TWN Info Service on WTO and Trade Issues (July11/07)
WTO rules against
Geneva, 6 Jul (Kanaga Raja) -- A World Trade Organization (WTO) dispute panel has handed down a ruling that export restraints imposed by China on certain important raw materials were inconsistent with its WTO obligations.
In a ruling issued on 5 July, the panel recommended
that the Dispute Settlement Body (DSB) request
The ruling, subject to any rulings of the Appellate
According to the ruling,
The panel acknowledged that by this ruling,
However, based on the text of the protocol, the panel
said it can only assume that this was the intention of
On 23 June 2009, the United States and the European
Communities, and on 21 August 2009,
At its meeting of 21 December 2009, the DSB established
a single panel pursuant to the requests of the
In a press release on 5 July, US Trade Representative
Ron Kirk said: "Today's panel report represents a significant victory
for manufacturers and workers in the
"The panel's findings are also an important confirmation of fundamental principles underlying the global trading system. All WTO Members – whether developed or developing - need non-discriminatory access to raw material supplies in order to grow and thrive," he added.
"They have also caused massive distortions and
harmful disruptions in supply chains throughout the global marketplace.
WTO rules are designed to deal with precisely these kinds of problems.
If left undisciplined, these types of policies could proliferate not
The press release said that the raw materials at issue are used in a multitude of downstream applications in the steel, aluminum and chemicals industries.
The press release stated that
In a separate press release, EU Trade Commissioner Karel De Gucht said: "This is a clear verdict for open trade and fair access to raw materials. It sends a strong signal to refrain from imposing unfair restrictions to trade and takes us one step closer to a level playing field for raw materials."
"I expect that
In a background to the dispute, the panel report said that the dispute concerns China's use of certain export restraints on the exportation of certain forms of bauxite, coke, fluorspar, magnesium, manganese, silicon carbide, silicon metal, yellow phosphorus and zinc (referred to as the raw materials).
The complainants (the
(1) export duties; (2) export quotas; (3) export licensing; and (4) minimum export price requirements.
The complainants challenged the existence of these restraints as well as aspects of the allocation and administration of export quotas, export licences and minimum export prices, and the alleged non-publication of certain measures.
-- the application of temporary export duties applied to fluorspar are justified pursuant to (General Exception provisions) of GATT 1994: Article XX(g) - conservation of exhaustible natural resources; and the application of temporary export duties to non-ferrous metal scrap of zinc, magnesium metal, and manganese metal, and to coke, magnesium metal and manganese metal are justified pursuant to Article XX(b) - necessary to protect human, animal or plant life or health.
-- the export quota applied to refractory-grade bauxite is justified pursuant to Article XI:2(a) of the GATT 1994, or is otherwise justified pursuant to Article XX(g) of the GATT 1994.
-- The export quotas applied to coke and silicon carbide are justified pursuant to Article XX(b) of the GATT 1994.
With respect to export duties, the complainants claim that China imposes duties on bauxite, coke, fluorspar, magnesium, manganese, silicon metal, yellow phosphorous, and zinc at the time of the panel's establishment on 21 December 2009 that are inconsistent with China's obligations in Paragraph 11.3 of China's Accession Protocol and its Annex 6.
The panel noted that Paragraph 11.3 of China's Accession
Protocol contains specific obligations with respect to export duties
and provides that: "
Annex 6 of
The Note to Annex 6 states that: "
Generally, said the panel, the complainants claim
that the export duties imposed by China on the exportation of the relevant
raw materials cannot be justified by either of the exceptions mentioned
in Paragraph 11.3 quoted above. They submit that, except for yellow
phosphorus, the relevant raw materials at issue are not included in
Annex 6 of China's Accession Protocol. The complainants add that such
duties are not covered by Article VIII of the GATT 1994 which, in any
case, is not invoked by
On whether China failed to consult pursuant to the
Note to Annex 6 to China's Accession Protocol, the panel noted that
in its first written submission, the European Union claimed that China
has violated the obligation under Annex 6 to China's Accession Protocol
to consult "with other affected WTO Members prior to the imposition
of the export duties imposed on bauxite, coke, fluorspar, magnesium,
manganese, silicon metal and zinc."
The panel concluded that
For each of these products (bauxite, coke, fluorspar, magnesium, manganese, silicon metal and zinc), said the panel, the series of measures operating in concert has resulted in the imposition of export duties that are inconsistent with China's obligations under Paragraph 11.3 of China's Accession Protocol.
It is only by examining these three measures (2009 Tariff Implementation Programme, Customs Law and Regulations on Import and Export Duties) as they work in concert that the panel said it concluded that it could reach a final determination on the complainants' export duty claims. The panel said it did not reach the conclusion that individually each of those measures is necessarily WTO-inconsistent; rather, when they operate in concert to result in WTO-inconsistent duties, it is then that they become prima facie WTO-inconsistent.
The panel recalled its view that findings on the measures acting in concert is necessary so that annually renewed measures do not evade WTO dispute settlement review merely through their expiration during the panel proceedings. The panel did not make any findings on the complainants' claims relating to yellow phosphorus.
The panel further concluded that
On whether export duties on bauxite, coke, fluorspar, magnesium, manganese, silicon carbide, and zinc are justified pursuant to Article XX of the GATT 1994, the panel noted that it had determined that the application of temporary export duties to non-ferrous metal scrap of zinc, magnesium metal, and manganese metal; to coke, magnesium metal and manganese metal; and to fluorspar, is inconsistent with Paragraph 11.3 of China's Accession Protocol.
According to the panel,
As a threshold matter, the complainants argued that
Accordingly, they argued that
Addressing the issue of whether Article XX of the GATT 1994 can be invoked to justify a violation of a provision falling outside the GATT 1994, the panel said that in its view, it is reasonable to assume that, were GATT Article XX intended to apply to Paragraph 11.3 of China's Accession Protocol, language would have been inserted to suggest this relationship. However, no such language is found in Paragraph 11.3 of China's Accession Protocol.
The panel agreed with
To the panel, the implication of
Thus, said the panel, there is no contradiction between
China's sovereign right to regulate trade, the rights acquired, and
the commitments undertaken by China that are contained in its Accession
Protocol, including in its Paragraph 11.3. On the contrary,
For the panel, the wording and the context of Paragraph
11.3 precludes the possibility for
For the foregoing reasons, the panel concluded that
there is no basis in
"To allow such exceptions to justify a violation
when no exception was apparently envisaged or provided for, would change
the content and alter the careful balance achieved in the negotiation
The panel said it is mindful that excluding the applicability of Article XX justifications from the obligations contained in Paragraph 11.3 means that China is in a position unlike that of most other WTO Members who are not prohibited from using export duties, either via the terms of their respective accession protocols or their membership to the WTO at the time of its inception.
However, based on the text before it, the panel said
it can only assume that this was the intention of
On the issue of whether a "critical shortage" of refractory-grade bauxite exists in China, the panel noted that China maintained that its export quota on refractory-grade bauxite forms part of a conservation plan aimed at extending the reserves of refractory-grade bauxite, but argued that the temporary application of those export restrictions is designed also to prevent and relieve the elements of the critical shortage caused by factors other than the products' availability.
In its assessment, the panel said that it cannot
According to the panel, Article XI:2(a) permits the application of restrictions or prohibitions "temporarily" to address "critical shortages" of "essential products". The panel concluded that a product may be "essential" within the meaning of Article XI:2(a) when it is "important" or "necessary" or "indispensable" to a particular Member.
This may include a product that is an input to an important product or industry. The determination of whether a particular product is "essential" to a Member must take into consideration the particular circumstances faced by that Member at the time in which a Member seeks to justify a restriction or prohibition under Article XI:2(a).
The panel concluded that the term "critical shortage" in Article XI:2(a) refers to situations or events that are grave or provoking crises and which can be relieved or prevented through the application of measures on a "temporary", and not an indefinite or permanent, basis.
Bearing these conclusions in mind, the panel concluded
that refractory-grade bauxite is "essential" to
On whether the export duties and export quotas applied
to refractory-grade bauxite and fluorspar are justified pursuant to
Article XX(g) of the GATT 1994, the panel noted that
According to the panel, in order for a measure to be justified under Article XX(g), the measure at issue must: (i) "relate to the conservation of an exhaustible natural resource", and (ii) be "made effective in conjunction with restrictions on domestic production or consumption".
The panel observed that although the parties agree
that the products (raw materials) covered by the present dispute are
exhaustible natural resources, they
The panel was of the view that
At that time,
"This is, in fact, the very essence of the conservation objective set forth in Article XX(g): if a WTO Member is not taking steps to manage the supply of natural resources domestically, it is not entitled to seek the cover of Article XX(g) for the measures it claims are helping to conserve the resource for future generations."
In sum, said the panel, paragraph (g) of Article XX can justify GATT-inconsistent trade measures if such measures along with parallel domestic restrictions aimed at the conservation of natural resources and are primarily aimed at rendering effective parallel domestic restrictions operating for the conservation of natural resources. A contrario, Article XX(g) cannot be invoked for GATT-inconsistent measures whose goal or effects is to insulate domestic producers from foreign competition in the name of conservation.
China also argued that export restrictions contribute
to its stated objective of conservation of the natural resources at
issue because by reducing foreign demand for the resource, they will
reduce domestic production and, hence, the extraction of the resource.
Furthermore, the use of export restrictions is said to be required because
the use of domestic restrictions on production without export restraints
The panel said it has some difficulties with
In light of the evidence submitted to it, the panel
said it is clear that there is a substantial increase in the domestic
consumption of fluorspar and refractory-grade bauxite, while exports
do not appear to have grown at the same pace. For the panel, this evidence
does not support
The panel said it is also concerned with the possibility that export restrictions may have long-term negative effects on conservation due to the increased demand from the downstream sector. An export restriction on an exhaustible natural resource, by reducing the domestic price of the materials, works in effect as a subsidy to the downstream sector, with the likely result that the downstream sector will demand over time more of these resources than it would have absent the export restriction. This could offset the reduction in extraction determined by the export restriction.
The panel also observed that there is no clear link
between the way the duty and the quota are set and any conservation
For the panel, measures that increase the costs of
refractory-grade bauxite and fluorspar to foreign consumers but decrease
their costs to domestic users are difficult to reconcile with the goal
of conserving refractory-grade bauxite and fluorspar. It concluded that
The panel also addressed China's contention that its export duties on and quotas on magnesium metal and manganese metal, coke and silicon carbide are justified under Article XX(b) on the grounds that production of these EPRs (i.e., primary production) is environmentally harmful. The export restrictions on these products, according to China, will lead to a reduction of production of these metals (because of the reduced demand for them outside China) and therefore a reduction of the pollution associated with their production.
As to whether the objectives of the measures are the protection of health and the environment, in the panel's view, all of these measures are evidence of China's considerable efforts to regulate in the interest of protecting the environment. The breadth of China's measures touching on environmental (and other) matters is impressive.
"However, commendable as China's efforts might be, we do not discern in this array of measures a comprehensive framework aimed at addressing environmental protection and health."
"More importantly, we do not find evidence that the export measures at issue in this dispute form part of any such framework. This is not to say that Members can only succeed in justifying their measures under Article XX(b) by producing one or more instruments stating explicitly that a challenged measure has been put in place because it is necessary to protect human, animal or plant life or health, or that such instrument details the manner in which its objective will be achieved."
"However, in our view, a Member must do more than simply produce a list of measures referring, inter alia, to environmental protection and polluting products. It must be able to show how these instruments fulfil the objective it claims to address."
Thus, the panel concluded that neither the measures implementing the export restrictions, nor the contemporaneous laws and regulations, convey in their texts that the export restrictions are contributing to, or form part of, a comprehensive programme for the fulfilment of its stated environmental objective.
The panel issued its findings in the form of a single document containing three separate reports with common sections on the panel's findings and separate sections on the panel's conclusions and recommendations for each complaining party.
With respect to the three complainants - the United States, the EU and Mexico - the panel said that under Article 3.8 of the Dispute Settlement Understanding (DSU), in cases where there is infringement of the obligations assumed under a covered agreement, the action is considered prima facie to constitute a case of nullification or impairment of benefits under that agreement.
Accordingly, the panel concluded that where China has acted inconsistently with Articles X:1, X:3(a), XI:1 of the GATT 1994; Paragraphs 1.2, 5.1 and 11.3 of China's Accession Protocol; and Paragraphs 83 and 84 of China's Working Party Report, it has nullified or impaired benefits accruing to the United States under the WTO Agreement.
Pursuant to Article 19.1 of the DSU, having found that China has acted inconsistently with Articles X:1, X:3(a) and XI:1 of the GATT 1994; Paragraphs 1.2, 5.1 and 11.3 of China's Accession Protocol; and Paragraphs 83 and 84 of China's Working Party Report, the panel recommended 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 made no recommendation on expired measures, namely, the 2009 measures at issue and pre-2009 MEP (minimum export price)-related measures. In respect of findings concerning export duties and export quotas, the panel found that the series of measures operating collectively has resulted in the imposition of export duties or export quotas 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. +