U.S., EU, Japan Seek WTO Consultations On China’s Rare Earth Export Curbs

Scott Otterman, Inside U.S.-China Trade

The Obama administration, backed by the European Union and Japan, this week took the first step toward a potential World Trade Organization challenge of Chinese restrictions on rare earths materials, tungsten and molybdenum by requesting formal consultations.

But senior administration officials said in a March 13 press conference that the administration still holds out hope that China will agree to bring its export restraints into compliance with its WTO obligations during the upcoming consul- tations, especially in light of the strong legal victory the U.S. won from Appellate Body in the raw materials case.    Such a settlement of the long-standing dispute would be preferable for U.S. businesses and workers than a drawn-out WTO proceeding, stressed one senior official. If consultations fail to settle a dispute, complainants can seek a dispute settle- ment panel 60 days after the consultation request has been filed.

President Obama in separate Rose Garden comments touted the decision as a step to fight for fair economic competi- tion and America’s energy future.

At issue in the dispute are both the export duties and export quotas that China imposes on rare export quotas on rare earths, tungsten, and molybdenum. Also being challenged are other Chinese export restrictions on those tariff lines that China imposes through “export procedures and requirements,” according to USTR.

China committed as part of the terms of its WTO accession to eliminate export duties for all products other than those listed in a specific annex, USTR pointed out in its announcement, and none of the products under challenge are included in that annex.

Article XI:1 of the General Agreement on Tariffs and Trade (GATT) generally prohibits restrictions on exports other than taxes, duties and charges, USTR stressed in announcing the case. In addition, it pointed out, China’s WTO Accession Protocol contains broad commitments not to restrict the right to export goods.

According to USTR, China unfairly imposes export restraints on rare earths, tungsten and molybdenum, as well as many intermediate products processed from these raw materials. In all, USTR said in a March 13 announcement, China’s export restraints on the materials at issue in this dispute cover more than 100 tariff codes.

“Because China is a top global producer for these key inputs, its harmful policies artificially increase prices for the inputs outside of China while lowering prices in China,” USTR said. “This price dynamic creates significant advantages for China’s producers when competing against U.S. producers — both in China’s market and in other markets around the world.”

The policies also create “substantial pressure” on U.S. and other foreign downstream producers to move their operations, jobs, and technologies to China, according to USTR.

New action on these restrictions has been expected since the WTO Appellate Body ruled against Chinese export restrictions on other raw materials in December in favor of the U.S., EU and Mexico.

The Appellate Body’s support for the U.S. legal arguments in that case, China — Measures Related to the Exporta- tion of Various Raw Materials, specifically ruled that China cannot escape the commitment it made in its WTO accession protocol to abandon export restraints by resorting to an exception under GATT Article XX by insisting they are meant to preserve natural resources. This bolstered confidence among government litigators that a similar case could be mounted against Chinese rare earth export restraints.

The determination to pursue the case was also strengthened by China’s reluctance to drop its export restraints after losing the raw materials case, a factor mentioned by EU Trade Commissioner Karel De Gucht in a separate statement announcing the decision to seek WTO consultations.

“These measures hurt our producers and consumers in the EU and across the world, including manufacturers of pioneering hi-tech and ‘green’ business applications,” De Gucht said. “Despite the clear ruling of the WTO in our first dispute on raw materials, China has made no attempt to remove the other export restrictions. This leaves us no choice but to challenge China’s export regime again to ensure fair access for our businesses to these materials.”

Responses to the administration’s action were largely positive in Congress.  House Ways and Means Committee Chairman Dave Camp (R-MI) and trade subcommittee Chairman Kevin Brady (R-TX) both voiced their support. “The United States should not hesitate to enforce its rights at the WTO, and I hope the Administration will bring additional cases to address China’s barriers,” said Camp in a statement. “I look forward to consulting closely as this – and other WTO cases – move forward.”

Ways and Means Ranking Member Sander Levin (D-MI) and trade subcommittee Ranking Member Jim McDermott (D-WA) also applauded the step, but went on to press for further trade action by Congress, such as currency legislation.

In the Senate, Finance Committee Chairman Max Baucus (D-MT) wholeheartedly supported the move, but former Ranking Member Charles Grassley (R-IA) used the occasion to strike out against Obama’s recently established Inter- agency Trade Enforcement Center (ITEC).

The filing of this case and one last week against Indian poultry practices demonstrates that the administration can pursue WTO cases without creating a new bureaucratic entity like the ITEC, Grassley said.

“The cases show the United States is already capable of bringing enforcement actions without a new layer of govern- ment,” Grassley said. “It’s not clear whether a new office would lead to more cases or just create redundancy.”

Private-sector reactions struck a similarly positive tone, with the U.S. rare-earths industry praising the move. But one lobbyist who has been pressing for more U.S. government action to diversify the supply chain of rare earths and other critical materials stressed that the U.S. has a “larger problem” due to its lack of a supply chain to process and utilize rare earths.

“While this is a positive development for consumers of rare earth, it should not be the last move by the U.S. Govern- ment to secure a rare earth supply chain,” said Jeff Green, CEO of Jeff Green & Company, which is pressing for execu- tive and legislative branch action on behalf of a consortium of miners, processors and users of rare earth materials. “Actions are needed to not only enforce trade obligations, but to stimulate development of a non-Chinese rare earth industry.”

Green noted that because China is moving toward becoming a net importer of rare earths, “a WTO case that may take years to resolve may have limited effect, but is still a worthwhile endeavor to force compliance with trade obligations.”

Offering a positive reaction were two business groups that are often at odds on China trade issues, the Ameri- can Iron and Steel Institute (AISI) and the US-China Business Council (USCBC).

“Tungsten and molybdenum are important raw materials in making steel and other products, and China’s export restrictions have distorted the world market for those materials, to the detriment of American manufacturers and Ameri- can workers,” said AISI President and CEO Thomas J. Gibson.

“The United States has a variety of tools to use when it believes China is not complying with its WTO commitments, including bilateral discussions at U.S.-China government meetings throughout the year,” said USCBC Vice President Erin Ennis. “When it is clear that good-faith bilateral discussions have not yielded the desired results, the U.S. has every right to utilize the WTO dispute settlement system.”

She added that a “well-focused” U.S. WTO case should be viewed as a “normal” part of any nation’s WTO member- ship, and said USCBC, whose membership is largely multinational corporations with business operations in China, supports U.S. efforts to seek improvements in China’s exports of rare-earth minerals.

But she also noted that the 60 days’ consultation process allows time to yield a result that “advances free trade and international best business practices.”

According to the EU’s March 13 announcement, rare earth elements are a set of 17 chemical elements in the periodic table, “specifically 15 lanthanides (lanthanum, cerium, praseodymium, neodymium, promethium, samarium, europium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, ytterbium, lutetium) as well as scandium and yttrium.”

These elements possess “unique magnetic, heat-resistance and phosphorescence properties” that allow them to be used “to directly produce highly efficient magnets, metal alloys, phosphors, optical material, battery material, ceramics, [and] special abrasive powders.” These are “key components” of downstream and consumer goods such as “wind power turbines, catalysers (for car and oil cracking), energy-efficient bulbs, engines for electric and hybrid vehicles, flat screens and displays (LED, LCD, plasma), hard drives, car parts, camera lenses, glass applications, industrial batteries, medical equipment or water treatment,” according to the EU release.