Pass the Molybdenum, Please

While trade nerds wait with bated breath, copies of 19 CFR clenched in their fists, for the conclusion of the TPP and TTIP* negotiations, the WTO issued its ruling on Chinese rare earths.  The three complainants, the U.S., E.U., and Japan, are each involved in TPP / TTIP, and this ruling may affect the language in those final agreements. On March 26, 2014, the WTO Dispute Settlement Body (DSB) issued its Report, which addressed the limits of a state’s power to restrict the export of exhaustible natural resources.  In this case, the state is China and the resources are 19 “rare earth” elements critical for personal electronics, high-tech weapons, and green energy production.  (One of the elements, neodymium, gives magnetballs their (in?)famous powers.)

The case is DS431.

Why “rare earths?”

They’re called “rare earths” because it’s rare to find them in concentrations worth mining, and extraction can be difficult and dangerous.  Rare earths often are found alongside radioactive elements, and the mining, refining, and recycling of rare earths can release deadly toxins.

Sounds interesting.  Where can I get some?

Currently, almost all of the world’s rare earth extraction happens in China, and that’s also where almost all of the rare earths are processed.  China restricts rare earth exports, which helps keep the processing “in-house.”  This means that Chinese rare earth extractors might get less for the elements than they would on the open market, but Chinese producers of downstream products have an edge over their foreign rivals.  China says it needs export controls to protect an exhaustible resource from overexploitation and to guard against negative environmental effects.  The U.S., E.U., and Japan say sustainability concerns are just a pretext for domestic protectionism, so — don’t bogart that erbium, my friend.

Tough call.  Who’s right?

The mother of all international trade agreements is called the General Agreement on Tariffs and Trade (GATT), and it was the precursor to the WTO.  Before joining the WTO and agreeing to GATT, China could do what it pleased with its rare earth supply.  However, one of GATT’s purposes was trade liberalization, and export restrictions are disfavored.  GATT Article XX(g) provides an exception, but only for measures “relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption.”

China tried to convince the DSB to apply an Article XX(g) exception (an uphill battle — historically, few states have raised any Art. XX clause successfully).  While the DSB recognized that states can develop sustainability plans for natural resources that might meet Art. XX(g), the DSB found that China’s restrictions were for economic gain, not environmental protection.  The DSB also found that China had not made equivalent restrictions on domestic use of rare earths.  This was a pretty clear victory for the U.S., E.U., and Japan — the DSB agreed that China’s environmental concerns were a pretext.

What’s next?

The U.S. and China each noticed an appeal, with the U.S. complaining about how the DSB rejected some of its exhibits, and China complaining about everything else.  I predict China will have a tough time before the Appellate Body, but the more interesting question is how might this ruling affect the ongoing trade relationships of the victors, each of whom is involved in TPP, TTIP, or both?  Will TPP and TTIP rely on GATT’s language when it comes to export restrictions for natural resources?  Or will they attempt a “WTO-plus” model that narrows the language and perhaps makes the outcome of raising a conservation defense more predictable?  By finding China’s conservation goal was a pretext, the DSB avoided drawing a line in the sand as to when a legitimate environmental concern might satisfy Art. XX(g).  However, with rising global interest in sustainability, I predict more and more of these cases will come before the WTO (or arbitration panels that might consider WTO rulings as persuasive authority).

Why should we care?

GATT has lowered tariffs to the point where many free trade agreements are being negotiated at the margins, and are more likely to involve the lowering of non-tariff barriers, such as sanitary/phytosanitary measures, technical barriers to trade, and export controls.  U.S. lumber companies have been grumbling for a long time over allegedly unfair Canadian log export restrictions.  The U.S. has its own restrictions on the export of crude oil and liquified natural gas.  Are these restrictions justified by conservation efforts?  Or is that merely a pretext to give domestic consumers an edge?  And if the answer’s somewhere in the middle, which way would a WTO panel jump?

*Or is it T-TIP?

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