Tensions Build between EU, China over Rare Earths in Aftermath of Raw Materials Decision

20 July 2011

China's recent announcement that it would further tighten its rare earths export quotas came as a surprise, given that the WTO found similar restrictions on raw materials to violate trade rules (see Bridges Weekly, 6 July 2011). Meanwhile, China is still debating whether to appeal the raw materials ruling, as the deadline for appeal is 2 September 2011.

Last week, Beijing notified the quotas that would apply during the second half of 2011. While the annual amount keeps up with last year's numbers, a new product - ferro-alloys - has been added to the list, effectively tightening the quotas.

"This is highly-disappointing," said the EU Trade Spokesperson John Clancy. "The EU continues to encourage the Chinese authorities to revisit their export restriction policy to ensure there is full, fair predictable and non-discriminatory access to rare earth supplies as well as other raw materials for EU industries," he added.

Rare earths are elements needed in the high technology industry, such as for manufacturing wind turbines, mobile phones, or computers. China currently produces more than ninety percent of global demand for these elements; however, last year Beijing started to severely restrict its exports. The extraction of rare earth is highly complicated and polluting - one reason why most Western countries closed down their extraction plants in the nineties when China increased its production.

Possible WTO case in the making?

The announcement comes only weeks after the release of a new WTO panel report ruling against China on export restrictions for certain raw materials, a finding that had been celebrated by the EU and others (see Bridges Weekly, 6 July 2011).

EU Trade Commissioner Karel De Gucht had called it "a strong signal to refrain from imposing unfair restrictions to trade," taking countries "one step closer to a level playing field for raw materials." The case concerned another group of raw materials that had been subject to similar export restrictions. When acceding to the WTO, China had agreed to eliminate all quantitative export restrictions, including quotas, and to discipline its export duties.

Though the WTO has no precedence system, panel and Appellate Body reports are usually a good indicator of how the trade body might address certain questions in the future. Observers had hoped that the rejection of China's export restrictions would induce Beijing to increase its rare earths exports.

Chinese Trade Minister Chen Deming, however, said China was "not worried" about a possible WTO case over rare earths.

Indeed, observers caution against dismissing China's rare earth export restriction system too easily. In the raw materials case, China's defence on environmental grounds was rejected because, among other reasons, Beijing failed to prove that it had limited domestic production and consumption in addition to the export disciplines - which is a requirement under WTO law when using this type of defence. But as China is busy introducing stronger environmental consideration provisions into its legislation, it might be better prepared should the rare earths issue ever reach the global trade body.

Manufacturers looking elsewhere for rare earths

Meanwhile, manufacturers in Europe, Japan, and the US are preparing themselves for a lengthy diplomatic process by searching for alternative sources of rare earths. In bilateral talks in the German city of Hanover on Monday and Tuesday of this week, Russia agreed to allow Germany to access its rare earth deposits. Germany, as a high tech producer with no own rare earth sources, is highly dependent on generating access to other sources.

Russian Deputy Prime Minister Viktor Zubkov told reporters that "we are ready to grant an opportunity for German companies to actively participate in the extraction of rare earth metals, which are used in automotive and agricultural machinery production, so that they could build these enterprises in Russia."

In addition, Australian press reports that Germany's high-tech giant Siemens has signed a letter of intent with Australian miner Lynas to establish a joint magnet plant to supply European wind farms. Neodymium-based rare-earth magnets are needed in wind turbine generators and other energy-efficient drivers.

The joint venture could choose to establish a plant for rare earth extraction in Malaysia, as Lynas is already building a rare earths plant in the country.

ICTSD reporting; "Lynas, Siemens look at rare-earths venture," THE AUSTRALIAN, 8 July 2011; "China holds firm on rare earth quota," FINANCIAL TIMES, 14 July 2011; "Russia eyes record German trade with gas, minerals," REUTERS, 19 July 2011.

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