WTO rules against China on ‘rare earths’ export restrictions

Ren Limin, a worker at the Jinyuan Company's smelting workshop, prepares to pour the rare earth metal Lanthanum into a mould

A Chinese woker prepares to pour the rare earth metal lanthanum into a mould

The World Trade Organisation has ruled against China and its export restrictions on rare minerals vital to the production of smartphones, cameras, steel and hybrid cars in a significant victory for the US, EU, and Japan.

The WTO said Beijing had for years used trade policy to control key markets for strategic commodities and encourage manufacturers to move their operations to China.

The ruling was welcomed by trade officials in the US, Japan and Europe who had complained that the export restrictions gave unfair advantage to Chinese companies.

“Today’s ruling by the WTO on rare earths shows that no one country can hoard its raw materials from the global marketplace at the expense of its other WTO partners,” said Karel De Gucht, EU trade commissioner.

China accounts for 90 per cent of the world’s production of the 17 elements – including lanthanum, tungsten, neodymium and molybdenum – collectively known as rare earths.

Beijing’s export restriction, first introduced in 2009, caused a surge in prices around the world in 2011. The cost of some rare earths soared by as much as 500 per cent amid fears of global shortages.

The Chinese restrictions also prompted a flurry of new investment in rare earths mines in places such as the US and Australia, aimed at breaking Beijing’s stranglehold. Last year, Japanese scientists also claimed to have discovered vast deposits of rare earths on the Pacific ocean floor.

But the more immediate fight has been at the WTO, where Japan, the US and EU lodged complaints in 2012.

China argued that the export restrictions were driven by a need to conserve the minerals and protect the environment. The WTO panel rejected that argument.

Michael Froman, the US trade representative, told reporters that some US manufacturers had to pay three times more than their Chinese competitors for the same rare earths.

“China’s actions unfairly deny unlimited access to key raw materials. . . This ruling will mean American companies and workers throughout our manufacturing economy will be able to compete fairly,” he added.

The rare earths case is unlikely to end with Wednesday’s ruling, however. Beijing has 60 days to appeal. China’s commerce ministry expressed “regret” at the WTO decision and said it was assessing the report.

China said that the “regulatory” measures taken on rare earths “are perfectly consistent with the objective of sustainable development promoted by the WTO, and contribute to the co-ordinated development of resources, environment and human beings”.

The WTO panel said it had sought to reconcile the UN principle of countries’ “permanent sovereignty” over natural resources with global trade rules. It concluded that once they were extracted from the ground and put on to the market for sale, natural resources should be subject to WTO rules. This could make it harder for other countries to impose or maintain export restrictions on raw materials.

Wednesday’s ruling is also about a much longer, broader battle under way between China and the US over industrial policy and how Beijing has used it to benefit from globalisation.

For decades, China has used low-cost labour, requirements for foreign companies to produce locally and cleverly constructed restrictions on the trade in key raw materials to develop its manufacturing base. The result has been China’s rapid development as a key link in global supply chains and, critics of globalisation claim, the hollowing out of the manufacturing sector in the US and Europe.

The latest finding follows an earlier ruling in which the WTO said China’s export restrictions on nine more common commodities, including bauxite and zinc, violated global trade rules. It was widely seen as laying the groundwork for the rare earths case, especially as China has since complied with the ruling.

Wednesday’s WTO ruling – part of which was first reported in October – was greeted with dismay by an official at the Chinese Society for Rare Earths, which helps set government policy for the minerals.

“I think China will definitely appeal because the WTO ruling is unfair,” she said. In Washington, key lawmakers hailed the ruling, which could help the Obama administration make the case that it is taking a tough stance on the enforcement of global trade laws and successfully challenging other countries at the WTO.

“The WTO decision sends a strong message to China that its mercantilist trade restrictions on rare earth elements have no place in the 21st century,” said Ron Wyden, the Democratic chairman of the Senate finance committee.

President Barack Obama is facing trouble garnering political support for trade deals with the EU and 11 Pacific nations, but more WTO cases – and victories – could help bring some members of Congress on board.