The conclusion by the panel could mean Beijing will face trade sanctions from the United States, which initially brought the case before the WTO, the European Union and Japan. While China argued that the restrictions were in place to reduce pollution levels associated with the mining of such elements, the WTO panel said the restrictions helped secure preferential use of the elements by Chinese companies.
"The overall effect of the foreign and domestic restrictions is to encourage domestic extraction and secure preferential use of those materials by Chinese manufacturers" said the WTO in a statement."Accordingly, the panel concluded that China's trading rights restrictions breach its WTO obligations."
China produces more than 90 percent of the global supply of these elements that are used in smartphones, wind turbines, industrial catalysts and high-tech magnets. China in 2010 restricted the export of these elements to just over 30,000 tons, causing prices to soar in global markets.
The United States, which is completely reliant on imports from China for such elements, filed the case in March 2012, after which they were joined by the EU and Japan.
Over the past decade the demand for such elements has gone up three-fold to nearly 125,000 metric tons a year, with some estimating it may surpass 200,000 tons this year.
Michael B. Froman, the United States trade representative, said that the restrictions imposed by China favored local companies, whereas businesses in other countries paid as much as "three times more than what their Chinese competitors pay for the exact same rare earths.”
The Chinese Commerce Ministry expressed its disappointment at the ruling, saying that its restrictions were "perfectly consistent with the objective of sustainable development promoted by the WTO.” China had argued that the restrictions were acceptable under trade rules that allow such steps when they relate to the conservation of exhaustible natural resources.
“China cannot use export restrictions to protect its own industries or give them a helping hand on the global market at the expense of foreign competitors,” said European trade commissioner Karel De Gucht.
The panel, which do not say anything explicitly about imposing trade caps to protect scarce resources, said that once a commodity was extracted from the ground its trade would have to comply with the WTO's rules. While export taxes are permitted by the WTO, the agreement China signed when it joined the WTO only allowed for a limited number of taxes and did not include rare earth elements.
While it is not clear if China will appeal the ruling, Beijing said it was “assessing the panel report and will follow the WTO dispute settlement procedures to settle this dispute.”
[World Trade Organization]
[The New York Times]
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