Beijing should settle WTO case over rare-earth exports
Here is a little secret that folks at the Ministry of Commerce in Beijing do not want the domestic audience to know much about. When it comes to resolving China's trade conflicts with other countries, the ministry's dealings at the World Trade Organisation have been about as good as chimps throwing darts at the board - it has never come out on top at the WTO's Dispute Settlement Body since China's accession to the WTO.
China has faced complaints in 23 cases concerning 14 different issues up to the end of 2010. Each has resulted in either an unfavourable ruling or the ministry giving in during the consulting stage, promising to comply with most, if not all, of the opposing party's requests.
Major cases include one about value-added-tax rebates to domestic integrated circuit suppliers, initiated by the US in 2004, which resulted in China's commitment, during the consultation stage, to eliminating these preferential policies. A more recent case was about China's treatment of audiovisual imports. The WTO again issued a report that was mostly unfavourable to China.
The ministry's track record does not bode well for the prospects of the case initiated by the US, European Union and Japan this year over China's export quota on rare-earth materials, This is especially so given China's defeat last year in a case about export quotas on various forms of bauxite, coke, fluorspar, magnesium and other raw materials, which was brought by the US, EU and Mexico.
World prices of rare-earth metals have risen dramatically over the past few years, but domestic prices have remained more reasonable. China's rare-earth reserves make up just over 30per cent of the world's total, but it supplies nearly 95per cent of global demand. This gives the impression that China has developed near-monopoly control over the world's supply and it has tried to benefit from its market position. It is not surprising, therefore, that the US, EU and Japan are uneasy about the situation, given they are all major consumers of rare-earth materials.
The ministry's defence of the export quota is based on resource conservation. Under WTO rules, members can adopt measures relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption. The measures cannot be designed to discriminate between domestic and international consumption.
But because China has not implemented a domestic quota system, the ministry's argument seems to be hanging by a thread. Indeed, such a defence of export restrictions on natural resources has been notoriously unsuccessful in WTO history. In addition, China is committed to even stricter so-called WTO-plus rules as part of its WTO accession conditions.
Nevertheless, China genuinely wishes to clean up its rare-earth industry, which was characterised by fierce competition, overexploration, and lax enforcement of environmental and workplace safety regulations. The industry is not sustainable as it is, and the Chinese public has to bear the social and environmental costs.
The export quota system itself seems destined to become a thing of the past. Last year, for example, the quota was not even fully used. If there's no scarcity of supply, what is the point of a rationing system? At present, all it does is provide another target for overzealous US politicians keen to question at every turn China's trade practices.
So here is my suggestion: instead of going all the way, just to get another slap in the face, China should strike a deal with the US, EU and Japan during the consultation stage. The ministry probably knows that maintaining the current quota system is buying time to clean up the domestic rare-earth industry, and it is just a matter of time before it has to be phased out. At least it should do it in a quiet and face-saving way.
John Gong is associate professor at the Beijing-based University of International Business and Economics. johngong@ gmail.com