China: World Trade Organization: Chinese Export Restraints Under Attacks

Copyright 2012, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on International Trade & Investment - China Focus, February 2012

In one of the most significant World Trade Organization (WTO) dispute settlement decisions in 2011 to impact China, a dispute settlement panel (Panel) ruled on July 5, 2011 that a number of measures taken by China to restrict the export of raw materials were in violation of WTO rules. This determination was largely confirmed by the WTO Appellate Body (AB) on January 30, 2012. This article briefly discusses the WTO Panel and the AB decisions and their likely impact on China's measures relating to the export of rare earths.

Background to the Dispute

In 2009, the U.S., the European Communities and Mexico filed complaints before the WTO Dispute Settlement Body against certain measures taken by China to restrict the exportation of raw materials. In January 2010, Canada announced that it would join the proceedings as a third party, which gave it a limited right to make submissions and participate in the oral hearings before the Panel.

The dispute related to China's use of export restraints on the exportation of certain forms of raw materials – in particular, bauxite, coke, fluorspar, magnesium, silicon carbide, silicon metal, yellow phosphorus and zinc. These raw materials are commonly used for a number of industrial applications, including in the chemical, steel, and aluminum industries, and are also used in the manufacture of a number of everyday items such as beverage cans, compact discs, electronics, automotives, ceramics, refrigerators, batteries and medicines.

The complainants alleged that the Chinese measures, which included: (1) export duties, (2) export quotas, (3) export licensing, and (4) minimum export prices, as well as the manner of administration and allocation of export quotas and alleged non-publication of certain measures, were in violation of the commitments that China made pursuant to its Accession Protocol when it acceded to the WTO and also in violation of certain provisions of the General Agreement on Tariffs and Trade (GATT).

The WTO Panel and AB Findings

The complainants argued that the export duties imposed on the raw materials were contrary to paragraph 11.3 of China's Accession Protocol which required China to eliminate taxes and charges on all exports beyond those specifically listed in an annex. The Panel agreed with the complainants' argument and found that the export duties on the raw materials (except one raw material which was in fact listed in the relevant annex) were in violation of China's Accession Protocol. The Panel also dismissed China's claim that its export duties were justified pursuant to Article XX(g) of the GATT which creates an exception for measures relating to the conservation of exhaustible natural resources. In this context, the Panel found that the words of paragraph 11.3 of China's Accession Protocol do not allow for Article XX to be invoked as an exception.

In relation to export quotas, the complainants argued that such quotas were in violation of Article XI:1 of GATT which prohibits any restrictions on exports other than duties, taxes or other charges, including those made effective through quotas. The Panel found that the relevant measures were indeed quotas and therefore in violation of Article XI:1 of GATT. China, on the other hand, argued that its measures were protected by the operation of Article XI:2(a) of GATT which exempts "temporary export prohibitions or restrictions" applied to "prevent or relieve critical shortages" of foodstuffs or other products "essential" to the exporting WTO member. The Panel found that China had not provided evidence that there was a "critical" shortage of the relevant raw material(s) or that the measures taken by China were "temporarily applied".

The complainants also argued that China's measures requiring licences for the export of the raw materials were inconsistent with Article XI:1 of GATT. The Panel found that the uncertainty in an applicant's ability to obtain a licence due to the uncertain nature of the licensing requirements amounted to a restriction on exportation in violation of Article XI:1. Similarly, with respect to measures setting a minimum export price for exports of certain raw materials, the Panel found that such a requirement, by its very nature, has a limiting or restricting effect on trade and is therefore in violation of Article XI:1 of GATT.

The AB noted that with respect to some of the claims by the complainants relating to export licensing requirements, minimum export price requirements and the administration and allocation of export quotas and fees, the complainants had failed to demonstrate the required linkages between the measures and the obligations in the relevant WTO agreements. It therefore declared the Panel's findings in regards to these claims to be of no legal effect. However, the AB largely upheld the Panel's findings.

Thus, on the whole, the WTO Panel and the AB found that the "series of measures" adopted by China to restrict the export of raw materials through export duty and export quota measures were in violation of China's WTO commitments and recommended that China bring its measures into conformity with its WTO obligations.

Implications of the WTO Decisions

A practical outcome of the Panel and the AB's decision is its impact on China's export measures relating to certain "rare earth" minerals such as cerium, dysprosium and lanthanum that are used in the manufacture of a number of goods such as flat-screen TVs, batteries, electric cars and wind turbines. China reportedly controls about 95% of the global production of rare earths and has adopted a policy that includes setting quotas for the export of rare earths and of requiring licences to export rare earths.

With the AB largely confirming the Panel's decision in relation to raw materials, China can be expected to closely review its export policy and measures regarding rare earths to deter potential WTO challenges. At the same time, lower demand for rare earths as a result of the global economic situation, which reportedly resulted in the export quota imposed by China for 2011 going partly unused, may reduce the likelihood of any immediate WTO challenge against China on rare earths. Thus, China's measures in relation to the export of rare earths will remain an area to monitor in 2012.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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