China's rare earth minerals - Let the markets work?

News of U.S. along with the E.U and Japan requesting for formal consultations under the Dispute Settlement mechanism of the W.T.O on export restrictions on rare earth minerals from China hogged the headlines here, here and here. The WTO website reported about it here. Rare Earth minerals are a group of 17 elements and are crucial ingredients used in the production of flat-screen televisions, smart phones, hybrid automobile batteries, and other high technology products. China maintains export restrictions on such materials.

 

The President of the U.S. made this statement:

"We’re bringing a new trade case against China -- and we’re being joined by Japan and some of our European allies.  This case involves something called rare earth materials, which are used by American manufacturers to make high-tech products like advanced batteries that power everything from hybrid cars to cell phones. 

We want our companies building those products right here in America.  But to do that, American manufacturers need to have access to rare earth materials -- which China supplies.  Now, if China would simply let the market work on its own, we’d have no objections.  But their policies currently are preventing that from happening.  And they go against the very rules that China agreed to follow. 

Being able to manufacture advanced batteries and hybrid cars in America is too important for us to stand by and do nothing.  We've got to take control of our energy future, and we can’t let that energy industry take root in some other country because they were allowed to break the rules.  So our administration will bring this case against China today, and we will keep working every single day to give American workers and American businesses a fair shot in the global economy."

Several thoughts on this measure:

1. "Now, if China would simply let the market work on its own, we’d have no objections." - Let the market work? Do all countries let the market work in the context of international trade? With rising "protectionism" all around and "subsidies" being provided, is China the only country that does not let the market work? Are providing subsidies to Airbus and Boeing "letting" the market work?

2. Would the restriction on exports of rare earth minerals be consistent with WTO obligations? What seems to be an essentially domestic policy choice of protecting and deciding on one's national, mineral resources by restricting exports has international trade ramifications. Article XI of GATT provides :

"1.       No prohibitions or restrictions other than duties, taxes or other charges, whether made effective through quotas, import or export licences or other measures, shall be instituted or maintained by any contracting party on the importation of any product of the territory of any other contracting party or on the exportation or sale for export of any product destined for the territory of any other contracting party."

 However, Article XX of the GATT provides for this exception that China will most probably use:

"(g)      relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption;"

Hence, if China's measure of export restrictions on rare earth minerals are in conjunction with restrictions on domestic production or consumption it looks like a defensible measure under WTO rules. Non-discrimination between domestic and international use is the determinant factor here. This commentary in a Chinese daily seemed to suggest that this was the case.

3. The U.S is well within its rights to seek for consultations under the WTO. Countries would be expected to protect their domestic interests in the multilateral fora when they perceive a measure to be discriminatory or going against international trade rules. Viewing the consultation as a "trade war" may not be appropriate. After all, this is the mechanism to settle disputes in international trade disputes. Whether the U.S's stand is legally sustainable is different from the right to invoke the dispute settlement mechanism in the WTO. China should view it as a normal trade dispute that will inevitable lead to the WTO deciding on the issue. It is the same mechanism that China would rely on to challenge discriminatory U.S. trade practices.

4. CATO makes an interesting analysis of the issue here. While supporting the U.S. measure it highlights the restrictions that the U.S. imposes which are violative of international obligations.

"USTR’s argument against Chinese export restrictions in the raw materials and Rare Earths cases are just as applicable to U.S. import restrictions. Removing restrictions—whether the export variety imposed by foreign governments or the import variety imposed by our own—reduces input prices, lowers domestic production costs, enables more competitive final-goods pricing and, thus, greater profits for U.S.-based producers.

Yet the U.S. government imposes its own restrictions on imports of some of the very same raw materials. It maintains antidumping duties on magnesium, silicon metal, and coke (all raw materials subject to Chinese export restrictions).  In fact, over 80 percent of the nearly 350 U.S. antidumping and countervailing duty measures in place restrict imports of raw materials and industrial inputs—ingredients required by U.S. producers in their own production processes. But those companies—those producers and workers for whom Ambassador Kirk professes to be going to bat in the WTO case on rare earths (and the previous raw materials case)—don’t have a seat at the table when it comes to deciding whether to impose AD or CVD duties. (Full story here.)"

Would it not be unreasonable to say "Let the markets work here" too?

5. The present case raises issues of domestic policy space int he context of an increasingly interconnected world. One would have perceived control over one's national resources to be exclusively within a country's domain. Export restrictions was the manifestation of this control. However, this control is not unbridled. While there is still domestic policy space to restrict exports, it cannot be done in a discriminatory manner favouring local industry over foreign competition. In other words, export restrictions that as a policy tool favour local industry will be violative of WTO rules.