DISPUTE SETTLEMENT DS394 / CHINA – MEASURES RELATED TO THE EXPORT OF VARIOUS RAW MATERIALS Presented by Dominika Kobylinska, Tyler Krouse, and Kuan An Liao March 28, 2016

Background Rare earth revolution began in the United States with the discovery of high concentrations of europium, a lanthanide, in California’s Mojave Desert For decades, Molycorp’s Mountain Pass rare earth facility mined the majority of rare earths 1992 – Deng Xiaoping delivered a mostly unnoticed speech: “There is oil in the Middle East; there is rare earth in China.” China increased their production of rare earths and, by the late 1990s, flooded the markets

Background (2) Chinese producers supplied rare earths at lower prices, which were facilitated by (1) the lack of environmental constraints, (2) lower labor costs, and (3) far less safety concerns for their workers As such, other producers give up. After an environmental disaster in 1998, Molycorp closes the Mountain Pass facility in 2002 Until China tried to exercise its monopoly (the cause of this dispute), the United States was more than happy to pay “all we can eat” prices (Worstall 3) China supplied approx. 90% to 95% of rare earths, until recently The New York Times states, “Sharply raising the stakes in a dispute over Japan’s detention of a Chinese fishing trawler captain, the Chinese government has blocked exports of a crucial category of minerals used in products like hybrid cars, wind turbines and guided missiles.” (Sept. 22, 2010)

Courtesy of ment/2012/aug/07/china-rare-earth- village-pollution ment/2012/aug/07/china-rare-earth- village-pollution High levels of pollution in Baotou, China’s largest industrial city in Inner Mongolia / rare earths are mined north of the city in the Bayan Obo Mining District Open pit mine at the Mountain Pass facility, courtesy of california-challenges-china-in-rare-earths- mining california-challenges-china-in-rare-earths- mining “So ramping up production would mean that Western countries would need to tolerate a level of pollution they’ve been all too happy to outsource to China,” said Tim Worstall, a Senior Fellow at the Adam Smith Institute and a rare earths dealer

Context of the Case With China’s accession to WTO (11 December 2001): - China undertook to eliminate all export duties (taxes) except for a number of products listed in the 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). Despite China’s the accession to WTO: - China imposed restraints on the exports from China on various forms of raw materials; prices soared by hundreds of percent, the restrictions gave Chinese companies an unfair competitive edge.

Graphs courtesy of According to the U.S. Trade Rep. Michael Froman: China’s decision to promote its own industry and discriminate against U.S. companies has caused U.S. manufacturers to pay as much as three times more than what their Chinese competitors pay for the exact same rare earths.

Context of Case, continued On 23 June 2009, the United States requested consultations with China with respect to China's restraints on the export from China of various forms of raw materials. This dispute concerns four types of export restraint and certain measures imposed by China on the export of a number of raw materials: (1) Export Duties, (2) Export Quotas, (3) Minimum Export Price Requirements, and (4) Export Licensing Requirements

The Position of the Main Parties This dispute concerns four types of export restraint and certain measures imposed by China on the export of a number of raw materials. China also committed not to apply EXPORT QUOTAS (restrictions on the amount that can be exported). 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 Complainant (United States) The complainant (U.S.) 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.

The Complainants: EU, Canada, & Mexico The European Union, Canada and Mexico also requested to join the consultation. Before the Panel, the United States, Mexico, and the European Union challenged the above four types of export restraints imposed on the different raw materials at issue. The complainants alleged that these export restraints were inconsistent with China's Accession Protocol and Articles VIII:1(a), X:1, X:3(a), and XI:1 of the GATT 1994.

China’s Defense Export duties and quotas were justified because they related to the conservation of exhaustible natural resources for some of the raw materials. China was not able to demonstrate that it imposed these restrictions in conjunction with restrictions on domestic production or consumption of the raw materials. 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.

Proceeding June 2009 – the U.S. requested consultations with China July 2009 – the European Communities requested to join the consultations July 2009 – Canada, Mexico, and Turkey also requested to join the consultations November 2009 – the U.S. requested the establishment of a panel. At its meeting on 19 November 2009, the DSB deferred the establishment of a panel December 21, 2009 – the DSB established a single panel, pursuant to Article 9.1 of the DSU, to examine this dispute and DS395 and DS398 July 5, 2011 – the panel report was circulated to Members January 30, 2012, the Appellate Body report circulated to Members

Key findings by the Panel 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 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 China's export licensing regime, restricting the export of the raw materials are inconsistent with WTO rules. The complainants were successful in most of their trading rights claims.

Later proceedings 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. On August 31, 2011, China notified the DSB of its decision to appeal certain issues of law and legal interpretations of the panel report. On September 6, 2011, the United States notified the DSB of its decision to appeal certain issues of law and legal interpretations of the panel report. The Appellate Body report was circulated to Members no later than January 31, 2012.

The Appellate Body The Appellate Body upheld the Panel's recommendation that China bring its EXPORT DUTY and EXPORT QUOTA measures into conformity with its WTO obligations. The Appellate Body upheld the Panel's finding that there is no basis in China's Accession Protocol to allow the application of Article XX of the GATT 1994 to China's obligations under Paragraph 11.3 of the Accession Protocol. The Appellate Body concluded that a proper interpretation of Paragraph 11.3 of China's Accession Protocol does not make available to China the exceptions under Article XX of the GATT 1994 to justify export duties that are found to be inconsistent with China's obligations under Paragraph The Appellate Body upheld the Panel's conclusion that China did not demonstrate that its export quota on refractory-grade bauxite was “temporarily applied” to either prevent or relieve a “critical shortage”, within the meaning of Article XI:2(a) of the GATT 1994.

The Specific WTO Agreement and Provisions Involved CHINA IS IN VIOLATION OF: Articles VIII, X, and XI of the GATT 1994 Articles VIII Fees and Formalities connected with Importation and Exportation Article X Publication and Administration of Trade Regulations Article XI General Elimination of Quantitative Restrictions Paragraphs 5.1, 5.2, 8.2, and 11.3 of Part I of the Protocol on the Accession of the People's Republic of China (“Accession Protocol”)

Implementations and Sanctions On 17 January 2013, China and the United States informed the DSB of Agreed Procedures under Articles 21 and 22 of the DSU. At the DSB meeting on 28 January 2013, China reported that on 28 December 2012, the General Administration of Customs of China had promulgated the 2013 Tariff Implementation Program. On 31 December 2012, the Ministry of Commerce of China and the General Administration of Customs of China had jointly promulgated the 2013 Catalogue of Goods Subject to Export Licensing Administration. The application of export duties and export quotas to certain raw materials had been removed. Both notices had taken effect on 1 January Through those measures, China had fully implemented the DSB's recommendations and rulings in these disputes.

Observations With the accession, China has to follow the basic requirements of the WTO membership: transparency of the trade regime; uniform, non- discriminatory application of trade rules, otherwise it will be held accountable if not complying with the WTO trade regulations. China overplayed its hand: “China’s monopoly only had been won by low prices that accrued to our benefit.” Their monopoly was broken, as soon as they tried to profit from that monopoly. The United States was more successful in the WTO dispute because China limited exports of raw materials, but NOT anything made from those raw materials.

Observations, continued The free market prevailed: more mines outside of China opened up and scientists increasingly looked for cheaper and safer alternatives to separate lanthanides Tim Worstall states, “Supply went up and demand went down in other words. Thus the Chinese monopoly was broken and prices fell back. All of which teaches us something useful about monopolies. Where a monopoly is contestable we don’t in fact have to worry about it very much. China was selling us all the rare earths we wanted, at prices we were happy to pay, for decades. So, they had a monopoly? So what? As soon as they actually tried to take advantage of that monopoly then it all fell apart for them. They actually, by attempting to restrict supply, managed to call into being their own competition.”