U.S. - China WTO Trade Dispute Export of Raw Materials (DS394) ITRN 603 Johnson, Krysiak, and Mena October 16, 2018

Introduction History of the Case Current State of the Case Observations

What was the setting? The dispute was brought the WTO in 2009 post financial crisis of 2007-2008. It was aimed at protecting the global trade environment Economies were trying to recover Sensitive to any protectionist measures Claims of China attempting to devalue the Yuan. The export duties were distorting competition and increasing global prices

History and Context of DS394 On 23 June 2009, the Obama Administration launched the 13th trade enforcement case against China at the WTO over export duties that Beijing charges on nine raw materials. Export duties range from various forms of bauxite, coke, fluorspar, magnesium, manganese, silicon metal, yellow phosphorus, and zinc. These duties impose higher costs on U.S. manufacturers, while Chinese competitors do not have to pay them, which serves as a financial incentive for companies to locate production in China.

Background The WT/DS394 case “China – Measures Related to the Exportation of Various Raw Materials” was the first issue of export controls for natural resources to be heard at the WTO. The Chinese government has plans and policies formulated to guide the economic development of the country. One of these policies is the Five Year Plans for National Economic and Social Development. The plan was launched in 2001 and since inception, China’s economic development has made remarkable progress.

Background continued It was argued their growth had been made at the expense of the rest of the world. Rendered competitive advantage for Chinese industries at the expense of non-Chinese users. The production of raw material and processed goods has increased Exports of value-added goods have increased BUT Industrial raw material has decreased This is argued as the strategic moved by China to have its economic and industrial agenda come to fruition.

Background continued How? As China’s criterion, they planned on taking advantage of the difference in domestic and international markets for raw material and downstream, processed products, using restraints on exports. Although this is part of China’s domestic policy, it imbalances trade flows and conflicts with China’s WTO agreement. China was not in conformity with their export duties. https://www.wto.org/english/thewto_e/acc_e/completeacc_e.htm Paragraph 11.3, Part 1 of the Accession Protocol requires China not to impose export duties on products NOT listed in Annex 6 of the Accession → most are not listed in Annex 6 (forms of bauxite, coke, fluorspar, magnesium, manganese, silicon, metal, and zinc. Regarding yellow phosphorus, China imposes and export duty that exceeds the max accorded rate in Annex 6 of the Accession.

Background Continued In 2008, China production totaled 336 million metric tons (MT), yet they placed export quotas on coke, limiting annual exports to 12 million MT. In August 2008, the world price for finished steel was $1,150 USD per MT. China’s domestic price for coke was $472 USD/MT vs. world price of $740/MT. To make one MT of steel in China, one MT of coke is required. China’s domestic producers were saving $268 per input (740-472 = 268). Their domestic producer had a dramatic competitive advantage against foreign steel producers. https://ustr.gov/about-us/policy-offices/press-office/fact-sheets/2009/june/wto-case-challenging-chinas-export-restraints-raw-materi

DS394 - Current Issues

Main Parties of DS394 - Export of Raw Materials Complainant: United States Respondent: China Third Parties: Argentina; Brazil; Canada; Chile; Colombia; Ecuador; European Union; India; Japan; Republic of Korea; Mexico; Norway; Chinese Taipei; Turkey; Kingdom of Saudi Arabia

Complaints This dispute concerns measures imposed by China affecting the exportation of certain forms of bauxite, coke, fluorspar, magnesium, manganese, silicon carbide, silicon metal, yellow phosphorus, and zinc. Before the Panel, the United States, Mexico, and the European Union (the “complainants”) challenged four types of export restraints imposed on the different raw materials at issue: Export Duties Export Quotas Minimum export price requirements Export licensing requirements Export Duties: Export duties consist of general or specific taxes on goods or services that become payable when the goods leave the economic territory or when the services are delivered to non-residents; profits of export monopolies and taxes resulting from multiple exchange rates are excluded. Export Quotas: A restriction imposed by a government on the amount or number of goods or services that may be exported within a given period, usually with the intent of keeping prices of those goods or services low for domestic users. Minimum Export Price (MEP): MEP is the price below which an exporter is not allowed to export the commodity from the domestic country. Export Licensing Requirements: The Bureau of Labor (BLS) is responsible for implementing and enforcing the Export Administration Regulation (EAR) License requirements are dependent upon four criteria: An item's technical characteristics, Destination End Use End User

Why was this Dispute Significant? China was/is a leading producer of many strategic raw materials which are used to produce vital everyday items and technology products. The complainants argued that the use of export restraints created scarcity and caused higher prices of raw materials in the global market. They also provided Chinese domestic industry with a significant competitive advantage by way of a sufficient supply, and lower and more stable prices for raw materials. Characteristic of Strategic Raw Materials: The exploitable mineral reserves are generally found in one or a few geographical regions of the world implying that their potential mining and export are concentrated in a few countries. This in turn leads to a dependence on such imports by countries that consume these materials. The strategic materials are generally used as inputs into high-technology or strategic sectors. There are few substitutes available in the short term for these raw materials.

The Effects on Industry - Semiconductors Many of the raw materials disputed in DS394 including Silicon and Silicon Carbide are essential to the production of semiconductors. China is the world’s largest producer of silicon. In 2016 the industry directly employed nearly 250,000 people in the U.S. and supported more than 1 million additional U.S. jobs. In 2016 U.S. exports of (NAICS 334413 -Semiconductor and related device manufacturing) totaled $43 Billion. https://minerals.usgs.gov/minerals/pubs/commodity/silicon/mcs-2017-simet.pdf

Timeline June 23rd, 2009 - Request for Consultations Received The United States requested consultations with China with respect to China's restraints on the export from China of various forms of raw materials. The United States cites 32 measures through which China allegedly imposes restraints on the exports in question and note that there appear to be additional unpublished restrictive measures. November 4th, 2009 - The United States requested the establishment of a panel. July 5th, 2011 - Panel Report Circulated August 1st, 2011 - China notified the DSB of its decision to appeal certain issues of law and legal interpretations of the panel report. January 30th, 2012 - The Appellate Body report was circulated to Members.

Specific Agreements and Provisions Involved Complainants: GATT 1994 Article VIII: Fees and Formalities connected with Importation & Exportation China was imposing restrictions for fiscal purposes Article X: Publication and Administration of Trade Regulations The restrictions prejudiced the legitimate commercial interests or particular enterprises Article XI: General Elimination of Quantitative Restrictions Quotas, import or export licenses or other measures are prohibited on imports or exports Protocol of Accession of the People’s Republic of China: Part I, para 1.2, Part I, para 5.1, Part I, para. 5.2, Part I, para 8.2, Part I, para. 11.3

Protocol of Accession of the People’s Republic of China: Para. 1.2: “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. This Protocol, which shall include the commitments referred to in paragraph 342 of the Working Party Report, shall be an integral part of the WTO Agreement” Para. 5.1: “China is required to give all foreign enterprises and individuals, as well as enterprises in China, the right to export most products.” Para. 5.2: “Except as otherwise provided for in this Protocol, all foreign individuals and enterprises, including those not invested or registered in China, shall be accorded treatment no less favourable than that accorded to enterprises in China with respect to the right to trade.” Para. 8.2: Except as otherwise provided for in this Protocol, foreign individuals and enterprises and foreign-funded enterprises shall be accorded treatment no less favourable than that accorded to other individuals and enterprises in respect of the distribution of import and export licences and quotas. Para 11.3: China can not impose export duties on products not listed in Annex 6 of the Protocol. It was breached for coke and quotas for bauxite, fluorspar, and silicon carbide: How? Requires exporters to meet certain criteria to receive an allocation through their bidding process for coke and to even participate in the bidding process.

Specific Agreements and Provisions Involved China: Article XI: 2(a) designed to prevent material shortage Article XX (g) of the GATT (General Exceptions) Argued restrictions were imposed to conserve raw materials Article XX (b) permits environmental protection measures China’s Commitments: China’s Accession Protocol China’s Accession Working Party Report

Decision/Recommendation of the Appellate Body The Appellate Body found that the Panel erred under Article 6.2 of the DSU in making findings regarding claims allegedly identified in Section III of the complainants' panel requests. Declared claim moot and of no legal effect. 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. 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.

Consistent or Inconsistent DSU Article 19: Where a panel or the Appellate Body concludes that a measure is inconsistent with a covered agreement, it shall recommend that the Member concerned bring the measure into conformity with that agreement. In one of its key findings, 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 also found that export quotas imposed by China on some of the raw materials were inconsistent with WTO rules. The Appellate Body upheld these findings.

Resolution March 23, 2012 - China notified the DSB of intention to implement recommendations and rulings - requested 10 months and 9 days to do so (until December 31, 2012) January 17, 2013 - China & U.S. notified the DSB of Agreed Procedures under Article 21 and 22 of DSU January 28, 2013 - China notified the DSB that export duties and export quotas had been removed for certain raw materials and took effect January 1, 2013 thus fully implementing the DSB’s recommendations and rulings through the following measures: December 28, 2012 - General Administration of Customs of China promulgated the 2013 Tariff Implementation Program December 31, 2012 - Ministry of Commerce of China and the General Administration of Customs of China jointly promulgated the 2013 Catalogue of Goods Subject to Export Licensing Administration

Observations Started out as a bilateral issue and became a multilateral issue. Demonstrated impact of raw material exports on global markets. China was vulnerable to the Financial Crisis - Took steps to protect itself within a global market. This stance affected trade flows. The DSB resolved the dispute in a time effective manner and laid the groundwork for future cases regarding raw material. https://www.bbc.co.uk/news/14705180

New Cases DS395: China — Measures Related to the Exportation of Various Raw Materials (2009) Complainant: European Communities Respondent: China DS398: China — Measures Related to the Exportation of Various Raw Materials (2009) Complainant: Mexico DS508: China — Export Duties on Certain Raw Materials (2016) Complainant: United Stated DS509: China — Duties and other Measures concerning the Exportation of Certain Raw Materials (2016) Complainant: European Union

Bibliography China — Measures Related to the Exportation of Various Raw Materials (WT/DS394, WT/DS395, WT/DS398). (n.d.). Dispute Settlement Reports 2012,3933-3936. doi:10.1017/cbo9781107279797.001 China to appeal a WTO ruling on exports of minerals. (2011, August 29). Retrieved October 14, 2018, from https://www.bbc.co.uk/news/14705180 Kilby, C. (2014). China's rare earth trade: Health and the environment. The China Quarterly, 218, 540-550. doi:http://dx.doi.org.mutex.gmu.edu/10.1017/S0305741014000320 United States Geological Survey (2017). Mineral Commodity Summaries 2017. Retrieved September 29, 2018, from https://minerals.usgs.gov/minerals/pubs/commodity/silicon/mcs-2017-simet.pdf