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.