Rare Earths, Tungsten and Molybdenum Lindsey Constantino, Mayada Al Turki, Yichun Chen Global Trade Relations October 17, 2017

“The Middle East has oil, China has rare earths” Deng Xiaoping, January 1992 (Lindsey) 97% of the world’s rare earth metals are produced in China. Deng Xiaoping, 1978-1997

What are rare earths and why are they important? Modern life depends on rare earth metals. Toyota Prius contains 25 pounds of rare earths. iPhone 6 contains .01 ounces of rare earths. The United States used to produce it’s own rare earth metals, but environmental restrictions and health concerns ended production. September 2010, Japan and China had a maritime border dispute and China responded by stopping all rare earth metal shipments to Japan. (Lindsey) Rare earths are raw materials used in the production of various kinds of electronic goods o Export restrictions: export duties, export quotas, minimum export price requirements, export licensing requirements and additional requirements and procedures in connection with the administration of the quantitative restrictions. - Duties: China argued that the export duties are necessary to protect human, animal and plant life and health from the pollution caused by mining the products at issue. - Quotas: China argued that the restrictions are related to the conservation of its exhaustible natural resources, and necessary to reduce pollution caused by mining. -Trading Rights: China imposes certain restrictions on the right of enterprises to export rare earths and molybdenum. - relate to the conservation of exhaustible natural resources.

Industries Affected U.S. Rare Earths- $300 billion Advanced electronics, hybrid car batteries, flat-panel displays, mobile phones, disk drives, wind turbines, energy-efficient lighting, steel, medical imaging equipment, automobiles, petroleum and chemicals. Tungsten and molybdenum - $75 million Steel industry E.U. Rare earths More than 50% of cost for wind turbine components and 50% to 60% for an LCD display. (lindsey) EU Rare Earths - Therefore, the price difference can carry a decisive competitive disadvantage for components' makers outside China.”

(Lindsey)

China’s Production of Rare Earths China's share of global production grew from 27% in 1990, to 97% in 2012. The high concentration of these raw materials in China creates a situation of dependence for global manufacturers outside of China The rare earth industry was identified as a strategic sector for China's economic development that would be carefully protected and fostered under state control and planning. As a result, all foreign investment was prohibited in the mining of rare earths. (Lindsey) China currently supplies 97% of global demand for rare earth metals Produces 60% of rare earth manufactured products After China reduced its exports, many firms moved their operations to China

The Black Market The rare earth black market is a open dirty secret. In 2009, as a result of a cut in exports, the price of rare earths increased and stimulated the black market to grow. In 2011, overseas rare-earth import statistics were 1.2 times that of China's customs export statistics. (Yichun) In 2011, overseas rare-earth import statistics were 1.2 times that of China's customs export statistics. Compared with China’s share of global production, the

History March 13, 2012 - U.S. requests consultations with China regarding rare earths. July 23, 2012 - Establishment of Panel March 26, 2014 - Circulation of Panel Report August 7, 2014 - Circulation of AB Report August 29, 2014 - Adoption (Lindsey) White House Rose Garden Announcement, March 2012 Pictured left to right: Secretary of Commerce John Bryson, President Obama, United States Trade Representative Ron Kirk. New York Times.

Previous Actions 2009: EU, U.S., and Mexico launched first formal complaint in the WTO against China's export restrictions on nine raw materials. The WTO Dispute Settlement Body ruled against China in its July 2011 judgement. Following an appeal by China, the WTO Appellate Body confirmed the judgement in January 2012. China has made no attempt to remove its other export restrictions. This left no choice to the EU but to challenge China's export regime again to ensure fair access for European businesses to these materials. (Lindsey) https://archive.intereconomics.eu/year/2013/4/chinas-growing-conflict-with-the-wto-the-case-of-export-restrictions-on-rare-earth-resources/

China’s Justification Issue Justification Export Duties Article XX of GATT “General Exceptions” Quotas Article XX(g) of GATT 1994 (Yichun) Export duties: In this case, China argued that the export duties are necessary to protect human, animal and plant life and health from the pollution caused by mining the products at issue. (US argued that the “General Exceptions” are not available to justify breaches of China’s obligation to eliminate export duties contained in China’s Accession Protocol and that, in any event, China’s export duties were not necessary for the protection of human, animal or plant life or health Majority of panel agreed Quotas: China argued that they are justified under the exception in Article XX(g) of the GATT 1994, since they relate to the conservation of an exhaustible natural resource. Panel did not agree. found that China’s export quotas were designed to achieve industrial policy goals rather than conservation The Panel agreed with China that the term “conservation” in Article XX(g) means more than simply “preservation” of natural resources, and that every WTO Member can take its own sustainable development needs and objectives into account when designing a conservation policy, in accordance with the general international law principle of sovereignty over natural resources reflected in various United Nations and other international instruments. However, the Panel held that “conservation” does not allow Members to adopt measures to control the international market for a natural resource, which is what the challenged export quotas were, in the view of the Panel, designed to do.

U.S., EU, and Japan Justification Country Justification United States Export restraints give China the ability to affect global supply and pricing on key inputs in the production of products such as wind turbines, advanced electronics, and cars. Inconsistent with GATT 1994 and China’s Protocol of Accession European Union Export restrictions distort market and create competitive advantage for Chinese manufacturing industry Japan China’s export restriction have caused a short supply of materials in the international market (Yichun) Business and Politics: - US: China’s export restraint measures gave China the ability to significantly affect global supply and pricing. It said that the materials at issue are key inputs in the production of a wide range of important products, such as hybrid car batteries, wind turbines, automobiles and advanced electronics. It added that the export restraints appeared to be inconsistent with the General Agreement on Tariffs and Trade (GATT) 1994 and China’s Protocol of Accession. - EU: China’s export restrictions significantly distort the market and create competitive advantages for the Chinese manufacturing industry to the detriment of foreign competitors. It said these policies put pressure on foreign producers to move their operations and technologies to China. It recognized environmental protection and sustainable resource management as legitimate aims but strongly believed that export restrictions are not the appropriate tools to promote these aims. - Japan: the materials at issue are used by its industry in the production of various final products, such as catalysts and polishing media. China’s export restrictions have caused a short supply of the materials in the international market and significant price differences between China’s domestic market and export market. It said that Japanese manufacturers have faced difficulty in purchasing the materials from China, putting them at a disadvantageous position with their Chinese counterparts.

GATT 1994 Article Summary of Article Article VII Valuation for Customs Purposes - How to determine the customs value in cases where it cannot be determined under the provisions of any of the preceding Articles. Article VIII Fees and Formalities connected with Importation and Exportation - Fees imposed by contracting parties in connection with importation or exportation shall be limited in amount to the approximate cost of services. Article X Publication and Administration of Trade Regulations - Laws and regulations need to be published promptly to enable governments to become acquainted with them. Article XI General Elimination of Quantitative Restrictions - No prohibitions other than duties, taxes shall be instituted or maintained by any contracting party on the importation of any product. (lindsey) Articles VII, VIII, X and XI of the GATT 1994

China’s Protocol of Accession Paragraph Summary Paragraph 1.2 General Provisions - The WTO Agreement to which China accedes shall be the WTO Agreement as rectified, amended or otherwise modified by such legal instruments as may have entered into force before the date of accession. Paragraph 2(A)2 Administration of the Trade Regime - China shall administer in a uniform, impartial and reasonable manner, all its laws, pertaining to or affecting trade in goods, services, trade-related aspects of intellectual property rights ("TRIPS") or the control of foreign exchange. Paragraph 2(C)1 Administration of the Trade Regime - China undertakes that laws and regulations pertaining to or affecting trade in goods, services, TRIPS or the control of foreign exchange that are published and available to WTO Members. (Lindsey) paragraphs 1.2, 2(A)2, 2(C)1, China’s Protocol of Accession,

China’s Protocol of Accession Paragraph Summary Paragraph 5.1 Right to Trade - Within 3 years, all enterprises have the right to trade. All goods shall be accorded national treatment under Article III of the GATT 1994 Paragraph 5.2 Right to trade - All foreign individuals and enterprises shall be given treatment no less favourable than that to enterprises in China. Paragraph 7.2 Non-tariff measures - In accordance with Articles III and XI of GATT 1994 and the Agreement on Agriculture, China shall eliminate and shall not introduce non-tariff measures that cannot be justified under the provisions of the WTO Agreement. (Lindsey) 5.1, 5.2, 7.2, 8.2 and 11.3 of Part I of China’s Protocol of Accession,

China’s Protocol of Accession Paragraph Summary Paragraph 8.2 Import and Export Licensing - Foreign individuals and enterprises and foreign-funded enterprises shall be accorded treatment no less favorable than that accorded to other individuals and enterprises. Paragraph 11.3 Taxes and Charges Levied on Imports and Exports - China shall eliminate all taxes and charges applied to exports unless specifically provided for in Annex 6 of this Protocol or applied in conformity with the provisions of Article VIII of the GATT 1994. (Lindsey)

Panel Decision Panel found that the challenged export quotas do not work together with measures restricting domestic Chinese use of rare earths, tungsten, and molybdenum, as required by the second part of Article XX(g). The overall effect of the foreign and domestic restrictions is to encourage domestic extraction and secure preferential use of those materials by Chinese manufacturers. The Panel concluded that the “even-handedness” required by the Appellate Body under Article XX(g)had not been met, and hence the quotas could not be justified under that provision (Yichun)

Implementation December 8, 2014: China and the United States agreed that the reasonable period of time for China to implement the DSB recommendations and rulings is 8 months and 3 days, or May 2nd , 2015 May 20, 2015: China informed the DSB that, export duties and export quotas and the restriction on trading rights of enterprises exporting rare earths and molybdenum had been removed. (Yichun) from the date of adoption of the Appellate Body and panel reports. Accordingly, the reasonable period of time expired on May 2nd 2015 China informed the DSB that, the application of export duties and export quotas to rare earths, tungsten and molybdenum as well as restriction on trading rights of enterprises exporting rare earths and molybdenum which were found to be inconsistent with WTO rules, had been removed.

U.S. Trade Representative 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,” Froman said. “WTO rules prohibit this kind of discriminatory export restraint and this win today, along with our win two years ago in an earlier case, demonstrates that clearly.” “Both established and emerging sectors are touched by this decision, as is our current and future ability to grow our economy and create jobs,” Froman added. “U.S. manufacturers have faced pressure to scale back their operations or relocate their facilities, their jobs and their technology to China. We will not allow that type of pressure, in breach of WTO rules, to go unchallenged.” (lindsey) noted before china’s appeal. March 2014. 2012 - ruling Froman hopes that the panel’s ruling “will discourage further breaches of WTO rules that hurt American manufacturers.”

Rare Earth Industry in China Today Under the new guidelines, rare earth minerals will still require an export license in China but the amount that can be sold abroad will no longer be covered by a quota During 2015, the price of rare earths decreased by 5% to 25%. China published policies forcing State-Owned-Enterprises to put rare earths under state control after the removal of restrictions. It is too early to see how implementation effect rare earth industry. (Yichun)

References Gavin, B. (2013, August). China's growing conflict with the WTO: the case of export restrictions on rare earth resources. Retrieved from https://archive.intereconomics.eu/year/2013/4/chinas-growing -conflict-with-the-wto-the-case-of- export-restrictions-on-rare-earth-resources/ Pruzin, D. (2014, March 28). WTO rules against china On rare earths export restrictions. Retrieved from https://www.bna.com/wto-rules-against-n17179889210/ Office of the US Trade Representative. (2014, March). United States wins victory in rare earths dispute with China: WTO report finds China’s export restraints breach WTO rules. Retrieved from https://ustr.gov/about-us/policy-offices/press-office/press- releases/2014/March/US-wins- victory-in-rare-earths-dispute-with- China

Further Reading: 60 Minutes Segment: https://www.cbsnews.com/news/rare-earth-elements-china- monopoly-60-minutes-lesley-stahl-2/ New York Times, “China Tries to Clean Up Toxic Legacy of its Rare Earth Riches” http://www.nytimes.com/2013/10/23/business/international/china-tries-to-clean- up-toxic-legacy-of-its-rare-earth-riches.html