This is a guest post from Ilaria Espa of the World Trade Institute
The third WTO dispute targeting China’s regime of export restrictions on raw materials is around the corner. Between June and August, the US and the EU filed separate requests for consultations, later supplemented (here and here), concerning China’s export duties imposed on various forms of antimony, chromium, cobalt, copper, ferro-nickel, graphite, indium, lead, magnesia, talc, tantalum and tin as well as export quotas imposed on antimony, indium, magnesia, talc and tin.
While the consultations requested by the US and the EU will run in parallel, they will likely lead to the establishment of a single panel in case the dispute cannot be settled.
The background
The US and the EU had already teamed up in and won two earlier raw materials disputes against China: China – Raw Materials and China – Rare Earths. The first targeted the export duties and quotas that China maintained on various forms of bauxite, coke, fluorspar, magnesium, manganese, silicon metal, yellow phosphorous and zinc. The second challenged the export duties and quotas imposed on rare earth elements, tungsten and molybdenum. In both cases, China’s export duties were found in breach of Paragraph 11.3 of China’s Accession Protocol, whereas the export quotas at issue were declared inconsistent with Article XI:1 GATT. China’s arguments seeking justification under Article XX (b) and (g) GATT were dismissed. The condemned measures were eventually removed.
The new dispute appears an easy win to the extent that it revolves around the same core legal arguments successfully invoked in China – Raw Materials and China – Rare Earths.
China as an ‘easy’ target
China is not the only country imposing export restrictions on raw materials. Export restraints on primary resources have been proliferating on a more general level in recent years, causing great alarm among net-importers such as the US and the EU. Yet, several factors explain why WTO disputes have repeatedly targeted Chinese export restrictions.
First, China’s regime of export restrictions is pervasive. According to the WTO Secretariat, China still maintains interim export duties on 314 tariff lines at the HS 8-digit level, while 102 tariff lines are subject to statutory export duties. Duty rates range from 5 to 50 per cent with the highest rates applied on minerals and metals, including those targeted by WTO disputes. China also maintains the most comprehensive (and complex) system of export quotas among WTO Members. Before the China – Rare Earths report was implemented in 2015, such a system applied to almost 200 tariff lines at the HS 8-digit level, including more than 40 types or groups of minerals according to OECD data.
Second, China’s regime of export restrictions covers raw materials that are strategically important to key manufacturing sectors: from construction to electronics and telecommunication, from equipment manufacturing to transportation. These sectors have played a crucial role in China’s transition from a resource-based economy to one characterized by manufacturing and export diversification. China has consistently denied that export restrictions were implemented to lower the price of domestic raw materials as part of its industrial policy. However, it is highly unlikely that Chinese exports of downstream products could have reached current levels without access to these materials at prices below world market levels. Not surprisingly, the measures challenged by the EU and the US are imposed on materials that are irreplaceable in a variety of rapidly expanding high-tech applications (e.g. medical devices, batteries of electric and hybrid vehicles, and thin-film technologies for photovoltaic cells).
Third, China happens to be – by far – the world’s leading producer of many of these raw materials. What’s more, it remains or has until recently been the sole producer of certain raw materials (e.g. rare earth elements). As a result, a number of import-dependent countries are exposed to severe competitiveness losses without being able to rely on alternative suppliers or indigenous production capacity. Other relatively well-endowed countries such as Australia and the US have resumed production of critical raw materials, but they are still dwarfed by China. As the largest exporter of critical minerals and metals, China can affect world supply and drive up world prices through the use of export barriers, in addition to artificially lowering domestic prices. US- and EU-based companies dependent on restricted inputs may be forced to relocate manufacturing facilities to China in order to be competitive with Chinese downstream firms. The threat of manufacturing jobs loss is however a scenario that both the US and the EU cannot afford at a time where economic stagnation is leaving them vulnerable to anti-trade political rhetoric.
But the most important reason lies in the scope of China-specific WTO obligations
Last but not least, when it comes to the use of export restrictions, China’s WTO obligations are more stringent than those assumed by any other resource-endowed WTO Member. In particular, China has undertaken a general obligation to eliminate export duties in its 2001 Accession Protocol, with the exception of 84 HS 8-digit products listed in Annex 6 to the Protocol. This obligation not only goes much further than standard GATT disciplines, which explicitly allow WTO Members to introduce and/or maintain export duties. It also has a much broader scope than most other WTO-plus obligations assumed by newly acceded developing country Members in their accession protocols.
Moreover, China’s export duty commitments were not incorporated into the GATT framework. Rather, they were assumed under an individual accession protocol provision, Paragraph 11.3, which does not include any express references to the package of WTO rights and obligations under the WTO Agreement. Failing such an ‘objective link’, the Appellate Body (AB) found that Paragraph 11.3-inconsistent export duties could not be subject to Article XX GATT defenses in China – Raw Materials and Rare Earths. By the same token, China is prevented from renegotiating its export duty commitments in accordance with GATT-specific procedures available to duty concessions.
The inflexibility of China’s WTO obligations on export duties makes China particularly vulnerable to WTO disputes as Paragraph 11.3-inconsistent measures cannot be derogated from a priori. China is thus left with the harder task to seek justification for more trade-distortive types of export restrictions, such as export quotas, under Article XX GATT. As shown in China – Raw Materials and China – Rare Earths, the odds of convincing the AB are not good. At least for what concerns the environmental exception under Article XX (b) and the conservation exception under Article XX (g), the AB made clear that mineral export restraints are difficult to justify because environmental externalities and depletion risks derive from domestic mine production rather than exports. In the same vein, it warned against invoking the principle of sustainable development and the principle of sovereignty over natural resources as pretexts to use export restrictions as instruments of industrial policy.
What’s next? Predictability vs. legitimacy of the multilateral trading system
It remains to be seen whether China will change its defensive strategy for Article XI:1 GATT-inconsistent export quotas (e.g. by invoking other Article XX justifications such as Article XX (j)). Recent WTO case law seems to leave no room for it to successfully defend the challenged export duties.
Were consultations between China and the US and the EU to fail, a third raw materials dispute would once again reveal China’s vulnerability to a WTO challenge concerning its export restrictions. This is good news for the EU and the US: they could show to their constituencies that enforcement of multilateral trade rules is not only possible, but actually protects their national interests (e.g. protecting jobs in the manufacturing sector). Yet, checkmating China may revive a more general sentiment of mistrust in the multilateral trading system, owing to the uneven playing field created by the WTO accession regime on export duties (i.e., the only type of export restrictions otherwise available under standard GATT disciplines to achieve economic diversification goals). China’s ill-concealed reluctance to get rid of its export duties speaks of this sentiment, but also more generally reflects the long-standing stance of developing country Members on export duties as legitimate developmental tools. Among them, importantly, are other newly acceded Members that assumed export duty commitments in post-1994 accession protocols such as Saudi Arabia, Vietnam and Ukraine.
As such, the new case against China’s export duties may revive the more general issue of policy space available to newly acceded Members after the enforcement of a proliferating number of (uneven) WTO-plus commitments. What is at stake is the legitimacy of the multilateral trading system in the eyes of developing country Members that allege to be left with commitments too onerous under their WTO accession protocols. These tensions cannot go unheeded for long before they frustrate the ambition of the new post-Nairobi ministerial cycles.
Ilaria Espa is Marie Curie Senior Research Fellow at the World Trade Institute and has most recently published Export Restrictions on Critical Minerals and Metals - Testing the Adequacy of WTO Disciplines with Cambridge University Press.
