SCENARIOS - Could China face a WTO dispute over rare earths?

GENEVA Fri Oct 29, 2010 10:50pm IST

A labourer works at the site of a rare earth metals mine at Nancheng county, Jiangxi province October 29, 2010. REUTERS/Stringer

A labourer works at the site of a rare earth metals mine at Nancheng county, Jiangxi province October 29, 2010.

Credit: Reuters/Stringer

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GENEVA (Reuters) - Businesses in Japan, the United States and European Union are crying foul over cuts in China's export quotas of rare earths and calling on their governments to sue Beijing at the World Trade Organization.

China, which currently has a near-monopoly in supplies of rare earths, has drastically reduced shipments to Japan of the minerals, essential for many high-tech products.

The cuts emerged during a territorial dispute between the two Asian powers, giving rise to fears that China could use its dominance as a political bargaining tool.

But China says it will not exploit this for leverage, and the reductions in export quotas aim to conserve a diminishing natural resource and protect the environment.

Could China's partners launch a dispute over the issue at the WTO, and how likely are they to do so?

CAN YOU SUE OVER EXPORT CURBS AT THE WTO?

WTO rules focus on restrictions to imports, the source of most disputes that come to the body that polices world trade.

WTO Director-General Pascal Lamy pointed out last week that most members have not made binding commitments on the use of export taxes, in contrast to the way they control import duties.

The WTO's basic treaty, the General Agreement on Tariffs and Trade, bans prohibitions and restrictions such as quotas on both imports and exports.

But among the exceptions it allows are measures to protect health and those "relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption."

It also allows restrictions on exports of domestic materials to ensure supplies to domestic industry if the domestic price is held below the world price under a government stabilisation plan -- provided those restrictions do not help domestic industry increase its exports or enjoy protection, or generally undermine the WTO's basic principle of non-discrimination.

So to win a case, the challengers would have to prove that the cuts in quotas are about protectionism rather than conservation, and that the curbs discriminate against foreign users of the earths in favour of Chinese processors.

And the plaintiffs would have to prove that disruptions to supplies are the result of an official policy, something which is by no means clear at the moment.

HAVE THERE BEEN SIMILAR CASES?

The WTO is dealing with a similar dispute over Chinese export curbs on other raw materials such as bauxite and magnesium.

The challenge was launched by the European Union, joined by the United States and Mexico.

There too, China argues that it needs to restrict exports to protect the environment and conserve resources, while the plaintiffs say the measures discriminate against their industries by driving up the world price of the materials.

For China to prevail, it will need to show that the export quotas are reducing production for all users to conserve resources, rather than shifting supplies to domestic consumers.

The challengers argue that China can meet its environmental and conservation goals by means other than export restrictions.

They can draw on a report in May by the WTO's secretariat for the two-yearly review of China's trade policy, which said the export curbs may not meet the stated goal of conservation but give Chinese industry an unfair advantage.

The case is proving so complicated that the panel of experts examining it said last week it was delaying its ruling until April next year.

WILL IMPORTING COUNTRIES MOUNT A CHALLENGE?

Officials in importing countries have expressed concerns about rare earths, but have refrained from suggesting a full WTO dispute is imminent, not least because of the uncertainty about whether disruptions to supplies are politically motivated.

WTO litigation is the final step in a dispute and trading partners generally try to avoid a public row. Even the WTO dispute process aims initially for an agreed solution rather than imposed rulings and sanctions.

Japan in particular is sensitive about relations with China. Significantly, it did not join the EU, United States and Mexico in the raw materials dispute as a plaintiff, and in fact has never launched a dispute against China at the WTO.

An official at Japan's trade ministry said Tokyo was still investigating the rare earths situation. A WTO challenge remained an option but nothing had been decided.

Frank Hoffmeister, a senior aide to EU trade chief Karel De Gucht, said on Tuesday that Brussels was monitoring the situation to decide on possible legal action, but needed clear facts.

And a top White House official said on Thursday that diplomacy was the approach for now and the facts were murky.

President Barack Obama or Secretary of State Hillary Clinton are likely to raise rare earths with Chinese leaders at the G20 summit in Seoul next month or on other forthcoming meetings in Asia, said Jeffrey Bader, the senior National Security Council for Asia.

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