Frictions over Export Limits on the Rise

By BAI MING

FOR many people, free trade is all about free entry of goods and services into other countries. But a crucial condition underpinning this freedom is that countries do not willfully block nor hinder the flow of exports from their own shores. Such a position is hypocritical and contrary to the tenets of free trade.

As China becomes increasingly involved in global markets, it is being embroiled in a growing number of trade disputes, and these are spreading from the usual complaints over import links to the export side of the coin. The latest reminder is the January decision by a WTO appeals body to reject China's appeal over a ruling last July that concluded the country had violated international trade rules by restricting exports of nine materials used widely in the steel, aluminum and chemical industries. The WTO appeals body said China must "bring its export duty and export quota measures into line with WTO obligations." The ruling affects China's exports of certain forms of bauxite, coke, fluorspar, magnesium, manganese, silicon carbide, silicon metal, yellow phosphorous and zinc.

The case was first initiated by the United States and the EU in June 2009, with Mexico joining the suit later. They held that China had inadvertently driven up prices on overseas shipments of the above materials by setting export duties, quotas and licensing requirements on them, and in the process gave the country's own manufacturers an unfair edge over competitors. China argued export limits were needed to protect the environment.

Chinese exports of raw materials originally sprung from a thirst for foreign currency as China was just entering world markets – these materials, most of which were low value-added, were an easy way to earn foreign exchange, but came at a heavy cost to the environment.

In 1998 China set up export quotas on rare earth products and later banned them in the processing trade. But implementation was slack in the years following. In May 2011 the Ministry of Commerce and the General Administration of Customs released a joint decree that brought ferrous alloys containing more than 10 percent by weight of rare earth elements into the export-quota license-management system, and charged export duties of 25 percent on them.

It is a desire to protect the environment and rectify export growth patterns that prompted China to scale back on production and sales of low-priced raw materials, as well as to encourage a shift to products of greater technical sophistication. Extracting and exporting its resources at the pace of previous years would make the exhaustion of China's domestic mineral reserves an imminent prospect, and is counter to the sustainable development goals supposedly championed by developed nations.

Upon its accession to the WTO, China undertook to eliminate all export duties except for a number of products listed in an annex to its Protocol of Accession. Tariff and other forms of restraints are allowed, however, in exceptional cases under WTO rules, and China cited the environmental exceptions described in Article XX of the General Agreement on Tariffs and Trade (GATT) of 1994 to justify its restraints on exports of the nine industrial materials, arguing that the measures "related to the conservation of exhaustible natural resources." In the end, the WTO panel ruled that such measures, if consistent with the rules of the WTO, must be made effective in conjunction with restrictions on domestic production and consumption. This ruling, however, constitutes a misrepresentation of the situation.

Over the past few years China has closed countless energy-hungry, high-polluting mining and manufacturing enterprises, preventing the production and consumption of the nine materials by ensuring they never leave the ground.

Premier Wen Jiabao told German businesspeople in a meeting during Angela Merkel's visit to China in February this year that China's policy on the minerals does not discriminate against foreign companies. Both domestic and international operators are subject to the same environmental standards and rare earth supply quotas. It should also be noted that China is in a quandary on the issue – with its economy structured the way it is, proposed taxes on mineral resources are believed to have a destructive impact on downstream businesses. Changes in economic growth patterns cannot be achieved overnight by strategic taxes, and such changes, when they happen, often come at a hefty price.

The WTO Appellate Body upheld certain claims by China relating to export licensing requirements, minimum export price requirements, China's administration and allocation of export quotas, and fees and formalities in connection with export activities. Nevertheless it still concluded that the Chinese measures breached WTO rules. This ruling will have dire consequences for Chinese industry. At worst it could threaten China's national sovereignty by dictating guidelines by which the national economy must abide, as well as by handcuffing its foreign trade policies.

The raw materials dispute is not the first case against China targeting its handling of exports. Back in 2004 the EU accused China of breaking trade rules by imposing quotas on coke exports – a complete about-face from 2001, when it slapped anti-dumping tariffs on Chinese coke. Though a settlement was reached before the complaint was brought to the WTO, the case rang the alarm bells for future potential discord over China's exporting activities.

China's losing the WTO appeal on the nine industrial materials could have ripple effects on trade in other natural resources. Keith Bradsher of the New York Times in his coverage of the WTO case published on January 31 quoted experts as saying, "The legal setback for Beijing could set a precedent for the West to challenge China's export restrictions on other natural resources, including rare earth metals that are crucial to many modern technologies."

In fact, even without the case of the nine materials, which are in fact not rare, countries like the U.S., EU members and Japan would continue to rack-up pressure on China over its capping of actual rare earth refining and exporting. Back in mid-2011, the U.S. and Mexico had already referred China to the WTO over rare earth restrictions.

Despite possessing some of the world's largest mineral reserves, the U.S. itself has gone to great lengths to preserve its own natural resources, all the while pressing China to exploit its own, far smaller, reserves and export ever greater quantities. And China is by no means the only or the first country to curb certain exports. The U.S. has a tight grip over its hi-tech exports to China. Australia and Brazil dominate the world's iron ore export market, and Russia for some time imposed grain export duties. "Love thy neighbor as thyself," so the scripture says.

With regard to rare earth, the blame and claims placed on China by other countries just don't stand up to scrutiny. Last year, for example, only half of China's rare earth export quotas were filled. As a country still in the early stages of industrialization, China admits to having erred in its approach to international trade in the past, but has been on the right track for several decades now.

The next step up the ladder for the Chinese economy will be all about securing firmer technological footholds. Better technology in industry creates brand new, high value-added industries, and green technology helps the environment. Perhaps China would be willing to export larger volumes of its exhaustible mineral resources if more developed countries displayed greater commitment in their promises of technology transfer to poorer countries. This would be of benefit to all parties, and maybe then we could stop talking about WTO rulings.

BAI MING is a research fellow and deputy director of the Department of International Commodity Market Studies of the Chinese Academy of International Trade and Economic Cooperation.