WTO Law and the Right to Regulate: China – Rare Earths
On March 26, 2014, a World Trade Organization (WTO) panel issued its report on a dispute between the European Union, Japan and the United States as complainants and China as respondent over access to so-called ârare earths,â as well as tungsten and molybdenum. The Panel found that China violated its obligations under the General Agreement on Tariffs and Trade 1994 (GATT) and the Accession Protocol by restricting exports of rare earths to manufacturers in other countries, while favoring Chinese competitors. Moreover, the Panel found that China could not invoke justifications under GATT Article XX to justify violation of the relevant provisions of its Accession Protocol and, in any case, China had not satisfied the requirements of Article XX. The Panel decision has implications for Chinaâs right to regulate under the terms of its Accession Protocol as well as the nature of precedent in WTO dispute settlement. These issues will likely be further addressed by the Appellate Body following the United Statesâ and Chinaâs appeal of the Panel Report.
The Nature of Rare Earths
The term rare earths encompasses seventeen minerals used in the production and manufacturing of a wide range of products. Light rare earths are used in glass manufacturing and oil refineries. Heavy rare earths are used for technology products such as smartphones, flat screens and compact fluorescent bulbs.
Although these elements are not rare in terms of their overall distribution, they are not commonly found in sufficient quantities in one area to justify their mining on an economic basis. While possessing only 37% of the total global deposits of rare earths, China accounted for more than 95% of global production in 2010. After about 2000, rare earth production shifted almost entirely to China. Until 2010, rare earths prices increased sharply, in three cases rising more than 15000% over the course of one year.
The mining and the production of rare earths is ecologically sensitive, especially if proper procedures are not followed. Rare earth slurry often contains radioactive substances. The production process itself requires the use of toxic acids and commonly leads to soil, water and air contamination and higher levels of radiation.
The Challenged Measures
Citing environmental and human health concerns as well as increases in illegal mining of rare earths due to increased prices, China announced the closure of a number of mining operations. These closures took place predominantly in southern China, concentrating the production process in the easier to control northern province of Inner Mongolia, although environmental concerns remain. China officially announced the reduction of exports in late 2009, setting an export quota of just over 30,000 tons per year, followed by further reductions in 2010.
The complainants alleged various violations of Chinaâs Accession Protocol and the GATT, with respect to export duties, export quotas, and export administration and allocation. China did not attempt to defend its measures as being compliant with its Accession Protocol or GATT Article XI, but rather argued that they were justified for health and environmental reasons under GATT Article XX (b) and (g), respectively. This led to the important question whether the justification contained in GATT Article XX extends to violations of provisions not contained in the GATT itself.
Prior Appellate Body Rulings on the Application of GATT Article XX to Chinaâs Accession Protocol
In 2009, the Appellate Body held in China â Publications and Audiovisual Products that China was able to invoke GATT Article XX as a defense to a violation of paragraph 5.1 of Part I of Chinaâs Accession Protocol because of the wording and rationale for that particular provision. That provision reads, in pertinent part: âWithout prejudice to Chinaâs right to regulate trade in a manner consistent with the WTO Agreement.â In contrast, in 2012, the Appellate Body found that China could not invoke GATT Article XX as a defense to a violation of paragraph 11.3 of Part I of its Accession Protocol, concerned with export duties, in China â Raw Materials. Unlike paragraph 5.1, paragraph 11.3 contains no reference to Chinaâs âright to regulateâ and therefore no basis for allowing the invocation of Article XX.
Justification of Chinaâs Export Duties Under GATT Article XX (b)
In China â Rare Earths, China invited the Panel to depart from the Appellate Bodyâs decision in China â Raw Materials regarding the availability of Article XX with respect to Accession Protocol violations, on the basis of new arguments presented by China. After reviewing the Appellate Bodyâs prior decisions, the Panel concluded that paragraph 11.3 of Part I of Chinaâs Accession Protocol is not subject to the general exceptions in GATT Article XX. China argued for its ability to regulate for environmental purposes, but the Panel found that in this particular instance China could have relied on other â non-discriminatory â measures to do so.
This result was not arrived at unanimously. A dissenting panelist agreed with the outcome in this particular case, but would have made Article XX applicable beyond the GATT on the basis that the WTO Agreement and its components (including accession protocols) comprise a single undertaking that is to be to be interpreted holistically. Noting the close relationship between paragraph 11.3 and GATT Articles II and XI, the dissenting panelist found that in situations involving âWTO-plusâ provisions, justifications contained in the GATT should be available. In the dissenterâs view, Chinaâs ability to invoke Article XX could be denied only by explicit language in the Accession Protocol.
Despite finding that Article XX was not applicable to the relevant provision of the Accession Protocol, the Panel analyzed Chinaâs argument that its export duties are justified under Article XX (b) due to the harms that the mining and processing of rare earths cause to human health. Article XX (b) of the GATT provides a justification for measures ânecessary to protect human, animal or plant life or health,â subject to the requirements regarding discrimination and trade-restrictiveness in the opening paragraph (the âchapeauâ) of Article XX. The Panel found that Chinaâs export duties did not have the objective of protecting human health. Rather, the Panel opined that the export duties had the intended effect of supporting the domestic industry by increasing the export of downstream products. The Panel rejected Chinaâs assertion that the export duties made a material contribution to the protection of human health by increasing prices, because the duties increased prices outside China but not domestically. On that basis, the Panel concluded that Chinaâs export duties failed to satisfy the necessity test and the chapeau of Article XX.
Justification of Chinaâs Export Quotas Under GATT Article XX (g)
GATT Article XX (g) provides an exception, subject to the chapeau, for measures ârelating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption.â The Panel examined Chinaâs justification for instituting export quotas under GATT Article XX (g) more extensively due to the intricate nature of the administration of the quotas for each product. The Panel nevertheless rejected Chinaâs defense on this basis. A key difficulty for China was that the export quota system â purportedly initiated in order to protect the environment â did not have a corollary for domestic producers.
The Panel identified in Article XX(g) a tension between the âprinciple of sovereignty over natural resourcesâ and the need to institute restrictions in an âeven-handed manner,â i.e. in a way that does not advantage its domestic industry over foreign producers, either by design or in application. The Panel concluded from the Appellate Bodyâs prior treatment in US â Shrimp and US â Gasoline that the Appellate Body was concerned not with the âactual impact or effects of the measures imposed by a regulating Member to restrict domestic production or consumption,â but rather with whether âGATT-inconsistent measures allegedly taken for conservation reasons are really about conservation.â This leads â in the words of the Panel â to âan investigation of the âregulatoryâ or âstructuralâ balance.â In this case, the Panel found that the quotas were designed âto reserve amounts of rare earths products for domestic consumption,â thus âguarantee[ing] a minimum amount of rare earths for its domestic downstream industries, which are themselves encouraged to export their final products.â With respect to the chapeau of Article XX, China argued that the export quota was not filled in 2012 and did not distinguish between foreign and domestic processors. However, the Panel found that China could have adopted less intrusive alternative means to achieve the same goals, namely administrative measures to curb smuggling and domestic consumption restrictions.
Although the dispute continues, the challenged measures have already created significant shifts in relevant international markets. The Chinese rare earths industry has been consolidated into three large producers, and many small mining operations have ceased to operate. A number of other countries have begun to redevelop rare earth mining, reducing the reliance on Chinese sources. As a result, prices for rare earths have fallen considerably since their peak in 2011.
The Panel Report in China â Rare Earths raises significant systemic issues. First among them is the precedential nature of Appellate Body reports. In recent years, the Appellate Body has consistently highlighted the desirability of developing coherent and predictable jurisprudence. While rejecting Chinaâs request that it reopen an issue already ruled on by the Appellate Body, the Panel fully explored Chinaâs arguments so that the Appellate Body could evaluate them should the decision be appealed.
A second systemic issue concerns the availability of GATT Article XX to defend violations of other instruments under the WTO umbrella. Particularly given the comments of the dissenting panelist, the Appellate Body may have to return to the issue of the availability of GATT Article XX in WTO agreements aside from GATT. This issue may be particularly important in determining the extent to which accession protocols can limit the right of recently acceded members (RAMs) to regulate for health and environmental reasons. The Panel in China â Rare Earths stated that any interpretation that results in WTO members âbeing legally prevented from taking measures that are necessary to protect the environment or human, animal or plant life or health would likely be inconsistent with the object and purpose of the WTO Agreement.â According to the Panel, âsuch a result could even rise to the level of being âmanifestly absurd or unreasonableâ.â
About the Author: Markus Wagner is an ASIL member and Associate Professor of Law at the University of Miami School of Law. The article is co-sponsored by ASILâs International Economic Law Interest Group.
 Panel Reports, China â Measures Relating to the Exportation of Rare Earths, Tungsten, and Molybdenum, WT/DS431/R, WT/DS432/R, and WT/DS433/R (Mar. 26, 2014) [hereinafter China â Rare Earths]. This ASIL Insight outlines the Panelâs reasoning regarding rare earths only. The Panel reached the same conclusions with respect to tungsten and molybdenum.
 General Agreement on Tariffs and Trade 1994, 1867 U.N.T.S. 187, available at http://www.wto.org/english/docs_e/legal_e/06-gatt_e.htm [hereinafter GATT 1994].
 Accession of the Peopleâs Republic of China, Decision of 10 November 2001, WT/L/432 (Nov. 23, 2001).
 World Trade Organization, China â Measures Related to the Exportation of Rare Earths, Tungsten, and Molybdenum, Notification of an Appeal by the United States under Article 16.4 and Article 17 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU), and under Rule 20(1) of the Working Procedures for Appellate Review, WT/DS431/9, Apr. 11, 2014; Liyan Qi and Chuin-Wei Yap, China to Appeal WTO Rare-Earth Ruling, Wall St. J. (Apr. 17, 2014), http://online.wsj.com/news/articles/SB10001424052702304626304579506551522446682.
 Humphries, supra note 5, at 2; Mark Tyrer and John P. Sykes, The Statistics of the Rare Earths Industry, 10 Significance 12, 14 (2013). By way of comparison, the price for gold rose by a factor of 260% during the same period.
 See China â Rare Earths, supra note 1, Â¶ 7.151. See also Keith Bradsher, After Chinaâs Rare Earth Embargo, a New Calculus, N.Y. Times (Oct. 29, 2010), http://www.nytimes.com/2010/10/30/business/global/30rare.html.
 China Halts Rare Earth Production at Three Mines, Reuters (Sept. 6, 2011), http://www.reuters.com/article/2011/09/06/china-rare-earth-idUSL3E7K620P20110906; Bradsher, supra note 6.
 Bradsher, supra note 9.
 China â Rare Earths, supra note 1, Â¶ 7.215. For a complete list of the Chinese measures that the complainants objected to, see Id. Â¶ 2.8 et seq. See also Zhang Qi and Ding Qingfen, China to Reduce Rare Earth Export Quotas, China Daily (Oct. 19, 2010), http://www.chinadaily.com.cn/business/2010-10/19/content_11427356.htm.
 Appellate Body Report, China â Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, Â¶ 233, WT/DS363/AB/R (Dec. 21, 2009), [hereinafter China â Audiovisuals].
 Appellate Body Report, China â Measures Related to the Exportation of Various Raw Materials, Â¶ 307, WT/DS394/AB/R, WT/DS4395/AB/R, and WT/DS398/AB/R (Jan. 30, 2012) [hereinafter China â Raw Materials]. For a critical review of the Appellate Bodyâs decision, see Marco Bronckers and Keith E. Maskus, China â Raw Materials: A Controversial Step Towards Enhanced Exploitation of Natural Resources, World Trade Rev. (forthcoming 2014) (on file with author).
 See China â Audiovisuals, supra note 14, Â¶Â¶ 230-3.
 China â Rare Earths, supra note 1, Â¶ 7.53 et seq.
 Id. Â¶ 7.3.3.
 See id. Â¶ 7.105 et seq. and Â¶ 7.117, respectively.
 Id. Â¶Â¶ 7.118-7.138.
 Id. Â¶ 7.165, Â¶Â¶ 7.180-7.195.
 Id. Â¶ 7.252 et seq. and Â¶ 7.268 et seq.
 US â Shrimp, supra note 22, Â¶ 144.
 Appellate Body Report, United States â Standards for Reformulated and Conventional Gasoline, 20, WT/DS2/AB/R (Apr. 29, 1996).
 China â Rare Earths, supra note 1, Â¶Â¶ 7.326-7, Â¶ 7.332.
 See e.g., id. Â¶ 7.601, Â¶ 7.612.
 See id. Â¶ 7.664 et seq. (especially Â¶ 7.677).
 Bradsher, supra note 6; Chuin-Wei Yap, China Tightens Reins On Rare-Earth Sector, Wall St. J., Jan. 4, 2014, at B4.
 Tyrer and Sykes, supra note 5, at 14.
 Appellate Body Report, US â Final Anti-Dumping Measures on Stainless Steel from Mexico, Â¶ 162, WT/DS344/AB/R (Apr. 30, 2008). The recent jurisprudence signals a departure from the Appellate Bodyâs previous jurisprudence. See e.g., Appellate Body Report, Japan â Taxes on Alcoholic Beverages, 14, WT/DS8/AB/R, WT/DS10/AB/R and WT/DS11/AB/R.
 China â Rare Earths, supra note 1, Â¶Â¶ 7.58-9.
 See Bronckers and Mankus, supra note 11; Julia Ya Qin, The Conundrum of WTO Accession Protocols: In Search of Legality and Legitimacy, Va. J. Intâl L. (forthcoming) (on file with author), available at http://ssrn.com/abstract=2419847. See also Han-Wei Liu and John Maughan, Chinaâs Rare Earths Export Quotas: Out of the China â Raw Materials Gate, But Past the WTOâs Finish Line? 14 J. Int'l Econ. L. 971 (2012); Ilaria Espa, The Appellate Body Approach to the Applicability of Article XX GATT In the Light of China â Raw Materials: A Missed Opportunity?, 46 J. World Trade 1399 (2012).
 China â Rare Earths, supra note 1, Â¶ 7.111.