the raw materials so as to conserve the raw materials.  The Panel acknowledged, however, that China appears to be heading in the right direction in adopting a framework to justify its quotas under WTO rules, but that the framework is not yet WTO-consistent as it still has to be put into effect for domestic producers.”

I’ve seen very little in the Chinese press pertaining to this, but as this WTO dispute is a natural antecedent to a dispute focussing specifically on rare earths, it will be interesting to see how China responds, and whether these new quota numbers will be released, or will be shelved for the time being (which makes more sense, given the circumstances).

This dispute concerns four types of export restraint that China imposes on the export of a number of raw materials.  The raw materials subject to the export restraints are various forms of bauxite, coke, fluorspar, magnesium, manganese, silicon carbide, silicon metal, yellow phosphorus and zinc.  China is a leading producer of each of the raw materials which are used to produce everyday items as well as technology products. 

The complainants argued that the use of export restraints creates scarcity and causes higher prices of the raw materials in global markets. They also provide Chinese domestic industry with a significant advantage by way of a sufficient supply, and lower and more stable prices for the raw materials.

Upon its accession to the WTO, China undertook to eliminate all export duties (taxes) except for a number of products listed in an Annex to its Protocol of Accession.  In this Protocol, China also committed not to apply export quotas (restrictions on the amount that can be exported). 

In one of its key findings, the Panel found that China’s export duties were inconsistent with the commitments that China had agreed to in its Protocol of Accession. The Panel also found that export quotas imposed by China on some of the raw materials were inconsistent with WTO rules. 

The Panel found that the wording of China’s Protocol of Accession did not allow China to use the general exceptions in Article XX of the GATT 1994 to justify its WTO-inconsistent export duties. The Panel also considered that even if China were able to rely on certain exceptions available in the WTO rules to justify its export duties, it had not complied with the requirements of those exceptions.

In particular, China had argued in its defence that some of its export duties and quotas were justified because they related to the conservation of exhaustible natural resources for some of the raw materials.  But China was not able to demonstrate that it imposed these restrictions in conjunction with restrictions on domestic production or consumption of the raw materials so as to conserve the raw materials.  The Panel acknowledged, however, that China appears to be heading in the right direction in adopting a framework to justify its quotas under WTO rules, but that the framework is not yet WTO-consistent as it still has to be put into effect for domestic producers.

As for other of the raw materials, China had claimed that its export quotas and duties were necessary for the protection of the health of its citizens.  China was unable to demonstrate that its export duties and quotas would lead to a reduction of pollution in the short- or long-term and therefore contribute towards improving the health of its people. 

China also committed to eliminate all restrictions on the “right to trade” — rights given to enterprises by China in parallel to market access and non-discrimination provisions guaranteed under the WTO.  The complainants were successful in most of their trading rights claims.

Regarding the administration and allocation of its export quotas, China successfully defended its practices in claims brought by the United States and Mexico whereas the European Union succeeded in its separate claim that it brought against China.

The Panel also found that certain aspects of China’s export licensing regime, applicable to several of the products at issue, restrict the export of the raw materials and so are inconsistent with WTO rules.