U.S. – China (Export of Raw Material) DS394 AB 2012 Team #5 Zhikuan L. JD L. Sarah M.

Cheap exploitation of raw materials inside China Leading up to case DS394: “Rare earths” not exactly rare, but the environmental restrictions surrounding the extraction & labor costs created obstacles for U.S. and other producers China had an advantage for supplying “rare earths” due to their minimal environmental policies, low labor costs, & overall ability to extract the material w/o restrictions China tried to monopolize “Rare earths” or “raw materials” consists of: bauxite, coke, fluorspar, magnesium, silicon carbide, silicon metal, yellow phosphorus, and zinc - used for electronics/technological devices & defense equipment Cheap exploitation of raw materials inside China Export restraints Unnecessarily higher prices for firms outside China & reasoning for this case

Leading up to case DS394: The Guardian states, “China has about 30% of global deposits of rare earths but accounts for more than 90% of production. It imposed export limits while it tried to build up domestic manufacturers to capture more of the profits that go to western and Japanese producers of mobile phone batteries and other products.” China claimed their reasoning for restraints was environmental; for conservation, but did not change methods of extraction or implement restrictions for industries inside China (Principle of non-discrimination applies) Source: https://www.theguardian.com/world/2015/jan/05/china-scraps-quotas-rare-earth-wto-complaint

Context: Time period is relevant; following 2008 financial crisis when governments were relying on exports to stimulate economy & minimize unemployment - quotas were interfering (The Guardian) China and Japan collided in disputed territory in 2010 and as a result, China blocked exports of minerals to Japan. “Japan has been the main buyer of Chinese rare earths for many years” (Bradsher, NYT) Uses: glass for solar panels, motors for hybrid cars (Toyota Prius), steering control in other cars, multiple industrial purposes Sources: http://www.nytimes.com/2010/09/23/business/global/23rare.html https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds431_e.htm

Rare earth metal Lanthanum at a workshop near the town of Damao in Mongolia. Photograph: David Gray/Reuters Source: https://www.theguardian.com/world/2015/jan/05/china-scraps-quotas-rare-earth-wto-complaint

Case DS394: Complainants : Respondent: United States China European Union Mexico Respondent: China

Context of case DS394: July 31, 2009 & September 1-2, 2009; U.S. requested consultations with China regarding restraints on raw materials; China did not comply, no progress was made. U.S., European Commission, & Mexico claimed the restraints caused “hardship for non- Chinese companies dependent on these raw materials, and were providing an artificial cost advantage to downstream industries within China.” (WTO) Source: WTO https://www.wto.org/english/news_e/news09_e/dsb_19nov09_e.htm

Relevant WTO Agreements China Article XX (g) of the GATT (General Exceptions) The complainants (US, EU, & Mexico) Article VIII of the GATT Article X of the GATT Article XI of the GATT China’s commitments China’s Accession Protocol China’s Accession Working Party Report

Relevant WTO Agreements China Article XX of the GATT (General Exceptions) (g) relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption Source: https://www.wto.org/english/docs_e/legal_e/gatt47_02_e.htm#articleXX Summary of key findings – The panel report “In particular, China had argued in its defense that some of its export duties and quotas were justified because they related to the conservation of exhaustible natural resources for some of the raw materials. But China was not able to demonstrate that it imposed these restrictions in conjunction with restrictions on domestic production or consumption of the raw materials so as to conserve the raw materials.” Source: https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds394_e.htm

Relevant WTO Agreements (The complainants) Article VIII of the GATT: Fees and Formalities Connected with Importation and Exportation 1. (a) “…shall not represent an indirect protection to domestic products or taxation of imports or exports for fiscal purposes.” Source: https://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htm#articleVIII Article X of the GATT: Publication and Administration of Trade Regulations 1. “…The provision of this paragraph shall not require any contracting party to disclose confidential information which would impede law enforcement or otherwise be contrary to the public interest or would prejudice the legitimate commercial interests of particular enterprises, public or private.” 3. (a) “Each contracting party shall administer in a uniform, impartial and reasonable manner all its laws, regulations, decisions and rulings of the kind described in paragraph 1 of this article.” Source: https://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htm#articleX

Relevant WTO Agreements (The complainants) Article XI of the GATT: General Elimination of Quantitative Restrictions “No prohibitions or restrictions other than duties, taxes or other charges, whether made effective through quotas, import or export licenses or other measures, shall be instituted or maintained by any contracting party on the importation of any other contracting party or on the exportation or sale for the export of any product destined for the territory of any other contracting party.” Source: https://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htm#articleXI

Are China’s Measures in This Case Consistent with WTO obligations or not? “The complainants alleged that these export restraints, as well as aspects of the administration and allocation of certain measures, were inconsistent with China’s commitments under China’s Accession Protocol and China’s Accession Working party Report, and Articles VIII: 1(a), X:1, X:3(a), and XI:1 of the GATT 1994.” “The Appellate Body upheld the Panel’s recommendation that China bring its export duty and export quota measures into conformity with its WTO obligations such that the ‘series of measures’ do not operate to bring about a WTO-inconsistent result.” — Summary of Key Findings, The Appellate Body Report \Source: https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds394_e.htm

About the Implementation The WTO, “On 17 January 2013, China and the noted States informed the DSB of Agreed Procedures under Articles 21 and 22 of the DSU.” Source:https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds394_e.htm Yatsu (2017), “Eventually, when the WTO ruled against China’s export restriction in 2014, and the market price went back to the original (or even lower) level.” Yatsu, Mayuko. (2017, August 29). Revisiting Rare Earths: The Ongoing Efforts to Challenge China’s Monopoly. The Diplomat. Retrieved from: https://thediplomat.com/2017/08/revisiting-rare-earths-the-ongoing-efforts-to- challenge-chinas-monopoly/

China’s Export of Rare Earth Materials At Issue China’s Export of Rare Earth Materials

Complaint by US Export restraints imposed on the different raw materials: export duties; export quotas; (iii) minimum export price requirements; (v) export licensing requirements; Additional Challenge: China’s allocation and administration of export quotas, Alleged non-publication of certain export measures.

China’s Response (Pre-decision) Article XX (b) and (g) – Exhaustible Natural Resources Inherent right to regulate trade under “exceptional circumstances” - Applied in order to reduce pollution and to protect human health

Panel’s Decision Article XI:1 (Quotas) -China failed to provide proof of critical shortage. It failed to define it’s own claimed “operational capacity” Inherent right -Raw materials in question were never on negative list per accession protocol

China’s Response (Pre-decision) Art X:3 - Failed to publish amounts and procedures in production and exportation

China’s Appeal Legal Error – Issues of Jurisdiction - Quoting preamble of WTO Due process Rights – Too short

China’s Appeal - more Complainants did not: Identify which measures Provide brief summary of legal basis

China’s Appeal - yes more Detrimental to foreign companies Measurements are local

On Appeals “We do not agree with China that the Panel acted inconsistently with its obligations under Article 7.1 of the DSU.

Proposal for resolving the issues or observations According to the WTO website, "China had fully implemented the DSB's recommendations and rulings. However, the United States could not share China's assessment that it had fully complied with the DSB's recommendations and rulings.“ Source: https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds431_e.htm