This post is by Heather Croshaw, a second year law student at Vermont Law School and a joint-research project student with the US-China Partnership for Environmental Law for 2011-2012.
China is a leading global exporter of raw materials and rare earth metals. For example, the E.U. alone receives 95 percent of its magnesium, 91 percent of its manganese, and almost 30 percent of its phosphorous from China.
On July 5, 2011, the WTO ruled that China’s export controls on nine minerals, including bauxite, coke and magnesium, violated international trade laws. The nine minerals covered by the WTO ruling are used in medicines, CDs, electronics, the automotive industry, ceramics, refrigerators and batteries among other products.
In early 2009, China began to limit their exports of the nine raw materials—various forms of bauxite, coke, fluorspar, magnesium, manganese, silicon carbide, silicon metal, yellow phosphorus and zinc. By late June 2009, the U.S., and E.U. (later Mexico, Canada and Turkey) filed a complaint to the WTO Dispute Settlement Body (DSB) that China violated international law through four export restrictions that inhibit free trade (Argentina, Brazil, Canada, Chile, Colombia, Ecuador, the European Union, India, Japan, Korea, Mexico, Norway, Chinese Taipei and Turkey reserved their third-party rights). (See “China — Measures related to the exportation of various raw materials”).
The U.S. and E.U. argued that China’s export restrictions not only violated 32 provisions in the GATT treaty, claiming that the export restrictions created a scarcity of raw materials in the global market, drove up prices, and affected downstream industries.
In response, China argued for Article XX (b) and (g) exceptions to protect human health and life, as well as preserve exhaustible natural resources. Much of China’s argument reflected the 1962 UN Resolution 1083 on Permanent Sovereignty over Natural Resources, China maintains its sovereign right over their natural resources to use for their domestic economic development. The government also argued that the quota restriction was to prevent a critical shortage of the raw materials and implementing the international principle of sustainable development.
The WTO DSB wrote in their opinion:
China devotes a great deal of time and effort to underscoring China’s belief that its economic justification – that is, a purported right to adopt measures regarding the use of natural resources to pursue domestic economic policies regardless of WTO obligations – is somehow reflected in Article XX(g). China characterizes this as an issue of “sovereignty” over its natural resources, and also purports to find support in the principles of “conservation” and “sustainable development.”’ China- Exportation of Raw Materials Case.
China argued that conservation measures justified its reduction in exports of the nine metals failed to meet the GATT Article XX (b) and (g) exceptions because they did not also implement domestic conservation regulations.
The decision on Tuesday concluded that Chinese quotas, export duties and license requirements put in place a discriminatory system for the sale overseas of industrial raw materials widely used in the steel, aluminum and chemicals industries, including coke, zinc and bauxite.” New York Times
The WTO DSB rejected China’s claim, deciding that their motivation was not to protect the environment but rather protectionism. Interestingly, the Panel found that China’s Protocol of Accession does not include language that permits Article XX exceptions. Even if China was able to rely on Article XX exceptions, it failed to comply with the domestic requirements.
Under the Article XX exceptions, a country may halt exports for a number of specific reasons. Under Article XX (b), often invoked to justify environmental measures, These measures must be indispensably “necessary” to protect human, animal or plant life and health or risk, and the measure must be to reduce the risk. Additionally, Article XX (g) includes an exception for a measure “relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption.”
The Chinese news agency, Xinhua, responded that the WTO DSB decision harmed China’s ability to protect their natural environment and inhibited the principle of sustainable development.
It is beyond reproach that the Chinese government reinforces the administration of the mining, refining and export of these raw materials in its own country as a responsible government for its people and the ecosystem… China’s limits on the export of these raw materials are aimed at saving the resources for future generations. In the long run, the efforts are not only beneficial to China but also to the world…It is to be hoped that related trade parties can acknowledge China’s goodwill and unremitting efforts, address trade disputes through negotiations, safeguard fair competition and jointly advance the sustainable development of human beings.” Xinhua.
Furthermore, in a statement issued in Geneva after the WTO decision, China said that ‘that although these measures have certain impact on domestic and international users, they are in line with the objective of sustainable development promoted by the W.T.O. and they help to induce the resource industry toward healthy development.’” New York Times.
After the WTO DSB decision, China has the choice to either appeal the decision; face trade sanctions from the U.S., E.U. and Mexico; or accept the decision and change their regulations to comply.
The Implications for China’s Rare Earth Metals
In early 2011, China cut the quotas for several minerals, including rare earth metals by 35 percent, citing environmental concerns.
Insisting that [China’s] high output levels are unsustainable and damaging to the environment, the central government slashed rare earth export quotas by 35 percent for the first half of 2011, building on previous quota cuts.” Reuters.
Due to the increasing demand and now limited supply, the prices of these rare earth metals doubled in the first four months in 2011. Some of the rare earth metals have a very high value on the market. For example, neodymium, which is used in hybrid car batteries, was worth $129 U.S. dollars a pound in May 2011. Another rare earth metal, samarium, crucial to the manufacture of missiles, increased from $18.50 in 2010 to more than $146 a kilogram in mid-2011. Europium oxide is worth $2,904 per kilogram. These prices already increased four times in 2011.
The countries, which protested the decreased quotas for rare earth exports, voiced their concerns over the type of trade measures that the WTO tries to prevent: protectionism, scarcity, and sudden price hikes
However, in response to the WTO ruling, the Ministry of Commerce said it would reform their export practices “according to relevant laws and World Trade Organization rules” for not only the raw materials, but also for rare earth metals.
The WTO DSB panel decision caused China to reevaluate their rare earth metal export policy. Speaking at a rare earth export conference in Baotou, Inner Mongolia, Ministry of Commerce’s vice commerce minister Zhong Shan spoke about the recent WTO decision and its effects on China’s rare earth exports.
Rare earths are a non-renewable and important strategic resource… Strengthening and perfecting rare earth exports has great significance in protecting the natural resource environment and promoting the restructuring of industry.” Reuters.
After the WTO DSB decision in July 2011, China decided to appeal the certain legal interpretations within the DSB decision on 31 August 2011.
Combating Environmental Degradation and Illegal Mining
The increasing the extraction of rare earth metals has environmental consequences, such as air and water pollution and radioactive residues, as well as illegal mining problems.
“First, illegal rare earth exploitation is severe and rare earth smelting is expanding in a disorderly manner. Second, the ecological environment is being badly damaged by the industry. Third, the waste left over by rare earth exploitation and smelting is very harmful and difficult to deal with. Fourth, the comprehensive utilization of rare earth resources is still insufficient.” People Daily.
Beginning in August 2011, China shut down three rare earth metal mines, citing environmental concerns over pollution control. The Chinese government acknowledges the growing problem of illegally mined or smuggled rare earth metals that will eventually enter the export market. The high prices of these rare earth metals, their relative abundance, and a weak regulatory regime creates incentives for illegal mining. To combat this problem, the Chinese government announced a value-added tax invoice as proof that the rare earth metals were mined legally.
Furthermore, the government has moved to consolidate the rare earth mining industry into the government-controlled ore-mining conglomerate Bao Gang Rare Earth, close 31 privately owned rare earth processing companies, and merge four other companies. Also, the government plans to consolidate the rare earth metals originating in southern China into three companies, where the government owns most of the shares.
More cynical views point to how China will use the international trade law’s environmental exception to justify their actions.
China says it has largely shut down its rare earth industry for three months to address pollution problems. By invoking environmental concerns, China could potentially try to circumvent international trade rules that are supposed to prohibit export restrictions of vital materials.” New York Times.
Considering the WTO DSB ruling on the raw materials restrictions, any environmental regulations would be placed under the same Article XX (b) and (g) scrutiny, and thereby must satisfy the General Exceptions criteria. The WTO would be more likely to find a similar outcome as the China- Raw Materials case, where the environmental measures will be found in violation, unless the Chinese government also regulates domestic consumption. The Article XX (b) and (g) exceptions can be harder to satisfy, as the central purpose of the WTO is to preserve free trade.
This post was extracted from a 7-page memo on the topic. The full memo can be found here.
