China’s Export Restraints on Rare Earths and Other Raw Materials: New Developments in 2013

October 10, 2013
Terence P. Stewart and Ping Gong

In June 2009, the United States, the European Union, and Mexico brought Dispute Settlement cases at the WTO regarding China’s export restraints on nine raw materials.[1] In January 2012, the WTO Appellate Body (“AB”) issued its decision which found that China’s obligations under its Protocol of Accession limited the products to which it could apply export duties to the 84 items listed in Annex 6 of that document. Despite the AB decision, in 2013 China applies export duties to 352 items, of which 253 items are either not listed in Annex 6 or are subject to export duties exceeding the levels permitted by Annex 6. The hope of WTO trading partners was that when China brought itself into compliance on the nine raw materials involved in the first WTO dispute, all the additional WTO-inconsistent export duties would also be eliminated or brought down to the levels authorized in Annex 6 of the Protocol. Unfortunately, at the end of 2012, when China implemented the adverse ruling in the first case, it simply revoked the export duties on the nine raw materials. The list it published for 2013 not only failed to address the hundreds of other items that were inconsistent with its Protocol obligations, but it actually added new items to the list – resulting in 253 items facing export duties in 2013 in violation of China’s WTO commitments.

As China did not move expeditiously to bring its overall policy into compliance with the AB decision, the United States, along with the European Union and Japan, brought a second round of cases before the WTO in March 2012, this time focusing on China’s similar export restraints on rare earths, tungsten, and molybdenum.[2] A decision from the WTO panel reviewing the export restraints, including export duties, on these additional 81 products is due to be released in November 2013. There is little doubt that China will again be found to be acting in violation of its obligations under the WTO. Based on the limited response from China to date, it is likely that the United States and other WTO members will need to bring additional cases on the other 172 products that remain subject to export duties in China. A list of these 172 products subject to export duties in 2013 that are not covered by the first or second cases and that are not authorized by Annex 6 (or which exceed levels permitted by Annex 6) are included in Exhibit 1 (available here).

China’s export restraint measures are designed to and do tilt the playing field in favor of China’s home production base. The restraints affect a wide range of materials that are crucial to products as diverse as hybrid and electric cars, wind turbines, rechargeable batteries, and missiles and aircraft, among many others. These export restraints artificially increase China’s export prices and drive up world prices. At the same time, they artificially lower China’s domestic prices due to significant increases in domestic supply, allowing Chinese producers of downstream products to produce lower-priced products, thereby hurting foreign producers. The export restraints also create incentives for foreign producers to move their operations, jobs, and technologies to China. Above all, all of these measures have been found to be WTO-inconsistent. Indeed, while export quotas can be defended on a case-by-case basis, that is not true for the export duties, which were found to violate China’s obligations when not specifically authorized in China’s WTO Accession Agreement Annex 6 and with no defenses available.

As we approach the release of the panel report in the rare earths, tungsten, and molybdenum cases, China has another opportunity to bring its export restraint practices into line with WTO obligations. Unfortunately, China’s actions to date do not indicate a likely early compliance. Therefore, the United States and China’s other trading partners will need to be ready to mount yet another round of cases on the additional products for which China applies export restraints, in particular export duties.

Below is some additional background on this important WTO case.

I. Export Duties

In 2013, China eliminated all the export duties imposed on the nine raw materials involved in the first WTO case. However, it continues to impose export duties on other raw materials, including rare earths, tungsten, and molybdenum. There are a total of 352 items in its 2013 Export Duty Rate Chart.[3] Among them, 81 items relate to the second WTO dispute covering rare earths, tungsten, and molybdenum. Their export duties range from 5% to 25%. These items and their rates are the same as those in 2012. However, it is worth pointing out that China imposed export duties on an additional 19 rare earth materials beginning in 2012. These include: (1) praseodymium, yttrium, neodymium; (2) their oxides, chlorides, fluorides, carbonates, and other compounds; and (3) NdFeB rapid setting permanent magnets. These materials continue to be subject to export duties in 2013 in the range of 15% to 25%. This indicates that China has tightened its control on rare earth materials despite losing the first case before the WTO.

Only 102 out of the 352 items in the 2013 Export Duty Rate Chart are arguably included in Annex 6 to China’s Protocol of Accession, which identifies the only items on which China can impose export duties and the maximum rates that can be assessed on the items. The term “arguably included in Annex 6” is used as Annex 6 has only 84 items. However, the 2013 list from the Government of China shows in some cases different product descriptions for the item tariff number as well as provides what appear to be subdivisions of some tariff numbers. Thus, arguably as many as 102 of the 352 items on the 2013 export duty list are permitted by Annex 6.

However, 3 of these 102 items have export duty rates higher than what is allowed by Annex 6. These are various forms of pig iron, and their rates are all at 25%, which is higher than the 20% rate allowed by Annex 6. For these 3 items, China’s 2013 rate violates China’s obligations to the extent of the excess rate applied.

An additional 169 items (besides rare earths, tungsten, and molybdenum) are not covered by Annex 6. These include various steel products and other metal products, wood and pulp products, and fertilizers, among others. Their export duty rates range from 2% to as high as 75%. If these are added to the 81 materials involved in the second WTO case and the 3 items that have higher rates, all together 253 out of 352 items are in facial violation of China’s obligations contained in its Protocol of Accession and Annex 6. Stated differently, only 28.1% of export duties in place in 2013 in China are WTO-consistent. The need for a third round of cases to cover the remaining 172 items in the 2013 list (the additional 169 items that are not covered by Annex 6 and the 3 items with rates exceeding Annex 6 levels)[4] and possibly later rounds to cover items yet to be added in subsequent years faces the United States and other WTO members.

II. Export Quotas

In the first raw materials case, the AB found that China’s export quotas are inconsistent with its WTO obligations based on the facts of that case.[5] However, China continues to impose export quotas on rare earths, tungsten, and molybdenum, and factual circumstances here are very similar to those of the first case. So far, China has only issued the first batch of 2013 export quotas for these materials.[6]

Unit: MT

Year

2013

2012

2011

Batch

1st Batch

1st Batch

Supplemental 1st Batch

2nd Batch

1st Batch

2nd Batch

Type of RE

Light RE

Medium and Heavy RE

Light RE

Medium and Heavy RE

Light RE

Medium and Heavy RE

Light RE

Medium and Heavy RE

N/A

Quota

13,561

1,938

9,095

1,451

9,490

1,190

8,537

1,233

14,446

15,738

Batch

Subtotal

15,499

10,546

10,680

9,770

14,446

15,738

Annual Total

N/A

30,996 (Total of 1st Batch and Supplemental 1st Batch: 21,226)

30,184

As the table above shows, the rare earth export quota figure for the first batch of 2013 has dropped sharply to 15,499 MT from 21,226 MT in the first batch of 2012 (which is the total of the 1st batch and the supplemental 1st batch figures). However, the notice appearing before the 2012 quota table explains that year’s first batch quota is supposed to be 80% of the annual quota, while the 2013 notice explains that the first batch quota is 50% of the total annual quota in 2012. Even though the first batch quota in 2012 actually amounts to only 68% of the annual 2012 quota (21,226/30,996), the first batch quota in 2013 is indeed close to 50% of the total annual quota in 2012. It remains to be seen how many quotas will be issued in the second batch later this year.

Similarly, China also continues to issue export quotas for tungsten and molybdenum in 2013.[7]

As the table above shows, there are small fluctuations in the movement of tungsten’s first batch quota figure over the years, and there are gradual decreases in the first batch quota figure for molybdenum since 2011. But the overall annual trend for both materials is pointing downwards. Whether that remains the case in 2013 cannot be determined until the second batch export quotas are released later this year.

The export licensing and export quota bidding requirements continue to apply in 2013 without any major changes. As the WTO also found similar export quotas to be WTO-inconsistent in the first raw materials case based on the facts of that case, China should eliminate these quotas at the earliest opportunity because they are applied in a similar manner to rare earths, tungsten, and molybdenum and hence are almost certainly WTO-inconsistent.

Unit: MT

Year

2013

2012

2011

Batch

1st Batch

1st Batch

2nd Batch

1st Batch

2nd Batch

Ammonium Paratungstate, Ammonium Metatungstate

2,904

3,036

2,024

3,095

2,064

Tungstic Acid and Tungstate

375

377

251

1,152

768

Tungsten Trioxide and Blue Tungsten Oxide

5,847

5,380

3,587

6,201

4,133

Tungsten Powders and Products

2,310

2,587

1,725

1,507

1,055

Total Tungsten in a Batch

11,436

11,380

7,587

11,955

8,020

Total Annual Tungsten

N/A

18,967

19,975

Molybdenum Primary Materials

19,798

19,914

13,276

20,312

13,541

Molybdenum Chemical Products

2,353

2,353

1,569

2,400

1,600

Molybdenum Products

2,250

2,250

1,500

2,295

1,530

Total Molybdenum in a Batch

24,401

24,517

16,345

25,007

16,671

Total Annual Molybdenum

N/A

40,862

41,678


[1] See “China—Measures Related to the Exportation of Various Raw Materials,” available at http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds394_e.htm.

[2] See “China—Measures Related to the Exportation of Rare Earths, Tungsten and Molybdenum,” available at http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds431_e.htm.

[3] The Chinese version of the 2013 Export Duty Rate Chart is available at http://gss.mof.gov.cn/zhengwuxinxi/zhengcefabu/201212/t20121217_716211.html (the Attachment No.7 to this announcement). The English translation by Stewart and Stewart is attached here as Exhibit 2.

[4] See Exhibit 1 for these 172 items (available here).

[5] See “China—Measures Related to the Exportation of Various Raw Materials,” available at http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds394_e.htm.

[6] The Chinese version of the 2013 first batch export quotas on rare earths is available at http://www.mofcom.gov.cn/article/b/e/201212/20121208504001.shtml. The English translation by Stewart and Stewart is attached here as Exhibit 3. Stewart and Stewart can provide prior years’ materials upon request.

[7] The Chinese version of the 2013 first batch export quotas on tungsten and molybdenum is available at http://www.mofcom.gov.cn/article/b/e/201212/20121208497114.shtml (Attachment No. 2 to this notice). The English translation by Stewart and Stewart is attached here as Exhibit 4. Stewart and Stewart can provide prior years’ materials upon request.



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