U.S. vs. China Export Restrictions on Rare Earths ITRN 603 - Global Trade Relations Amro Abdulati Folasade Adeyanju Maimoona Asghar

WHAT ARE RARE EARTH ELEMENTS Rare earth elements are a group of seventeen chemical elements that occur together in the periodic table. The group consists of yttrium, scandium, and fifteen lanthanide elements (lanthanum, cerium, thulium, ytterbium, praseodymium, gadolinium, terbium, dysprosium, neodymium, promethium, samarium, europium, holmium, erbium, and lutetium)

USES OF RARE EARTH ELEMENTS They are used in consumer electronics, computers and networks, communications, clean energy, advanced transportation, health care, environmental mitigation, national defense, and in many other ways.. Because of their unique magnetic, luminescent, and electrochemical properties, these elements help make many technologies perform with reduced weight, reduced emissions, and energy consumption; or give them greater efficiency, performance, miniaturization, speed, durability, and thermal stability. www.rareearthtechalliance.com/What-are-Rare-Earths

ARE THEY RARE They are available all over the world but in rare concentration.However, a few regions of the world, like South Africa, United States of America,Russia,India, China,Brazil, Canada, Malaysia & South East Asia have abundance of these elements.

RARE EARTHS SUPPLIER 1950s - SOUTH AFRICA, INDIA AND BRAZIL 1960S TO 1980S- UNITED STATES OF AMERICA 1990S- CHINA Rare earth mines have operated in South Africa, India, and Brazil in the 1950s, but from the 1960s to the 1980s, the largest global producer was a mine in Mountain Pass, California. In the 1990s, China began large scale production and exported cheaper rare earths. Other producers were unable to compete economically, and began closing in the 1990s, with the Mountain Pass mine shutting down in 2002 (Tse, 2011). Consequently, China is currently the world’s largest producer of rare earth elements, providing more than 95% of the world’s total supply from its mines in Inner Mongolia

Prior Proceedings (Amro) China currently caters to 97% of the global demand regarding these rare material which includes different elements and metals. Other than exporting it also manufactures 60% of rare finished goods to meet the demand. According to researchers, China has 36.5% share of these raw material all over the globe making it the biggest exporter around the world. (Smith Stegen, 2015) In 2010, Chinese government has drastically cut of their export quotas by 40% which was the major concern for many developing countries. These restrictions have automatically rattled the confidence of international market since a limited amount is exported. (Hatch, 2012)

History and Context (Amro) In joining the WTO, the Chinese government agreed its commitments on export duties as contained in the Protocol of Accession and the rules governing export quotas which are embodied in the General Agreement on Tariffs and Trade (GATT) of 1994. The rules include: A general prohibition on the use of quantitative measures, such as quotas, for the purpose of export restrictions in Article XI.1. Under certain conditions, exceptions to the general rule are permitted under Article XI.2. General exceptions to the prohibition on export restrictions are available for environmental purposes, for example the "protection of animal, human and plant life and health" and the "conservation of natural exhaustible resources" in Article XX.

Prior Proceedings (Amro) A formal complaint was made by US, EU and Mexico in 2009 to WTO against the restriction imposed by China. The WTO was to settle the dispute regarding the issue. Dispute settlement body (DSB) ruled against China in January 2012, the restrictions on the specific rare earth materials were removed after the reasonable period of time was given to china. The second formal complaint was made for two other major rare material known as tungsten and molybdenum by the alliance of EU, Japan, and the US.

DS431 - U.S. vs. China - Rare Earths WTO Case (Sade) DS431 - U.S. vs. China - Rare Earths Complaint: United States Respondent: China Relevant WTO Issue: Export restrictions on a number of rare earths, tungsten, and molybdenum Chinese Export Restrictions: Export Duties Export Quotas Limitations on the enterprises permitted to export the products. Products at issue: Various forms of rare earths, tungsten, and molybdenum *Tungsten was used extensively for the filaments of old-style incandescent light bulbs, but these have been phased out in many countries. This is because they are not very energy efficient; they produce much more heat than light. *Small amounts of molybdenum can be found in a wide variety of products: missiles, engine parts, drills, saw blades, electric heater filaments, lubricant additives, ink for circuit boards and protective coatings in boilers. It is also used as a catalyst in the petroleum industry.

WTO Case (Sade) On March 3, 2012, U.S. requested consultations with China. Requested Materials Included Materials falling under 212 eight-digit Chinese Customs Commodity Codes and over 30 measures. Chinese published and unpublished measures that impose and administer export restrictions E.g. 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. The United States requested consultations with China with respect to China’s restrictions on the export of various forms of rare earths, tungsten and molybdenum. The request refers to materials falling under but not limited to 212 eight-digit Chinese Customs Commodity Codes and over 30 measures. The request also refers to a number of Chinese published as well as unpublished measures that, operating separately or collectively, allegedly impose and administer export restrictions. These restrictions include 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.

WTO Case (Sade) U.S. Complaints China applies export duties on various forms of rare earths, molybdenum, and tungsten. Inconsistency with China’s WTO obligations due to China undertaking to eliminate all export duties, except for those imposed on a number of products listed in Annex 6 to China’s Accession Protocol. Export Quotas Trading Rights With the exception of tungsten ores and concentrates none of the products at issue are included in Annex 6, and China is therefore not entitled to impose the export duties on them. The complainants alleged that China applies export duties on various forms of rare earths, molybdenum, and tungsten. The complainants argued that these duties are inconsistent with China’s WTO obligations because in its Accession Protocol, China undertook to eliminate all export duties, except for those imposed on a number of products listed in Annex 6 to China’s Accession Protocol. The complainants argued that, with the exception of tungsten ores and concentrates (which they excluded from the scope of their claim), none of the products at issue are included in Annex 6, and China is therefore not entitled to impose the export duties on them. Export Quotas China also imposes quantitative limits (quotas) on the amount of rare earths, tungsten, and molybdenum that can be exported in a given period. Although it recognized that such restrictions are inconsistent with the GATT 1994, 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. (3) Trading Rights China imposes certain restrictions on the right of enterprises to export rare earths and molybdenum. Although China has committed to eliminating trading restrictions in its Accession Protocol, it argued that the restrictions in question are justified pursuant to Article XX(g), since they too relate to the conservation of exhaustible natural resources. Although the Panel found that China could rely on the Article XX exceptions to justify the restrictions in question, it found that China had not satisfactorily explained why its trading rights restrictions were justified under this provision. Accordingly, the Panel concluded that China’s trading rights restrictions breach its WTO obligations.

WTO Case (Sade) China’s Counter Argument Justified its imposition of export duties on the basis of the “General Exceptions” provision in Article XX of the GATT Article XX(b) allows WTO Members to maintain measures that would otherwise be inconsistent with the GATT 1994 if the measures are necessary to protect human, animal or plant life or health. China acknowledged that the duties at issue were imposed on products that are not included in the relevant Annex, but sought to justify its imposition of export duties on the basis of the “General Exceptions” provision in Article XX of the GATT. Specifically, Article XX(b) allows WTO Members to maintain measures that would otherwise be inconsistent with the GATT 1994 if the measures are necessary to protect human, animal or plant life or health. 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. The complainants argued that the “General Exceptions” contained in Article XX of the GATT 1994 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.

Contested Issue (Sade) China’s Environmental and Social Impacts of Mining Rare Earths Cost of Mining Rare Earth Ores are often laced with radioactive materials such as Thorium Separating the wheat from the chaff requires huge amounts of carcinogenic toxins Sulphates Ammonia Hydrochloric Acid Production processes and techniques in the mining of rare earth ores have caused: damage to surface vegetation caused soil erosion, pollution, Acidification reduced or even eliminated food crop output. Processing rare earths is very risky. Their ore is often laced with radioactive materials such as thorium, and separating the wheat from the chaff requires huge amounts of carcinogenic toxins – sulphates, ammonia and hydrochloric acid. Severe damage to the ecological environment. Outdated production processes and techniques in the mining, dressing, smelting and separating of rare earth ores have severely damaged surface vegetation, caused soil erosion, pollution, and acidification, and reduced or even eliminated food crop output. In the past, the outmoded tank leaching and heap leaching techniques were employed at ion-absorption middle and heavy rare earth mines, creating 2,000 tonnes of tailings for the production of every tonne of REO (rare earth oxide).

Contested Issue (Sade) China’s Depleting Rare Earth Supply Over the last 50 years of mining, China’s Rare Earth Ores are decreasing China's southern provinces has declined from 50 two decades ago to the present 15 Most of the southern ion-absorption rare earth deposits are located in remote mountainous areas Excessive exploitation of rare earth resources. After more than 50 years of excessive mining, China's rare earth reserves have kept declining and the years of guaranteed rare earth supply have been reducing. The decline of rare earth resources in major mining areas is accelerating, as most of the original resources are depleted. For Example, In Baotou, only one-third of the original volume of rare earth resources is available in the main mining areas, and the reserve-extraction ratio of ion-absorption rare earth mines in China's southern provinces has declined from 50 two decades ago to the present 15. Most of the southern ion-absorption rare earth deposits are located in remote mountainous areas. There are so many mines scattering over a large area that it is difficult and costly to monitor their operation. As a result, illegal mining has severely depleted local resources, and mines rich in reserves and easy to exploit are favored over the others, resulting in a low recovery rate of the rare earth resources. Less than 50 percent of such resources are recovered in ion-absorption rare earth mines in southern China, and only ten percent of the Baotou reserves are dressed and utilized.

Contested Issue (Sade) Divergence between Price & Value The price of rare earth products has remained low and failed to reflect in value Despite a gradual rise in the price of rare earth products, the rise has been much lower than that in the price rise of other raw materials like gold, copper and iron ore. *From 2000 to 2010, the price of rare earth products rose by 2.5-fold, while that of gold, copper and iron ore increased by 4.4-, 4.1-, and 4.8-fold during the same period, respectively. Severe divergence between price and value. Over quite a long period of time, the price of rare earth products has remained low and failed to reflect their value, the scarcity of the resources has not been appropriately represented, and the damage to the ecological environment has not been properly compensated for. Since the second half of 2010, despite the gradual rise in the price of rare earth products, the rise has been much lower than that in the price rise of other raw materials like gold, copper and iron ore. From 2000 to 2010, the price of rare earth products rose by 2.5-fold, while that of gold, copper and iron ore increased by 4.4-, 4.1-, and 4.8-fold during the same period, respectively.

Specific WTO Agreement (Sade) WTO Panel Ruling China’s export duties and quotas constituted a breach of WTO rules China failed to justify conservation or environmental protection measures. The ruling was based on disagreements over obligations China entered into when it joined the WTO in 2001 Agreed upon prohibitions on export restrictions that are found in the GATT China’s Accession Protocol. The Agreement allowed for the commitment of China to more rigorous liberalizations by agreeing to eliminate all taxes and charges related to exports, except to listed materials and those in conformity with GATT Article VIII. the WTO Panel ruled that China’s export duties and quotas constituted a breach of WTO rules, and that China failed to justify those measures as legitimate conservation or environmental protection measures. The background to this case consists in disagreements over the obligations China entered into when it joined the WTO in 2001, based upon generally agreed upon prohibitions on export restrictions that are found in the GATT, and China’s Accession Protocol. Additionally, it committed to more rigorous liberalizations by agreeing to eliminate all taxes and charges related to exports, except to listed materials and those in conformity with GATT Article VIII.

Consistency Of China’s Decision (Maimoona) ARTICLES CITED BY WTO IN THE FINAL DECISION ABOUT CHINESE RESTRICTIONS ON RARE EARTH ELEMENTS GATT 1994: Art. VII, VIII, X, XI, XI:1, X:3(a) Protocol of Accession: , , Part I, para. 1.2, Part I, para. 5.1, , , Part I, para. 11.3, Part I, para. 5.2, Part I, para. 8.2, Part I, para. 7.2 According to the decision of Appellate Panel, China has not followed the rules of accession protocol. China has maintained the plea that their action was based on the national interest of the Chinese resources of the rare earth elements and the conservation of their landscape but their actions was not consistent to the commitments China has made in the accession protocol to WTO.

Implementations & Sanctions (Maimoona) CHINA ACCEPTED THE FINAL DECISION OF THE PANEL OF WTO BUT APPEALED TO SOME OF THE FINDINGS OF THE WTO’S DECISION FIRST, “China appealed an intermediate Panel finding in reaching its conclusion that Article XX of the GATT 1994 is not available to justify a breach of Paragraph 11.3 of China's Accession Protocol. China contended that the Panel erred in rejecting China's interpretation of Paragraph 1.2 of China's Accession Protocol and Article XII:1 of the Marrakesh Agreement as meaning that each provision of China's Accession Protocol is an integral part of the Marrakesh Agreement or of the Multilateral Trade Agreement to which that provision “intrinsically relates”.

Implementations & Sanctions (Maimoona) SECOND, “China appealed limited aspects of the Panel's interpretation and application of Article XX(g) of the GATT 1994, in connection with its findings that the export quotas at issue are not measures “relating to” the conservation of exhaustible natural resources and are not “made effective in conjunction with” restrictions on domestic production or consumption.” In the end, China accepted to implement WTO’s decision and withdrew the export restrictions and duties on rare earth elements. So no sanctions were applied to China in this case.

Proposal on Trade Issue Purpose of WTO; To Maintain Stability in World Trade Chinese Act of Export Restrictions; Destabilized The World Trade of Rare Earth Elements in the Short Run US, European and Other Countries Act of relying on Chinese Supply of Rare Earth Elements; Destability in the trade of rare earth elements in the Long Run What we have learned from this case study is that the basic purpose of establishing WTO was to have a stability in the world trade. In this case, we have observed that the rare earth elements are immensely important to the world because of their usage.They are important components of our smartphones, Flat screen TVs, Hybrid car Engines, wind turbines, MRI scanners, etc. Every individual in this world is consuming those rare earth elements. So, the constant supply of those elements is important for every country, either they are involved in the manufacturing of these devices or just the users of those devices. We know that China has been supplying more than 90% of the rare earth elements but Chinese reserves are only 35 % f the world’s rare earth deposits. So in this situation, it should be the responsibility of WTO itself to find the ways that how the stability in the world trade can be achieved in the long run. What China did was the short run measure to conserve its resources and it destabilized the world trade.

Proposal on Trade Issue RULE OF NON- DISCRIMINATION AS PER ACCESSION PROTOCOL According to that rule, “foreign individuals and enterprises and foreign-funded enterprises shall be accorded treatment no less favorable than that accorded to other individuals and enterprises in respect of: the procurement of inputs and goods and services necessary for production and the conditions under which their goods are produced, marketed or sold, in the domestic market and for export; The stability in the world trade requires the planned usage of natural resources. Every member country of WTO has committed to implement the principle of Non-discrimination. So, this commitment alone makes every member country equally responsible to take care of the other country. As per this commitment, China cannot put the export restrictions on rare earth elements to have a monopoly on the use of rare earth elements and United States cannot force China to supply the rare earth elements more than its capability.