DS394: China – Measures Related to the Exportation of Various Raw Materials Lloyd – Luo – Martin

“Access to raw materials, including imported materials, determines in a sense the ‘heartbeat’ of an economy” http://www.oecd.org/tad/benefitlib/export-restrictions-raw-materials-2014.pdf -Barbara Fliess, Christine Arriola and Peter Liapis Recent Developments in the use of export restrictions in raw materials trade

Trade Battle Over Raw Materials https://www.youtube.com/watch?v=tij6y8CtRQI Link to Bloomberg News Video

Key Facts Complainant: United States – DS394; (European Union – DS395); (Mexico – DS398) Third Parties: Argentina, Brazil, Canada, Chile, Colombia, Ecuador, European Union, India, Japan, Korea, Mexico, Chinese Taipei, Turkey, Saudi Arabia Respondent: China Measure at issue: Export restraints imposed on the different raw materials. Product(s) at issue: Certain forms of bauxite, coke, fluorspar, magnesium, manganese, silicon carbide, silicon metal, yellow phosphorous, and zinc Lloyd References: https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds394_e.htm

History and Context Accelerated economic growth in developing countries in the 2000s increased global demand for raw materials Between 2000 – 2010 there was an 82% increase in steelmaking capacity leading to an increase in demand for raw materials Surge in demand for raw materials was unexpected, resulting in a significant imbalance in the market – as competition increased, so did the number of policy measures to restrict exports from resource-rich countries China’s rapidly growing industries unable to meet their mineral needs from domestic supplies China maintained export restraints on raw material inputs they are leading world producers of Restraints created competitive advantages for China, while placing serious disadvantage to the US and other foreign manufacturers in downstream industries Export quotas limited foreign access Export duties raised export price for raw material inputs Other fees and barriers (e.g. export licensing) limited eligible exporters This increased world prices – distorting the global market Export restraints increased availability in China, lowering domestic prices, producing significant cost savings for China’s downstream producers that compete globally First case brought to the WTO by the Obama Administration Case was filed in 2009 during the recession where countries were trying to protect their domestic companies Lloyd References https://www.ft.com/content/d594245e-600a-11de-a09b-00144feabdc0 https://ustr.gov/about-us/policy-offices/press-office/fact-sheets/2009/june/wto-case-challenging-chinas-export-restraints-raw-materi https://www.oecd.org/sti/ind/50494260.pdf

Raw Materials of Concern Use Bauxite Chief commercial ore of aluminum Coke Key steel input (used as main fuel and reductant in a blast furnace) Fluorspar Primary uses are in the metallurgical, ceramics, and chemical industries (refrigerants, glass, metals, fluoride) Manganese Steel production, Aluminum Alloys (soda can), Batteries, fertilizers, ceramics Silicon Carbide Automobile parts, electric systems, bulletproof vests Silicon Metal Steel refining, aluminum-casting, chemical industries, electronics (computers, cell phones, etc) Yellow Phosphorus Fertilizer, steel production, matches, laundry detergent, soft drinks, weapons Zinc Anti-corrosion agent (coating iron or steel), batteries, fire retardant, X-ray, television screens, Lloyd

Example – Coke Background: Issue: Consequence: Coke is a key steel input Coking coal demand rose from 954 mmt to 1,805 mmt (+85%) between 2000-2010 A tonne of steel production requires 0.6 tonnes of coking coal 2008: China is the world’s leading producer of coke, accounting for 60% of global production China’s production totaled 336 million metric tons (MY) Issue: China placed export quotas on coke that limited annual exports to only 12 million MT China placed duties on coke allowed to be exported (25% - 40%) Consequence: World price for finished steel = $1,150 per MT China’s domestic price for coke was $472 per MT, while world price was $740 China’s competitive advantage = $268 less input cost for coke than their foreign competitors Price of Coke before/after DSU: $6.89 per million BTU in 2011 vs 4.16 in 2015 Lloyd References: https://ustr.gov/about-us/policy-offices/press-office/fact-sheets/2009/june/wto-case-challenging-chinas-export-restraints-raw-materi https://www.oecd.org/sti/ind/50494260.pdf https://www.eia.gov/state/seds/data.php?incfile=/state/seds/sep_prices/total/pr_tot_US.html&sid=US

Contested Issues and Law Provisions Luo

Key Arguments US, EU, Mexico China Export restraints have proliferated despite China’s commitments to WTO China Restraints are required to protect scarce resources and ensure a healthy population Lloyd

Complaint by the United States China was imposing four types of restraints on the exports of raw materials: export duties, export quotas, export licensing, and minimum export price requirements Not in conformity of the following: GATT 1994 Article VIII: (1a), VIII:4, X:1, X:3(a), and XI:1 Part I of China’s Accession Protocol to WTO Paragraph 1.2, 5.1, 5.2, 8.2, and 11.3 Luo

China Accession Protocol Paragraph 1.2: Protocol is an integral part of China’s WTO Agreement – Legal Instrument 5.1: Right to regulate Trade [Imports/Exports] in a manner consistent with WTO Agreement 5.2: Foreign Individuals and Enterprises should received same treatment as those enterprises in China with respect to the right to trade 8.2: Foreign Individuals and Enterprises should received same treatment as those enterprises in China with respect to the distribution of import and export licenses and quotas 11.3: Eliminate all taxes and charges applied to exports, except those listed in the Annex or applied in conformity with Article VIII GATT 1994 Article VIII GATT 1994: Fees and Charges related to import/export

GATT 1994 Articles VIII: reduce fees, charges and complexities relating to importation and exportation 1(a): Fees and Charges related to import/export should represent the cost of the services and not for protection to domestic products or fiscal purposes 4: extend the application to other items related to importation/exportation: consular transactions, quantitative restrictions, licensing, exchange control, statistical services, documents and certifications, analysis and inspection, quarantine, sanitation and fumigation X: Publication of Trade Regulations 1: Transparent and prompt publication of requirements and regulations for trade measures 3(a): administer the published trade measures uniformly and impartially XI: Generation Elimination of Quantitative Restrictions 1: Restrictions or prohibitions should be in form of duties, taxes, or other changes (tariffs) whether made effective through quotas, import/export licenses or other measures

Complainants Provisions Para. 11.3 of China's Accession Protocol Elimination of all taxes and charges to export Temporary Export Duties Article XI:1 GATT 1994 No measures other than duties, taxes, or changes shall be applied to contracting parties of the destination countries for exports (tariffs only) Export Quota/Licensing Paragraph 5.1, 5.2 of China's Accession Protocol Regulation not consistent with WTO Agreement Different treatment for foreign enterprises Minimum/Prior Export Performance and Minimum Capital Requirement Article X:3(a), XI:1 Not a type of duty or taxes applied – restrictions should be in a form of tariffs Trade measures should be applied uniformly and impartially Minimum Export Price Article X:3(a) Partial and unreasonable administration of law, and regulations Export Quota - determining if applicants satisfy the conditions for export quota Article VIII:1(a) and Para. 11.3 of China's Accession Protocol Fees should be close to the cost services rendered Export Quota Bid Winning Fee Article X:1 Failure to publish certain measures providing rules and details on how the export prices are coordinated Publication of Minimum Export Price Requirements Luo

China Arguments GATT Exceptions International Law Exceptions in Article XX(b), XX(g) and XI:2(a) of GATT 1994 Conserve Exhaustible Natural Resources Protect Public Health and material shortages essential to the exporting country Right to regulate exports of its raw materials and resources on the basis of the principle of sovereignty Luo

WTO PROCEEDINGS Lloyd

Timeline of Events June 2009 July 2009 November 2009 March 2010 Request for Consultation by US to China July 2009 EU (DS395), Canada (DS398), Mexico and Turkey requested to join the consultations China accepted November 2009 US requested the establishment of a panel March 2010 Panel formed July 2011 Panel Report sent to Members August 2011 China informed DSB that it will appeal certain issues September 2011 US also announced that it will appeal certain issues January 2012 Appellate Body Report circulated March 2012 China announced it will implement the DSB recommendations, but it will need some time May 2012 US and China notified the DSB that they agreed on a timeline for China to implement the recommendations January 2013 China reported that the recommendations were implemented Luo

Panel - Key Findings China’s export duties were inconsistent with the commitments that China had agreed to in its Protocol of Accession Export quotas imposed by China on some of the raw materials were inconsistent with WTO rules 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 argued that some export duties/quotas were to conserve exhaustible natural resources for some of the raw materials China was not able to demonstrate that it imposed these restrictions on domestic production or consumption to preserve the raw materials China was heading in the right direction to justify its quotas under WTO rules, but was not yet WTO- consistent China also claimed its export quotas/duties were necessary for the protection of the health of citizens China was unable to demonstrate the restrictions would lead to a reduction of pollution in the short- or long-term improvement of health China committed to eliminate all restrictions on the “right to trade” – rights given to enterprises by China. Complainants were successful in most of their trading rights claims China successfully defended its practices in claims brought by the US and Mexico regarding administration and allocation of its export quotas, whereas the EU succeeded in its separate claim that it brought Certain aspects of China’s export licensing regime restrict the export of the raw materials and were inconsistent with WTO rules Lloyd

Appellate Body – Key Findings Appellate Body found that the panel erred under Article 6.2 of the DSU to “provide a brief summary of the legal basis of the complaint sufficient to present the problem clearly” Appellate Body declared moot the Panel’s findings related to export licensing requirements, minimum export price requirements, China’s administration and allocation of export quotas, and fees and formalities in connection with exportation Appellate Body upheld Panel’s recommendation that China bring its export duty and export quota measures into conformity with its WTO obligations Appellate Body upheld 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 - China does not have recourse to justify a breach of its obligation to eliminate export duties Appellate Body upheld 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” Appellate Body reversed a Panel interpretation of the phrase “made effective in conjunction with” in Article XX(g), and saw that nothing in the text suggested that a trade restriction must be aimed at ensuring the effectiveness of domestic restrictions. 22 February 2012 – The DSB adopted the Appellate Body Report and the panel report, as modified by the Appellate Body report 1 January 2013 – China had fully implemented the DSB’s recommendations and rulings in these disputes Lloyd

“Today’s report is a tremendous victory for the U. S “Today’s report is a tremendous victory for the U.S. — particularly its manufacturers and workers…The Obama administration will continue to ensure that China and every other country play by the rules so that U.S. workers and companies can compete and succeed on a level playing field.” Ron Kirk, U.S. Trade Representative “(The ruling) sends a clear signal that such measures cannot be used as a protectionist tool to boost domestic industry at the expense of foreign competition.” Karel De Gucht, EU Trade Commissioner Lloyd

China’s Promises With its accession to the WTO, China made the following promises: To eliminate all export duties (taxes) except for certain 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). To not impose export quotas (restrictions on the amount that can be exported). 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.

Results and Sanctions China was required to be compliant on ruling and recommendations by Dec. 31st, 2012, after a ten month period. The application of export duties and export quotas to certain raw materials had been removed. Both notices had taken effect on 1 January 2013. Through those measures, China had fully implemented the DSB's recommendations and rulings in these disputes. Because China was compliant by the deadline, there was no reason to impose sanctions. However, they also added a couple of provisions: A tariff implantation program A catalog of goods for export licensing

Example – Fluorspar – Price Change Used to manufacture products such as aluminum, gasoline, insulating foams, refrigerants, steel, and uranium fuel China Share of Worldwide Production 2008: 55% 2014: 64% Prices of Imported Fluorspar in US 2008: $530-$550 USD/metric ton 2014: $340-$370 USD/metric ton Sources: http://www.compareyourcountry.org/trade-in-raw-materials?cr=oecd&lg=en&page=3&visited=1 https://minerals.usgs.gov/minerals/pubs/commodity/fluorspar/index.html#mcs

Observations As a result of DS394/DS395/DS498 Settlement China only removed the raw materials listed in the dispute in their 2013 Catalogue of Goods subject to Export Licensing Administration In 2014, a similar case (DS431/432) related to export restrictions was filed by US and EU against China for measures related to Rare Earths China lose the case and removed the restrictions In 2016, a new export restriction case was filed by US and EU (DS508/DS509) against China related to different types of raw materials According to an OECD study, the removal of export taxes in steel and steelmaking raw material markets would benefit both upstream and downstream industries, including in countries that remove their export taxes China continues to be one of the biggest producer in raw materials, however it still places many restrictions on its exports Can the WTO settlements “recommend/push” members to take a more proactive approach to review practices to similar materials Will we continue to see similar cases until WTO members submit all the raw materials export measures in compliance?

China Share of Global Production and Exports OECD Source: http://www.compareyourcountry.org/trade-in-raw-materials?cr=oecd&lg=en&page=0&visited=1

China Exports to EU in Specialty Metals https://resourcetrade.earth/data?year=2015&exporter=156&importer=eur&category=5&units=weight

China Export to US in Specialty Metals

Other Comments Market forces and innovation Could have China used the argument of “exporting of materials that might threaten national security” against the US since some of the materials are for military consumption [Article XXI:b] Future policy consideration for WTO “outsourcing of environmental destruction” Green Technology danger

OECD – Trade in Raw Materials: the case against restrictive export policies http://www.oecd.org/tad/benefitlib/export-restrictions-raw-materials.htm