No Surprises as China Appeals WTO Raw Materials Decision

5 September 2011

In a move widely anticipated, China has appealed a WTO dispute settlement panel decision that had rejected Beijing's export control measures, which it argued were based on environmental grounds. The decision from July had found that Chinese export restrictions on raw materials including zinc, magnesium, and bauxite violated WTO law.

In the landmark dispute (DS394, 395, 398), the US, EU, and Mexico had challenged Chinese export restrictions imposed on nine different raw materials that are essential for the production of electronics, medicine, and steel. The three countries, all highly dependent on the exports, had argued that the quota system imposed by China had reduced global supply and could result in considerably higher world market prices.

The panel found that China's export restriction regime violated both the prohibition of all quantitative restrictions as mandated by the GATT agreement and China's additional vow to eliminate all export tariffs.

China continues to argue with the EU, US, Japan, and many more over export quotas concerning rare earth - another group of raw materials essential for the production of high-tech electronics. The July ruling was quickly interpreted as not only rejecting the raw material restrictions subject to the dispute but also those on rare earths. An appeal by China, which had lost almost all arguments subject to the dispute, had thus been expected.

While the possibility of a successful appeal is moderate, according to many observers, Chinese industry representatives welcomed the move.

"It could take as long as two years for the WTO to review the appeals and make a final decision," Sang Baichuan from the University of International Business and economics told China Daily. "That period leaves enough time for China's industries and companies to make industrial adjustments and restructuring."

Conservation grounds rejected

Beijing had tried to justify its export control regime on conservation grounds arguing that the limitation of exports resulted in a reduction of domestic extraction thereby conserving the finite resources. The policy reform had become necessary as some of the resources faced depletion within four to fifteen years time, Beijing said during the proceedings.

China furthermore noted that for some resources this scarcity would inevitably lead to a critical shortage of materials essential for the Chinese industry.

"The restrictions are thus also justified as measures ‘temporary applied to prevent or relieve critical shortages of essential products' as provided for by WTO law," China asserted.

The panel dismissed these arguments on several grounds. First, it noted that there was "no clear link between the way the duty and the quota are set and any conservation objective." In fact it disagreed that export restrictions could ever support conservation efforts as greater domestic supply could increase domestic demand over time thus stimulating increased extraction.

The panellists further found that the situation did not concern a "critical shortage" nor "temporarily applied measures." In the words of the panel, a "critical shortage" by nature has to be a "temporary shortage" that could be relieved or prevented through the application of measures on a "temporary" basis. It was the first time ever that a WTO dispute settlement panel was confronted with this exception.

Article XX not applicable: Panel

Finally, China noted that the extraction of certain materials was harmful to the environment and health.

"The control of the export of high-energy-consumption, high pollution and resource-based products was utterly necessary for the [...] reduction of environmental pollution, freeing the economic development from the limitation by resource and alleviating the tense relations among coal, electricity, and oil," China asserted.

While WTO law with Article XX GATT provides for sensitive exceptions to allow measures necessary to protect the environment and public health the panel nonetheless once more disagreed with Beijing's position.

"Neither the measures implementing the export restrictions, nor the contemporaneous laws and regulations, convey in their texts that the export restrictions are contributing to, or form part of a comprehensive programme for the fulfilment of the stated environmental objective," the panellists said.

More striking in this regard, however, was the panel's finding that for those WTO law violations that rested on China's accession protocol rather that one of the WTO agreements, Article XX GATT was not applicable. This decision, if upheld by the Appellate Body, would effectively place many of China's WTO obligations outside the scope of GATT's general exceptions including those for public health, the environment, or resource conservation.

Though this matter continues to be disputed among WTO law experts, the panel's firm finding came as a surprise to many. "The Appellate Body would be well advised to overrule this finding," experts suggested during an expert meeting part of the Dialogue Series "Talking Disputes" organised by the International Centre for Trade and Sustainable Development (the publisher of BioRes) and WTI Advisors in July.

Amongst others, China has appealed the panel's findings regarding the applicability of Article XX to its accession protocol, the interpretation of the term "critical shortage," and the natural resource conservation justification. Officially, an appeal may take up to three months to reach a conclusion; in practice, however, rulings can take up to twice that long before they are issued. Experts say the ruling will be available for public in early 2012.

ICTSD Reporting.

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