TWN Info Service on WTO and Trade Issues (Apr14/01)
22 April 2014
Third World Network  

WTO rules against China in rare earths dispute
Published in SUNS #7773 dated 28 March 2014
 
Geneva, 27 Mar (Kanaga Raja) -- A World Trade Organisation (WTO) dispute panel has handed down a ruling that Chinese measures relating to the exportation of rare earths, tungsten and molybdenum are inconsistent with its WTO obligations.
 
In the ruling issued on 26 March, the Panel said that having found that China has acted inconsistently with Article XI: 1 of the GATT 1994; Paragraphs 1.2, 5.1 and 11.3 of China's Accession Protocol; and Paragraphs 83, 84, 162 and 165 of China's Working Party Report, it recommends that the Dispute Settlement Body requests China to bring the existing measures at issue into conformity with its obligations under the GATT 1994, China's Accession Protocol and China's Working Party Report.
 
The panel report and ruling is a majority one, with one panellist recording his dissent on a systemic issue of the relationship between the Chinese Accession Protocol and the GATT 1994.
 
The Panel disagreed with the first main premise of China's argument regarding the systemic relationship between its Accession Protocol and the GATT 1994, namely, that the Accession Protocol-specific provisions in post-1994 accession protocols that relate to trade in goods, including Paragraph 11.3 of China's Accession Protocol, automatically became an "integral part" of the GATT 1994.
 
The Panel said this argument regarding the systemic relationship between its Accession Protocol and the GATT 1994 is not a "cogent reason" for departing from the Appellate Body's finding that the obligation in Paragraph 11.3 of China's Accession Protocol is not subject to the general exceptions in Article XX of the GATT 1994.
 
The Panel found that Paragraph 11.3 of China's Accession Protocol (an Accession Protocol-specific provision regarding export duties) is not an "integral part" of the GATT 1994, but that China's Accession Protocol is, according to its Paragraph 1.2, an integral part of the WTO Agreement.
 
The dissenting member (not otherwise identified, according to the Dispute Settlement Understanding practice), however, said that a proper interpretation of the relevant provisions at issue leads to the conclusion that the obligations in Paragraph 11.3 of China's Accession Protocol are subject to the general exceptions in Article XX of the GATT 1994.
 
In sum, the panellist said he believes that Paragraph 11.3 of China's Accession Protocol is an integral part of China's obligations on trade in goods in the sense that it adds to the basic obligations of the GATT 1994 relating to border tariffs. A proper interpretation on the availability of Article XX of the GATT 1994 to Paragraph 11.3 of China's Accession Protocol should take into account the fact that Paragraph 11.3 must be read cumulatively and simultaneously with related GATT Articles II and XI and as an integral part of the GATT system of rights and obligations.
 
"Therefore, in my view, unless China explicitly gave up its right to invoke Article XX of GATT 1994, which it did not, the general exception provisions of the GATT 1994 are available to China to justify a violation of Paragraph 11.3 of its Accession Protocol. I see nothing in China's Accession Protocol that clearly indicates such a waiver. In my view, finding that the obligation in Paragraph 11.3 is subject to the general exceptions in Article XX of the GATT 1994 allows China to exercise its rights and obligations with a view to favouring its sustainable development. This concludes my separate opinion." (See below for details.)
 
In its ruling and findings concerning export duties and export quotas on various forms of rare earths, tungsten, and molybdenum, and restrictions on the trading rights of enterprises exporting rare earths and molybdenum, the Panel said it has found that the series of measures have operated to impose export duties and export quotas on various forms of rare earths, tungsten, and molybdenum, and restrictions on the trading rights of enterprises exporting rare earths and molybdenum (i. e. the prior export experience requirement, the export performance requirement, and the minimum registered capital requirement), that are inconsistent with China's WTO obligations.
 
The Panel, therefore, recommended that the Dispute Settlement Body requests China to bring its measures into conformity with its WTO obligations such that the series of measures does not operate to bring about a WTO-inconsistent result.
 
This is the second dispute involving China's natural resources. Back in February 2012, the Dispute Settlement Body had adopted the Appellate Body and Panel reports in a separate dispute brought against China by the United States, the European Communities and Mexico concerning Chinese measures related to the exportation of various raw materials.
 
In that dispute, the Appellate Body had upheld an earlier panel ruling that had found that export restraints imposed by China on certain raw materials were inconsistent with its WTO obligations. (See SUNS #7316 dated 24 February
2012.)
 
The present dispute concerning China's rare earths, tungsten and molybdenum was brought separately by the United States, the European Union and Japan, and a single panel was subsequently established to hear the dispute.
 
A press release by the Office of the United States Trade Representative has quoted USTR Michael Froman as saying: "Time and again, the Obama Administration has made clear that we are willing to go to the mat for American workers and businesses to make sure that the playing field is fair and level."
 
"China's decision to promote its own industry and discriminate against US companies has caused US manufacturers to pay as much as three times more than what their Chinese competitors pay for the exact same rare earths. WTO rules prohibit this kind of discriminatory export restraint and this win today, along with our win 2 years ago in an earlier case, demonstrates that clearly," he further said.
 
According to the USTR press release, rare earths, tungsten and molybdenum are key inputs in a multitude of US-made products for critical American manufacturing sectors, including hybrid car batteries, wind turbines, energy-efficient lighting, steel, advanced electronics, automobiles, petroleum and chemicals.
 
In a separate press release, the EU Mission to the WTO said that the panel's ruling backs the claims of the EU and its co-complainants, the US and Japan. The verdict is clear: export restrictions cannot be imposed supposedly to conserve exhaustible natural resources if domestic use of the same raw materials is not limited for the same purpose, it added.
 
In a statement released by the Chinese Mission to the WTO, the Head of the Department of Treaty and Law in the Chinese Ministry of Commerce (MOFCOM) said that the Panel recognised China's comprehensive resource and environment conservation measures taken for rare earths, tungsten and molybdenum products, and rejected the European Union's claim that the "export performance" requirement imposed by the Chinese government on enterprises applying for molybdenum export quotas discriminated foreign enterprises.
 
While welcoming this, the Head of the Department of Treaty and Law expressed regret over the panel's ruling that China's export duty, export quota, and export quota administration and allocation measures imposed on the products at issue were inconsistent with the WTO rules and China's Accession Protocol. He pointed out that facing increasing resource and environment pressure, the Chinese government has been reinforcing and improving its comprehensive regulation on high-polluting, high-energy-consuming and resource-consuming products in recent years.
 
"Such efforts are China's response to the needs to conserve exhaustible natural resources and protect environment, which also shows China's endeavour to maintain global sustainable development," said the MOFCOM statement.
 
"China believes that these regulatory measures are perfectly consistent with the objective of sustainable development promoted by the WTO and contribute to the coordinated development of resources, environment and human beings. China will continue to strengthen its regulation on resource products in a WTO-consistent manner and maintain fair competition," said the Head of the Department of Treaty and Law.
 
According to the panel report, the dispute concerns China's use of export quotas and export duties on various forms of rare earths, tungsten, and molybdenum, and that the complainants also challenge the administration and allocation, including through export licensing, of the export quotas.
 
The raw materials at issue are either naturally occurring minerals or materials that have undergone some initial processing. "Rare earths" is the common name for a group of 15 chemical elements in the periodic table with atomic numbers 57 to 71. These elements are part of the so-called "lanthanide group", composed of: lanthanum, cerium, praseodymium, neodymium, promethium, samarium, europium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, ytterbium and lutetium. Two other rare earth elements are included in the scope of this dispute, namely, scandium (atomic No. 21) and yttrium (atomic No. 39).
 
With respect to export duties, the Panel noted that Paragraph 11.3 of China's Accession Protocol states that "China shall eliminate all taxes and charges applied to exports unless specifically provided for in Annex 6 of this Protocol or applied in conformity with the provisions of Article VIII of the GATT 1994."
 
The complainants assert that, in 2012, China imposed export duties on 363 products, including 58 rare earths products, 15 tungsten products, and nine molybdenum products. The complainants submit that these latter 82 products are not identified in Annex 6 of China's Accession Protocol, and that China's imposition of export duties on these products is therefore inconsistent with Paragraph 11.3 of its Accession Protocol.
 
According to the Panel report, China does not dispute the complainants' allegation that it has acted inconsistently with Paragraph 11.3 of its Accession Protocol. However, China argues that the obligation in Paragraph 11.3 is subject to the general exceptions in Article XX of the GATT 1994, and submits that the export duties at issue are justified under Article XX(b) of the GATT 1994 because they are "necessary to protect human, animal or plant life or health".
 
In its analysis, the Panel concluded that in 2012, China imposed export duties ranging from 5 to 25% ad valorem on 58 rare earths products, 15 tungsten products, and nine molybdenum products. The Panel concluded that these products are not included in Annex 6 of China's Accession Protocol. Accordingly, the Panel found that China's imposition of export duties on those products is inconsistent with Paragraph 11.3 of its Accession Protocol.
 
With respect to China's argument regarding the systemic relationship between the provisions of China's Accession Protocol and those of the GATT 1994, the Panel concluded that the legal effect of the second sentence of Paragraph 1.2 is to make China's Accession Protocol, in its entirety, an "integral part" of the Marrakesh Agreement, and not that, in addition, the individual provisions thereof are also integral parts of Multilateral Trade Agreements annexed to the Marrakesh Agreement. The Panel said it has also rejected China's argument based on Article XII: 1 of the Marrakesh Agreement.
 
The Panel therefore disagreed with the first main premise of China's argument regarding the systemic relationship between its Accession Protocol and the GATT 1994, i. e. that the Accession Protocol-specific provisions in post-1994 accession protocols that relate to trade in goods, including Paragraph 11.3 of China's Accession Protocol, automatically became an "integral part" of the GATT 1994.
 
Accordingly, the Panel said it is not strictly necessary for it to address the remaining elements of China's argument, which include the propositions that (i) the obligation in Paragraph 11.3 is "intrinsically" related to Articles II and XI of the GATT 1994; and (ii) assuming that Paragraph 11.3 is an "integral part" of the GATT 1994, Paragraph 11.3 is therefore subject to the general exceptions in Article XX of the GATT 1994 "unless there is explicit treaty language" to the contrary.
 
As for the proposition that the obligation in Paragraph 11.3 is "intrinsically" related to Articles II and XI of the GATT 1994, the Panel observed that there is no provision of the GATT 1994 that requires Members to eliminate export duties. Article II: 7 of the GATT 1994 provides that the schedules annexed to the GATT 1994 are an integral part thereof. It would appear to be possible for Members to include commitments regarding the use of export duties in such schedules. Indeed, some Members have done so. However, the export duty commitments at issue were not inscribed in China's schedule.
 
With respect to Article XI: 1, the Panel noted that this provision concerns prohibitions or restrictions on the exportation (or importation) of any product "other than duties, taxes or other charges". The obligation in Paragraph 11.3 of China's Accession Protocol does not relate to the same subject-matter as Articles II or XI of the GATT 1994.
 
In light of the foregoing, the Panel found that China's argument regarding the systemic relationship between its Accession Protocol and the GATT 1994 is not a "cogent reason" for departing from the Appellate Body's finding that the obligation in Paragraph 11.3 of China's Accession Protocol is not subject to the general exceptions in Article XX of the GATT 1994.
 
The Panel then addressed China's next specific argument, which is that "[t]he terms ‘nothing in this Agreement' in the chapeau of Article XX of the GATT 1994 do not exclude the availability of Article XX to defend a violation of Paragraph 11.3 of China's Accession Protocol". In this regard, China submits that the exceptions under Article XX of the GATT 1994 are also available to excuse violations of what it labels intrinsically GATT-related "WTO-plus" provisions contained in post-1994 accession protocols.
 
Following its analysis, the Panel found that China's argument regarding the terms "nothing in this Agreement" in the chapeau of Article XX of the GATT 1994 is moot as a consequence of the Panel's finding that Paragraph 11.3 of China's Accession Protocol (an Accession Protocol-specific provision regarding export duties) is not an "integral part" of the GATT 1994; China's Accession Protocol is - according to its Paragraph 1.2 - an integral part of the WTO Agreement.
 
Accordingly, the Panel found that China's argument cannot be regarded as a "cogent reason" for departing from the Appellate Body's finding that the obligation in Paragraph 11.3 of China's Accession Protocol is not subject to the general exceptions in Article XX of the GATT 1994.
 
On China's argument relating to the object and purpose of the WTO Agreement, the Panel noted that China's argument rests on a key premise: that the result of the Appellate Body's ruling on the non-applicability of Article XX as an exception to the obligation in Paragraph 11.3 is that "trade liberalization must be promoted at whatever cost - including forcing Members to endure environmental degradation and the exhaustion of their scarce natural resources".
 
China argues that this result is inconsistent with the object and purpose of the WTO Agreement. More specifically, China argues that such a result cannot be reconciled with the requirement to interpret treaties in a "holistic manner", with the requirement to give due meaning to a treaty's "object and purpose", with the specific reference to "the objective of sustainable development" in the preamble of the WTO Agreement, and the need to "balance trade liberalization with non-trade-related objectives".
 
The Panel agreed with China that an interpretation of the covered agreements that resulted in sovereign States being legally prevented from taking measures that are necessary to protect the environment or human, animal or plant life or health would likely be inconsistent with the object and purpose of the WTO Agreement. In the Panel's view, such a result could even rise to the level of being "manifestly absurd or unreasonable".
 
However, the Panel considered that the premise underlying China's argument is false. The Appellate Body found that the obligation in Paragraph 11.3 of China's Accession Protocol is not subject to the general exceptions in Article XX of the GATT 1994. Paragraph 11.3 of China's Accession Protocol concerns one type of instrument only - export duties. Thus, the only result that follows from this finding is that when seeking to address environmental concerns and protect the life and health of its population, China must use instruments and means other than export duties to do so (unless those export duties are imposed on products within the maximum rates "specifically provided for" in Annex 6 of China's Accession Protocol).
 
Such alternative instruments and means include the entire universe of instruments and means that governments maintain to protect the environment and human health, and that do not violate WTO obligations - or that may violate one or more WTO obligations, but which may be justified under Article XX of the GATT 1994.
 
In sum, the Panel agreed with China that an interpretation of the covered agreements that resulted in sovereign States being legally prevented from taking measures that are necessary to protect the environment or human, animal or plant life or health would likely be inconsistent with the object and purpose of the WTO Agreement. However, the Panel disagreed with China that this is the result of the Appellate Body's finding that the obligation in Paragraph 11.3 of China's Accession Protocol is not subject to the general exceptions in Article XX of the GATT 1994.
 
Accordingly, the Panel found that China's argument cannot be regarded as a "cogent reason" for departing from that finding.
 
The Panel recalled that in its prior adopted reports in China - Raw Materials, the Appellate Body found that there is no basis in China's Accession Protocol to allow the application of Article XX of the GATT 1994 to China's obligations in Paragraph 11.3 of China's Accession Protocol.
 
The Panel concluded that China has not presented this Panel with any cogent reason for departing from the Appellate Body's finding. Accordingly, the Panel found that the obligation in Paragraph 11.3 of China's Accession Protocol is not subject to the general exceptions in Article XX of the GATT 1994.
 
The Panel said it wishes to emphasise two points. The first is the narrow scope of this finding. "The question that has been presented to the Panel, and the only question that we have addressed, is the applicability of Article XX of the GATT 1994 to the obligation contained in Paragraph 11.3 of China's Accession Protocol. The Panel has not expressed, in this respect, any view, and its findings should not be understood as implying any view, on whether Article XX of the GATT 1994 is applicable to other provisions of China's Accession Protocol, other provisions of other Members' protocols of accession, or other provisions contained in the Multilateral Trade Agreements annexed to the WTO Agreement."
 
Second, the Panel said it wishes to underscore how limited the implications of this finding are in terms of China being able to adopt and maintain measures to protect the environment and the life and health of its population. When seeking to address environmental concerns and protect the life and health of its population, China must, according to Paragraph 11.3 of its Accession Protocol, use instruments and means other than export duties to do so (except to the extent it has provided for in its Accession Protocol).
 
"That is the only implication of this finding. In our view, this finding in no way impairs China's ability to pursue those legitimate objectives."
 
The panel report took note that one panellist was unable to agree with some of the findings and conclusions (contained in paragraphs 7.63 to 7.117 of the report).
 
According to this panellist: "I agree with the ultimate conclusion reached by this Panel that, in this dispute, China cannot justify its export duties on rare earths, tungsten, and molybdenum products pursuant to Article XX(b) of the GATT 1994 (GATT Article XX(b)). However, contrary to the finding made by the Panel's majority, I believe that a proper interpretation of the relevant provisions at issue leads to the conclusion that the obligations in Paragraph 11.3 of China's Accession Protocol are subject to the general exceptions in Article XX of the GATT 1994."
 
Setting out his opinion, the panellist said that in sum, he believes that Paragraph
11.3 of China's Accession Protocol is an integral part of China's obligations on trade in goods in the sense that it adds to the basic obligations of the GATT 1994 relating to border tariffs. A proper interpretation on the availability of Article XX of the GATT 1994 to Paragraph 11.3 of China's Accession Protocol should take into account the fact that Paragraph 11.3 must be read cumulatively and simultaneously with related GATT Articles II and XI and as an integral part of the GATT system of rights and obligations.
 
"Therefore, in my view, unless China explicitly gave up its right to invoke Article XX of GATT 1994, which it did not, the general exception provisions of the GATT 1994 are available to China to justify a violation of Paragraph 11.3 of its Accession Protocol. I see nothing in China's Accession Protocol that clearly indicates such a waiver. In my view, finding that the obligation in Paragraph 11.3 is subject to the general exceptions in Article XX of the GATT 1994 allows China to exercise its rights and obligations with a view to favouring its sustainable development. This concludes my separate opinion."
 
In other findings, the Panel, in its conclusions with respect to the chapeau of Article XX of the GATT 1994, concluded that China has demonstrated that the mining and production of rare earths, tungsten, and molybdenum have caused grave harm to the environment and to the life and health of human, animals, and plants in China.
 
The Panel recognised that in recent years China has considerably enhanced the scope of the environmental measures it has adopted with a view to addressing this harm. In this regard, the Panel recalled the Appellate Body's statement that "few interests are more 'vital' and 'important' than protecting human beings from health risks, and that protecting the environment is no less important".
 
However, the Panel found that China has not demonstrated that its export duties are designed to address this problem, or that they are apt to make a material contribution to addressing this problem, or that the alternative measures identified by the complainants are not reasonably available or would not make the same contribution to addressing this problem. In addition, the Panel found that China has not demonstrated that the measures are applied in a manner that satisfies the chapeau of Article XX of the GATT 1994.
 
For these reasons, the Panel found that China has not demonstrated that its imposition of export duties on the products at issue are justified under Article XX(b) as measures necessary to protect human, animal or plant life or health.
 
In its overall conclusions on claims relating to export duties, the Panel found that: (i) China's imposition of export duties on the products at issue is inconsistent with Paragraph 11.3 of China's Accession Protocol; (ii) the obligation in Paragraph 11.3 is not subject to the general exceptions in Article XX of the GATT 1994; and even if it were, (iii) China has not demonstrated that its export duties on the products at issue are justified under Article XX(b) of the GATT 1994 as measures necessary to protect human, animal or plant life or health.
 
Turning to export quotas, amongst other findings, the Panel did not agree with China that its sovereign right over its natural resources allows it to control international markets and the domestic and international allocation and distribution of rare earths.
 
It said that China, as a sovereign WTO Member, can control the amount of rare earths it extracts, but once such resources enter the market, they are subject to WTO rules, which prohibit quotas unless justified under one or more of the GATT exceptions. China has not convinced the Panel that the right in Article XX(g) to adopt measures for conservation provides China with the right to control the domestic and international allocation and distribution of rare earths.
 
In its overall conclusions on China's export quotas on rare earths, the Panel concluded that China's export quota on rare earths is inconsistent with Article XI: 1 of the GATT 1994 and Paragraphs 162 and 165 of China's Working Party Report. The Panel also concluded that China's export quota on rare earths is not justified under either subparagraph (g) or the chapeau of Article XX of the GATT 1994.
 
With respect to China's export quota on tungsten, the Panel concluded that China's export quota on tungsten is inconsistent with Article XI: 1 of the GATT 1994 and Paragraphs 162 and 165 of China's Working Party Report. The Panel also concluded that China's export quota on tungsten is not justified under either subparagraph (g) or the chapeau of Article XX of the GATT 1994.
 
On molybdenum, the Panel concluded that China's export quota on molybdenum is inconsistent with Article XI: 1 of the GATT 1994 and Paragraphs 162 and 165 of China's Working Party Report. The Panel also concluded that China's export quota on molybdenum is not justified under either subparagraph (g) or the chapeau of Article XX of the GATT 1994.
 
In respect of claims concerning export quota administration and allocation:
 
a. The Panel found that the restrictions on the trading rights of enterprises exporting rare earths and molybdenum (i. e. the prior export experience requirement, the export performance requirement, and the minimum registered capital requirement) that China applies by virtue of the series of measures at issue are inconsistent with Paragraphs 83(a), 83(b), 83(d), 84(a), and 84(b) of China's Working Party Report, as incorporated into China's Accession Protocol by virtue of Paragraph 1.2;
 
b. The Panel found that the restrictions on the trading rights of enterprises exporting rare earths and molybdenum (i. e. the prior export experience requirement, the export performance requirement, and the minimum registered capital requirement) that China applies by virtue of the series of measures at issue are inconsistent with Paragraph 5.1 of China's Accession Protocol;
 
c. The Panel found that China is entitled to seek to justify the restrictions on the trading rights of enterprises exporting rare earths and molybdenum referred to in paragraph 8.3 pursuant to Article XX(g) of the GATT 1994;
 
d. The Panel found that China has failed to make a prima facie case that the violations of its trading rights commitments are justified pursuant to Article XX(g).
 
The Panel also found that the European Union has not established that the prior export performance criterion in the 2012 Application Qualifications and Application Procedures for Molybdenum Export Quota is inconsistent with the commitment in Paragraph 84(b) of China's Working Party Report as incorporated into China's Accession Protocol by virtue of Paragraph 1.2.