WTO Finds China Rare Earth Metal Trade in Breach of Global Rules

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By Harun Rauf

SHANGHAI – Following an investigation into China’s trade of rare earth metals, a World Trade Organization (WTO) dispute panel has concluded that the country manipulated its export regulations in an effort to “secure preferential use” for domestic firms and encourage foreign investment.

Rare earth metals are critical raw materials used in the production of automotive and electronic products. China is currently the world’s largest supplier of rare earth metals – accounting for over 90 percent of the world’s total supply, and controlling 50 percent (55 million metric tons of 110 million metric tons) of global reserves.

China currently imposes duties and quotas on exports, as well as control which companies have the right to trade rare earth metals.

Chinese trade officials reasoned that the restrictions were imposed to conserve the natural resource, and were needed to mitigate the polluting effects that accompany the mining and processing of rare earth metal ores. The reasoning given for the export quota did not reflect domestic trade restrictions, however, and the WTO ruled that the quota aimed to fulfill industrial objectives rather than limit environmental harm.

The mining and processing of rare earth metals is a dirty job – a major reason production has shifted from the U.S. and Australia to China is because reserves in China are easier to extract with fewer harmful by-products, and China’s environmental regulations are significantly more relaxed.

Because the Chinese domestic trade of rare earth metals is not subject to the same constraints, the assertion that the quotas were in place to limit pollution was not considered valid by the WTO panel. While countries are permitted to limit exports and conserve natural resources in accordance with WTO rules, the panel decided China’s quota was too low when evaluated alongside its vast deposits.

China has 60 days to appeal the March 26 ruling, which was only recently made public.

Chinese export quotas on rare earth metals have been in place since 2009, and in 2010 China halted some exports to Japan for political reasons.

These restrictions have led to the reopening of mines in some countries and increased exploration efforts to discover new deposits.

After China, the second largest rare earth deposits lie in the Commonwealth of Independent States (former Soviet Republics), followed by Australia, the U.S. and India.

Japan, the world’s largest importer of rare earth metals, has begun seeking new suppliers and has so far signed a trade deal for rare metals with Mongolia and Vietnam among others, while Japanese companies have also made investments in Kazakh and Brazilian mining companies.

Japan also reported the discovery of large and easily accessible reserves in March 2013.

In 2010, global demand for rare earth metals was estimated at 136,000 tons (approx. 123,400 metric tons) while production was estimated at 133,600 tons (approx. 121,200 metric tons) and previously extracted supplies were able to compensate for this disparity. China’s production quote in 2010 was 89,110 metric tons, of which only 39,813 metric tons were exported.

According to projections, the future demand for rare earth metals will be between 160,000 tons and 200,000 tons in 2016.

Although China is, and will remain, the largest producer of rare earth metals, its own restrictions, combined with rising demand, could see it facing greater competition in the near future.

In the past, the WTO has ruled against China similarly: in 2009 the U.S., EU and Mexico complained about export restrictions of industrial materials, including yellow phosphorus, bauxite (Aluminium ore) and zinc among other minerals.

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