China Export Quotas on Metals Violate World Trade Law, Panel Finds

PARIS - China has broken international trade law by restricting the export of rare earth elements and other metals crucial to modern manufacturing, a World Trade Organization panel said Wednesday. That conclusion opens the possibility that Beijing will face trade sanctions from the United States, which brought the case, and the European Union and Japan.

China produces more than nine-tenths of the global supply of the strategically important metals, which are essential to a host of modern applications including smartphones, wind turbines, industrial catalysts and high-tech magnets. Prices soared in 2010 after Beijing cut export quotas by about 40 percent, to just over 30,000 tons, saying the restrictions were necessary on environmental grounds.

But critics said the quotas gave an unfair advantage to China's domestic manufacturing industries. Members of the W.T.O. panel considering the case in Geneva agreed with that assessment.

The United States, which is almost totally dependent on China for the metals, filed the case in March 2012, and the European Union and Japan joined on Washington's side soon after. They challenged the export restrictions on 17 rare earths, as well as two metals used in steel alloys, molybdenum and tungsten. An interim report by the W.T.O. panel last October had indicated that China would be found in violation of trade law in the case.

The dispute has attracted worldwide attention, as it has been framed by some as pitting a sovereign government's right to regulate destructive environmental practices against global trade rules.

China has amply demonstrated the damage caused at each step of the production process, from mining and refining of the metals to disposal of the waste, and Beijing has been shutting down some of the worst offending producers, among them criminal enterprises. The soil in parts of China is scarred from the concentrated acids used to leach the ores, making farming impossible, while giant tailing ponds full of toxic - and sometimes radioactive - chemicals attest to the fact that the recovery of every pound of rare earth metals entails the creation of hundreds or thousands of pounds of waste.

China had also argued that the export quotas were justified under an exception made where such steps 'relate to the conservation of exhaustible natural resources.'

But the complainants argued that the restrictions were inconsistent with China's obligations under the rules of the World Trade Organization, which it joined in 2001, because they were handled 'in a manner that is not uniform, impartial, reasonable, or transparent,' distorting the market in favor of China's domestic industry.

World trade rules do not prohibit export taxes. The agreement China signed with other countries when it joined the W.T.O. allowed for only a limited number of such duties and did not include rare earths.

Critics have argued that despite the claims of environmental damage, China was using its monopoly to create a cost advantage for companies operating within its borders; since the price was lower for domestic users, foreign companies also had an incentive to set up shop in China to be competitive, creating local jobs and transferring technology.

The panel ruled against China's arguments on all counts. While it did not rule that nations may not impose quotas to protect scarce resources, it argued that once a commodity is extracted from the ground it should be treated in accordance with the global rules.

Beijing now has about two months to appeal the case, as do the complainants if they think the outcome is not entirely in their favor. Any challenge would be heard by the Appellate Body, the World Trade Organization's permanent appeals tribunal.

The Appellate Body would probably make a final ruling by the end of July, said James Bacchus, a former chairman of the tribunal who is not involved in the current case. Mr. Bacchus said it was unlikely that the Appellate Body's ruling would be significantly different, and that the judges there can rule only on matters of legal principle, not on the panel's findings of fact.

World Trade Organization rules require that China be given a 'reasonable' amount of time to comply with the final ruling and recommendations. If Beijing fails to do so, the United States, Japan and the European Union could begin to impose sanctions about 15 months after the appeals judgment, Mr. Bacchus said, and these would have to be proportional to the economic damage they claim to have suffered.

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