China Lodges WTO Appeal in Rare Earths Dispute

1 May 2014

China has asked the WTO’s highest court to review a series of substantive findings in a dispute panel ruling that found Beijing’s restrictions on rare earths exports to be in violation of international trade rules. The move, confirmed last week, marks the latest chapter of a case that has highlighted the nuances of balancing natural resource management policies with global trade commitments.

Last month, a dispute panel had found that China’s use of export duties and quotas on various rare earth elements, along with tungsten and molybdenum, went against both international trade rules and its WTO accession commitments. (See Bridges Weekly, 27 March 2014)

These rare earths are used in the manufacturing of various high-tech and green energy products, such as wind turbines and engines for electric and hybrid vehicles. China is responsible for nearly all rare earths production – 90 percent, according to the US Geological Survey – and is the home of a quarter of the world’s supply.

A few weeks ago, the US had filed a conditional appeal of its own, in advance of a potential appeal from China. Unlike Beijing’s filing, Washington has focused primarily on a series of procedural concerns with the dispute panel’s review of evidence, rather than on questions regarding the substance of the ruling. The other two complainants in the case – the EU and Japan – had not filed appeals at the time Bridges went to press on Thursday. (See Bridges Weekly, 17 April 2014)

Accession protocol

In March, the panel said that there was “no basis” in China’s accession protocol – in other words, the specific terms Beijing agreed to when joining the global trade body in 2001 – for justifying the use of export duties under Article XX of the General Agreement on Tariffs and Trade (GATT). The result recalled an earlier Appellate Body finding in a separate dispute involving China’s export restrictions on raw materials. (See Bridges Weekly, 1 February 2012)

This particular GATT article establishes various justifications for measures that would otherwise be WTO-illegal, on the grounds that such measures are necessary for fulfilling greater public policy objectives.

Under Paragraph 11.3 of China’s accession terms, the country was required to eliminate all export duties. According to Appellate Body ruling in the Raw Materials case, that paragraph – by not making specific reference to the GATT Article XX exceptions – does not provide any basis for justifying the use of such duties.

The panel in the rare earths case found that Beijing had not brought a sufficiently new argument to depart from the Appellate Body’s previous finding. As a result, Beijing is now asking the Appellate Body to consider how exactly its accession protocol does tie in to the WTO Agreements – not just the overall Marrakesh Agreement establishing the global trade body, but also the various subject-specific texts that the organisation’s 159 members are bound to, such as the GATT.

In its appeal, China says that the panel “failed to give effective meaning” to the Marrakesh Agreement provision that says that new members “may not pick and choose among the various covered agreements but have to accept the WTO legal framework as a single undertaking.”

Furthermore, Beijing argues, “the panel unduly found that the words ‘shall be an integral part of the WTO Agreement’ in the second sentence of paragraph 1.2 of China’s accession protocol leads to the conclusion that China’s accession protocol is thereby made an integral part of the Marrakesh Agreement excluding the multilateral trade agreements annexed thereto.”

Natural resources conservation

In its March ruling, the panel had also found that China’s use of export quotas did not appear to be as related to conservation goals – as Beijing had claimed – as it was to industrial objectives. The Asian economy had argued that these export quotas were critical given the environmental damage caused by the rare earths extraction process, and the limited nature of these resources.

Under Article XX (g) of the GATT, WTO members are permitted to take measures related to the conservation of exhaustible natural resources, “if such measures are made effective in conjunction with restrictions on domestic production or consumption.”

The Article XX General Exceptions also require that such measures are not applied in a way that creates “arbitrary or unjustifiable discrimination” or that otherwise serves as a “disguised restriction on international trade.”

In its appeal, China has asked that the Appellate Body reverse the panel’s findings that the rare earths export quotas were not sufficiently linked to conservation. Beijing claims that the panel’s interpretation was flawed, as it focused on how these export quotas were designed, rather than on how these were implemented in tandem with other measures in China’s conservation policy.

Furthermore, the Asian economy says, the panel’s review of whether these export quotas were “made effective in conjunction with” domestic restrictions was also incorrect, as the panel focused more on the how the country’s regulatory system of conservation measures was structured, rather than on what effects this system actually has on the marketplace.

China has also questioned the panel’s objectivity and legal reasoning in its review of those measures that Beijing submitted as evidence of domestic restrictions on rare earths.

The panel, China says, relied on “inconsistent reasoning as well as a double standard of proof in comparing the relative burden of China’s restrictions on foreign and domestic users.” In its ruling, the panel had found that export quotas were indeed restrictions, even though these quotas were not filled in 2012. However, the panel was reluctant to accept that Beijing’s domestic measures – such as production and extraction quotas – also qualified as restrictive.

Next steps

Under WTO rules, the Appellate Body can review certain aspects of law and legal interpretation in the original panel ruling, but will generally not interfere with any factual findings. A report is likely to be issued within three months from the close of the appeal period.

ICTSD reporting.  

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