WTO Appellate Body confirms China rare earths export restrictions illegal

13 August 2014

The WTO’s highest court confirmed last Thursday that China’s export restrictions on various rare earths, as well as tungsten and molybdenum, are largely inconsistent with international trade rules. The decision upheld the main findings of a previous dispute panel ruling, released in March.

China is the leading producer of rare earths, which are primarily used for manufacturing high-tech products, such as wind turbines, energy-efficient lighting, hybrid and conventional vehicles, and medical equipment. However, despite accounting for over 90 percent of production of these minerals, it holds less than 25 percent of the estimated global supply.

In recent years, the Asian economy has imposed various measures to limit the exports of such rare earths. These decisions prompted the US, EU, and Japan to file nearly identical complaints at the WTO in 2012, questioning whether the measures were unfairly propping up global prices of these minerals and giving Chinese producers an unfair competitive advantage.

China, in turn, argued that the measures were geared toward protecting these natural resources, along with limiting the severe environmental damage that comes as a result of their extraction.

The case has drawn particular notice in the trade and environment community, as it brought to the fore the question of how to design natural resource conservation measures while adhering to global trade rules.

How the Appellate Body would rule on the relationship between China’s accession protocol and the WTO Agreements also piqued the interest trade law observers, particularly given the country’s loss in a separate case involving restrictions on raw materials exports.

“By upholding rules on fair access to raw materials, this decision is a win not only for the United States, but also for every nation that respects the principles of openness and fairness,” said US Trade Representative Michael Froman.

Accession protocol

One of the key questions ahead of the Appellate Body had been how it would interpret the relationship between China’s accession protocol – in other words, the terms under which the country joined the global trade body in 2001 – and the WTO’s founding Marrakesh Agreement.

Under China’s accession protocol, the country was required to eliminate all export duties, and the dispute panel had ruled in March that there was “no basis” in the protocol for justifying the use of such duties under Article XX of the General Agreement on Tariffs and Trade (GATT).

That particular article establishes a set of justifications under which WTO members may enact measures that would otherwise be illegal under international trade rules so long as these are used to fulfil greater public policy objectives. This includes, for instance, the conservation of exhaustible natural resources.

In its appeal, China argued that Article XII:1 of the Marrakesh Agreement and paragraph 1.2 of the China’s accession protocol, when read together, indicate that specific protocol provisions are to be treated as integral parts of either the Marrakesh Agreement or one of the Multilateral Trade Agreements, depending on the subject matter to which they “intrinsically relate.”

China had argued that the panel did not “give effective meaning” to the second sentence of Article XII:1 of the Marrakesh Agreement, which governs the WTO accession process. This article stipulates that new members to the global trade body must accept its legal framework as a “single undertaking” rather than cherry-picking select agreements. According to China, therefore, specific terms of accession must “intrinsically relate” to either the Marrakesh Agreement or one of the annexed Multilateral Trade Agreements.

The Appellate Body rejected China’s argument, indicating that Article XII:1 only provides the general rule for WTO accessions. They explained that Article XII:1 does not define the nature of the substantive relationship between the “terms” of accession, on the one hand, and the Marrakesh Agreement and the annexed Multilateral Trade Agreements.

Beijing also claimed that the term “WTO Agreement” of paragraph 1.2 of its accession protocol should also cover agreements other than Marrakesh Agreement. Therefore, the requirement under paragraph 1.2 that the accession documents “shall be an integral part of the WTO Agreement” means that the protocol’s individual provisions are also “integral parts” of the global trade body’s other specific agreements. The panel, China said, had erred in saying that these latter Multilateral Trade Agreements were excluded. (See BioRes, 13 May 2014)

The Appellate Body considered it of limited value to determine the scope of the term “WTO Agreement” under paragraph 1.2 in deciding the specific relationship between individual provisions of China’s accession protocol and the individual provisions of the Marrakesh Agreement and other Multilateral Trade Agreements.

Overall, the Appellate Body rejected the view that an inquiry into this relationship must start from the premise that such a provision is “intrinsically related” to some of the others. For the Appellate Body, the specific relationship between the two must be ascertained through a thorough analysis of the relevant provisions, on the basis of customary rules of treaty interpretation and the circumstances of each dispute.

Export quotas, domestic conservation

China had also challenged the panel’s finding that the rare earths export quotas were not actually measures that relate to conservation, given that these were not “made effective in conjunction with restrictions on domestic production or consumption.”

Under GATT Article XX(g), any trade measures that a country would like to exempt from WTO rules, on the grounds of their importance for natural resource conservation, must also be paired with domestic production or consumption constraints.

Beijing had argued that the panel had incorrectly limited itself by looking only at the structure and design of the export quotas, without also considering what actual effect these had on the marketplace. The complainants, however, had posited that the panel did indeed review the evidence that China provided on market effects, and “still found that China had failed to show how its export quotas, in their design and structure, relate to conservation.”

The Appellate Body ultimately agreed with the panel, and the complainants, on this particular point.

Even-handedness?

In April, Beijing appealed and alleged that the panel had mistakenly found that Article XX(g) imposed an additional requirement of “even-handedness” – splitting the burden of resource conservation evenly between foreign and domestic consumers and producers.

The Appellate Body clarified that Article XX(g) does not impose this as a separate requirement in addition to the conditions expressly set out in this provision. According to last week’s ruling, for GATT-inconsistent measures to be justified under Article XX(g), effective restrictions – namely “real restrictions – must be imposed on the domestic side. Ultimately, however, it also found that since the dispute panel did not use this “even-handedness” evaluation in reaching its findings the overall panel ruling that the export quotas were unjustified would remain unchanged.

In a statement, the Chinese Ministry of Commerce noted that this finding regarding how to interpret Article XX(g) “contributed to clarify, to the benefit of the WTO membership as a whole, the requirements for a WTO member to invoke an exception for conservation purposes.”

US conditional appeal

The Appellate Body did not rule on whether the panel’s decision to exclude certain evidence from its consideration – namely, a series of ten exhibits submitted by the three complainants – was inconsistent with the WTO’s Dispute Settlement Understanding, which outlines the terms that govern dispute proceedings at the global trade body.

The US had argued in its appeal that the panel was incorrect in deeming that these exhibits had been submitted too late, and would have therefore created “due process” concerns for China, given that the latter country would not have had enough time to respond adequately. The panel also found that the exhibits “did not supplement” other evidence that had already been accepted.

However, the US had made its appeal conditional, saying that it would not push the Appellate Body to rule on its concerns if China did not file its own appeal, or if the Appellate Body did not modify the panel’s legal findings or conclusions. (See BioRes, 17 April 2014)

Since the Appellate Body did not reverse or modify any of the panel’s findings or conclusions, it confirmed that it did not need to rule on the US appeal.

Next steps?

Under WTO dispute settlement practices, if China cannot immediately bring the cited measures into compliance, the parties can seek a mutual agreement on the reasonable period of time. The latter should occur within 45 days following the adoption of the Appellate Body report by the WTO’s Dispute Settlement Body.

Should there be no mutual agreement the parties can resort to arbitration under Article 21.3 of the Dispute Settlement Understanding.

 

ICTSD reporting.

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