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U.S. Trade Representative Michael Froman Announces U.S. Victory in Challenge to China’s Rare Earth Export Restraints

rare earth graphicWashington - U.S. Trade Representative Michael Froman today announced that the World Trade Organization (WTO) Appellate Body found China’s export restraints on rare earths, tungsten, and molybdenum, which are used as key components in a multitude of U.S-made products for critical American manufacturing sectors, including hybrid car batteries, wind turbines, and energy-efficient lighting, to be inconsistent with China’s WTO obligations.  The Appellate Body affirmed a WTO dispute settlement panel’s March 2014 finding, therefore agreeing with the United States and rejecting China’s appeal.

“This reports marks the end of the line for this dispute.  We are very pleased that America has prevailed in this important case,” said Ambassador Froman. "We have sent a clear signal to our trading partners that we will be tenacious in protecting American businesses, American workers, and the rule of law.”  

“By upholding rules on fair access to raw materials, this decision is a win not only for the United Sates, but also for every nation that respects the principles of openness and fairness.  Those principles are the pillars of the rules-based global trading system, and we must protect them vigilantly.”

The Chinese export restraints challenged in this dispute include export duties and export quotas, as well as related export quota administration requirements.  These types of export restraints can skew the playing field against the United States and other countries in the production and export of downstream products, including clean energy products.  They can artificially increase world prices for these raw material inputs while artificially lowering prices for Chinese producers.  This enables China’s domestic downstream producers to produce lower-priced products from the raw materials and thereby creates significant advantages for China’s producers when competing against U.S. and other producers both in China’s market and other countries’ markets.  The export restraints can also create substantial pressure on foreign downstream producers to move their operations, jobs, and technologies to China.

The European Union and Japan joined the United States as co-complainants in the dispute.  Upon a U.S. request, the WTO Dispute Settlement Body will adopt the panel and Appellate Body reports within 30 days and call for China to bring its measures into compliance with its WTO obligations.  

BACKGROUND

The United States initiated this WTO dispute in 2012, in cooperation with the European Union (EU) and Japan, after China drastically reduced its export quotas for rare earths and caused a spike in world prices and considerable disruption to the global rare earths market.  This dispute builds on and expands an earlier victory that the United States achieved in 2012 challenging China’s use of export restraints on a different set of raw material inputs used in the steel, aluminum, and chemicals industries (bauxite, coke, fluorspar, magnesium, manganese, silicon carbide, silicon metal, yellow phosphorous and zinc).   

On March 13, 2012, the United States requested WTO dispute settlement consultations with China regarding export restraints maintained by China on various forms of rare earths, tungsten, and molybdenum.  On the same day, the EU and Japan also requested consultations with China. On July 23, 2012, a single WTO panel was established to examine the three complaints. Argentina, Brazil, Canada, Colombia, India, Indonesia, Korea, Norway, Oman, Peru, Russia, Saudi Arabia, Taiwan, Vietnam, and Turkey joined as third parties in the dispute.

The United States and its two co-complainants challenged:

  • China’s imposition of export duties as inconsistent with China’s explicit commitment in paragraph 11.3 of its WTO Accession Protocol not to apply export duties to the raw material products at issue;
  • China’s imposition of export quotas as inconsistent with China’s obligations under Article XI:1 of the General Agreement on Tariffs and Trade 1994 (GATT 1994) not to restrict exports; and
  • China’s administration of the export quotas on rare earths and molybdenum as inconsistent with China’s obligations under Paragraphs 5.1 and 5.2 of China’s WTO Accession Protocol, and paragraphs 83 and 84 of the Working Party Report on the Accession of China, requiring China to give all foreign enterprises and individuals, as well as all enterprises in China, the right to export most products.

China argued in defense that its imposition of export duties and export quotas is justified under exceptions in the GATT 1994.  Specifically, China argued that:

  • Its export duties are permitted under Article XX(b) of the GATT 1994, as environmental protection measures; and
  • Its export quotas are permitted under Article XX(g) of the GATT 1994, as measures related to the conservation of exhaustible natural resources.

The panel found that the export duties and quotas that China maintains on various forms of rare earths, tungsten, and molybdenum constitute a breach of WTO rules and that China failed to justify those measures as legitimate conservation or environmental protection measures.  The panel also found that China’s export quota administration requirements are inconsistent with WTO rules.

In its report, the Appellate Body rejected China’s appeal and confirmed that China may not seek to justify its imposition of export duties pursuant to the exceptions provided in Article XX of the GATT 1994.  While modifying some of the panel's original reasoning, the Appellate Body affirmed the panel's finding that China failed to demonstrate that certain of its export quotas were justified as measures for the conservation of exhaustible natural resources under Article XX(g) of the GATT 1994.  The Appellate Body did not reach an argument by the United States that the panel erred in rejecting evidence supplied by the United States.

Under WTO rules, the panel and appellate reports will be adopted by the WTO within 30 days circulation at the request of any party to the dispute.