Why does China restrict the rare earths trade?

China controls nearly 98% of the production of rare earths. You may not know what rare earths are, but as tension is mounting between China, on the one hand, and the US, Europe and Japan on the other, maybe it is time for you to get to know what rare earths are and why they are so important for the future of the economy.

What are rare earths and why does everybody want them?

There is a set of 17 chemical elements in the periodic table that are known as rare earths. These chemicals, plus molybdenum and tungsten, have unique properties such as magnetism, heat-resistance and phosphorescence. They have a wide spectrum of applications, ranging from magnets, ceramics, special abrasive powders, optical material, medical equipment and wind power turbines to energy-efficient bulbs, LED screens, camera lenses and hard drives – and these are just some examples.

These production sectors are targeted by many countries worldwide, which aim to base their economy on the production of high-value products, which are, of course, sold at a higher price. Even though rare earths only make up a small percentage of the final product, they are essential for its production. Therefore, the industries involved in these sectors need some kind of supply certainty. If China moves to use trade in rare earths as a ‘weapon’, companies will then have to operate in a riskier and more hostile environment.

This is why developed countries, such as the United States (US), powerful European Union (EU) members, Japan (and lately Canada) are against any kind of export restriction China imposes on rare earths. Of course, it is exactly that same reason which motivates China’s wish to impose the restrictions in the first place.

The complaint

On January 30, 2012, the Dispute Settlement body of the World Trade Organization (WTO) ruled against China (a member of the WTO since December 2001) in a case of export duties and export quotas for a number of industrial minerals. The US, which has been a member since 1995, asked for a complete removal of the export quota system and for a reduction on its duties. The victory in the Dispute Settlement organ has given the USA, the EU, Japan and Canada the strength to, separately but in coordination, appeal the restrictions on the international trade of rare earths, tungsten and molybdenum.

China maintains that these restrictions, which are imposed as export duties, quotas, licensing and minimum export-price requirements, are “created after fully considering the ability of the environment to ensure effective supplies of rare earth metals.”, and so they are in compliance with Art. XX of the GATT, by which trade restricting measures are allowed if their purpose is of environmental conservation. This is an exception to GATTS’ Art. XI, which prohibits quantitative restrictions.

What must be resolved here is whether the protection of the environment is really the main reason for imposing these restrictions, or whether it is merely an excuse. Either way, China is in a difficult position. If its motivations are conservation and environmental protection, trade measures must be applied in conjunction with production and consumption measures, and such measures have not been put in place domestically. China defends itself by saying that there are plans and discussions on their implementation in the near future, but that this is taking longer than previously thought because of a number of internal difficulties. Now the WTO panel must decide whether it will accept this explanation, or not.

China’s position and development issues

For China, as for many other countries nowadays and throughout history, control over domestically produced raw materials, energy and food is vital to its national interests. Any attempted “attack” on this control is interpreted as unfair and will be rejected. Despite subjecting all of these goods to trade restrictions, China believes that what is being done is in total accordance with its membership of WTO, whose other members clearly oppose such measures. China is playing what it calls “procedural games” (游戏规则), which allows evasion of some of its WTO responsibilities, maintaining the power of defense in cases of national interest.

The issue has a legal basis in China’s Foreign Trade Law ( 对外贸易法), which provides that “export may be restricted for various reasons. Among the justifications for restricting exports is the protection and conservation of exhaustible natural resources” (chapter 3, art. 16). This is the reason for limiting exports of rare earths and other metals, and there is no mention of the necessary conjunction with domestic measures in this law (of which the WTO has full knowledge).

What are the background issues?

Seen from a distance, we cannot be sure whether it is true that China is breaking WTO rules only in order to maintain control over trade in rare earths. Or, whether they are in fact planning to protect the environment through measures, but need more time for these to be imposed. Perhaps  it is a combination of both… Whatever the case may be, China must have its reasons to impose the trade restrictions, especially given that it is a major importer of not only raw materials, but also of energy and food. Entering into this conflict with WTO and its major players can have negative effects on the national interests as a whole (retaliation, for example, as the EU is doing with Argentina for the Repsol case). The quest to increase power through the rare earths case carries not only these risks, but also others. For example, if prices keep rising, others will be encouraged to re-enter the market of rare earths production and refining. China would then have to face stronger competition and lose its monopolistic position.

The answer on the Chinese position may come from the web of interest groups that try to influence political decisions in China. As in so many other cases, lobbying is effective. If this were not the case, it is difficult to understand why the authorities do not prohibit export quotas, replacing them with taxes and duties instead – a measure that may in fact also bring in more money for the treasury.

This is a nonprofit explanation.

 

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