TWN Info Service on WTO and Trade Issues (July11/07)
18 July 2011
Third World Network  

WTO rules against China in raw materials dispute
Published in SUNS #7185 dated 7 July 2011

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 China to bring the existing measures into conformity with its obligations under the GATT 1994, its Accession Protocol and its Working Party report.

The ruling, subject to any rulings of the Appellate Body, if China or any of the parties go in appeal, will be automatically adopted by the DSB by negative consensus. When adopted, it may have implications over Chinese restraints on exports of rare earths.

According to the ruling, China's invocation of the General Exception provisions of GATT 1994 is limited by the terms of Paragraph 11.3 of its Accession Protocol.

The panel acknowledged that by this ruling, 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 of the protocol, the panel said it can only assume that this was the intention of China and the WTO Members when negotiating China's Accession Protocol. The situation created by this provision taken in isolation may be perceived as imbalanced, but the panel said it can find no legal basis in the Protocol or otherwise to interpret Paragraph 11.3 of China's Accession Protocol as permitting resort to Article XX of the GATT 1994.

On 23 June 2009, the United States and the European Communities,  and on 21 August 2009, Mexico, each requested consultations with China with respect to China's restraints on the export from China of various forms of bauxite, coke, fluorspar, magnesium, manganese, silicon carbide, silicon metal, yellow
phosphorus, and zinc.

At its meeting of 21 December 2009, the DSB established a single panel pursuant to the requests of the United States in document WT/DS394/7, the European Communities in document WT/DS395/7 and Mexico in document WT/DS398/6.

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 United States and the rest of the world."

"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.

"China's extensive use of export restraints for protectionist economic gain is deeply troubling. China's policies provide substantial competitive advantages for downstream Chinese industries at the expense of non-Chinese users of these materials," Ambassador Kirk further said.

"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 just within China but around the world - at the expense of everyone's growth and development," he added.

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 China's actions were not justified as conservation measures, environmental protection measures, or short supply measures.

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 China will now bring its export regime in line with international rules. Furthermore, in the light of this result, China should ensure free and fair access to rare earth supplies," he added.

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 US, the EU and Mexico) identified the following as four types of restraints that China imposes on the exportation of these raw materials:

(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.

China, amongst others, requested the panel to find that:

--  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: "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."

Annex 6 of China's Accession Protocol, entitled "Products Subject to Export Duty", lists 84 different products, each identified by an eight-digit HS (Harmonized System) number, and product description.

The Note to Annex 6 states that: "China confirmed that the tariff levels included in this Annex are maximum levels which will not be exceeded. China confirmed furthermore that it would not increase the presently applied rates, except under exceptional circumstances. If such circumstances occurred, China would consult with affected members prior to increasing applied tariffs with a view to finding a mutually acceptable solution."

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 China to justify such export duties.

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." China acknowledges that it failed to consult pursuant to the Note to Annex 6.

The panel concluded that China has in fact failed 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, in violation of its obligations under Annex 6 to China's Accession Protocol.

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 China did not 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, contrary to its obligations under Annex 6 to China's Accession Protocol.

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, China argued that temporary export duties applied 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). In addition, China argued that temporary duties applied to fluorspar are justified pursuant to Article XX(g).

As a threshold matter, the complainants argued that China is not entitled to resort to the defences of Article XX to justify export duties that are inconsistent with Paragraph 11.3 of China's Accession Protocol.

Accordingly, they argued that China cannot justify the application of such duties to these raw materials. The complainants further argued that were the panel to conclude that Article XX may be invoked as a defence to violations of Paragraph 11.3 of China's Accession Protocol, China failed to demonstrate that the application of duties to these raw materials is justified pursuant to Article XX(b) or Article XX(g).

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.

According to China, said the panel, the text of Paragraph 11.3 of its Accession Protocol shows that WTO Members, in imposing an obligation on China to forego export duties in certain circumstances, did not exclude the inherent right to regulate trade.

The panel agreed with China that WTO Members have an inherent and sovereign right to regulate trade. WTO Members and China have exercised this right, inter alia, in negotiating and ratifying the WTO Agreement. China has exercised its inherent and sovereign right to regulate trade in negotiating, among other actions, the terms of its accession into the WTO.

To the panel, the implication of China's argument is that because it has an inherent right to regulate trade, this right prevails over WTO rules intended to govern the exercise of that right. In the panel's view, it is China's sovereign right to regulate trade that enabled it to negotiate and agree with the provisions of Paragraph 11.3 of its Accession Protocol.

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, China's Accession Protocol and its various rights and obligations, are the ultimate expression of China's sovereignty.

For the panel, the wording and the context of Paragraph 11.3 precludes the possibility for China to invoke the defence of Article XX of the GATT 1994 for violations of the obligations contained in Paragraph 11.3 of China's Accession Protocol.

For the foregoing reasons, the panel concluded 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 the Accession Protocol.

"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 of China's Accession Protocol. It would thus undermine the predictability and legal security of the international trading system."

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 China and the WTO Members when negotiating China's Accession Protocol. The situation created by this provision taken in isolation may be perceived as imbalanced, but the panel said it can find no legal basis in the Protocol or otherwise to interpret Paragraph 11.3 of China's Accession Protocol as permitting resort to Article XX of the GATT 1994.

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 agree with China that it currently faces a "critical shortage" of refractory-grade bauxite in the sense of Article XI:2(a). The panel also rejected the argument that regulatory environmental or conservation-related restrictions imposed by China on the extraction or processing of a product in China should be taken into consideration when assessing whether a "critical shortage" of a product exists. These include the imposition of production caps, or licence, health, safety, environmental and other regulatory measures, and fees and taxes.

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 China. It  however found that China has not demonstrated that its export quota on refractory-grade bauxite is "temporarily applied" within the meaning of Article XI:2(a) to either prevent or relieve a "critical shortage".

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 China's defence of its export restrictions on refractory-grade bauxite and fluorspar is based on Article XX(g). China's argument is that refractory-grade bauxite and fluorspar are exhaustible natural resources; they are scarce, are not easily substitutable, and thus need to be managed and protected. China also insisted that nothing should interfere with their sovereignty over such natural resources.

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".

In China's view, said the panel, Article XX(g) includes within its scope the protection of living and non-living exhaustible natural resources, such as "raw materials". This is not contested by the complainants. China contended further that the term "conservation" should be interpreted as the act of preserving and maintaining the existing state or number of something, in this case "natural resources" covered by Article XX(g). China argued that Article XX(g) protects its sovereign right to adopt a comprehensive and sustainable mineral conservation policy, taking into account China's social and economic development needs.

For China, Article XX(g) must be interpreted in a manner that recognizes a WTO Member's "sovereign rights over their own natural resources." China claimed that these rights must be exercised in the interests of a Member's own social and economic development, as well as in light of the objective of sustainable development as stated in the Preamble to the WTO Agreement. China posited that sustainable development requires that economic development and conservation be aligned through the effective management of scarce resources, as the term "conservation" refers to the management of a limited supply of exhaustible natural resources over time.

The panel observed that although the parties agree that the products (raw materials) covered by the present dispute are exhaustible natural resources, they
disagree as to whether the challenged export restrictions "relate" to a "conservation" programme.

The panel was of the view that China's right to economic development and its sovereignty over its natural resources are not in conflict with China's rights and obligations as a WTO Member. When China chose to join the WTO in full exercise of its sovereignty, China made the concurrent decision that its sovereign rights over its natural resources would thereafter be exercised within the parameters of the WTO provisions, including those of Article XX(g).

At that time, China was aware of the terms of Article XX, as interpreted by the Appellate Body in its Gasoline and Shrimp reports, in particular with respect to the requirement that restrictions for which Article XX(g) is invoked could be justified only if they are made effective in conjunction with restrictions on domestic production or consumption. China's Accession Protocol does not reveal any contrary understanding on the part of China or any WTO Members.

"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.

In examining China's export restrictions on refractory-grade bauxite and fluorspar to determine whether they can be justified pursuant to Article XX(g), the panel said China's defence to justify its export restrictions on refractory-grade bauxite and fluorspar is based on the argument that these raw materials are exhaustible natural resources that need to be managed and conserved.

For China, refractory-grade bauxite and fluorspar are essential for its sustainable development, as they are a key input in the production of steel and aluminium. China contended that export restrictions on these raw materials are an integral part of China's conservation strategy.

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 would undermine China's sustainable development.

The panel said it has some difficulties with China's designed position. "It seems to us that a policy of restricting extraction would be more in line with a policy to achieve conservation than one confined to restricting exports. For the purpose of conservation of a resource, it is not relevant whether the resource is consumed domestically or abroad; what matters is its pace of extraction."

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 China's claim that it has put in place a comprehensive plan to conserve refractory-grade bauxite and fluorspar given that domestic extraction has in fact increased.

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 objective. China does not provide any evidence or argument to justify the use of an export duty on fluorspar, as opposed to a quota on refractory-grade bauxite. To justify the use of an export quota in the case of refractory-grade bauxite, China argued that a quota serves to ensure constraint in case of a sudden increase of foreign demand. However, China has not provided any evidence to suggest anything other than a stable demand for refractory-grade bauxite.

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 China has not met its burden of proving that its export quota on refractory-grade bauxite and its export duty on fluorspar "relate to the conservation" of refractory-grade bauxite and fluorspar.

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. +