Last week, the EU, US and Japan formally asked the World Trade Organisation (WTO) to look at China’s export restriction on rare earth metals. Lawyers believe the case will run and run.
The 17 rare earth metals, including dysprosium and neodymium, are essential components in modern technology such as iPhones, wind turbines, halogen lights and even precision-guided missiles. China produces more than 95pc of these minerals and it has imposed a quota restriction on their export.
EU Trade Commissioner Karel De Gucht said China’s export quotas and export duties give Chinese companies an unfair competitive advantage.
“China’s restrictions on rare earths and other products violate international trade rules and must be removed,” Mr De Gucht said. “These measures hurt our producers and consumers in the EU and across the world, including manufacturers of pioneering hi-tech and ‘green’ business applications.”
Rare earth metals are not rare, despite the moniker. Cerium, for example, is more common in the Earth’s crust than copper or lead. It is the 25th most common element of the Periodic Table.
However, the problem is that they are not really found in mineable deposits in many areas. They also tend to be associated with the radioactive elements, which makes the mining process costly and potentially environmentally damaging.
The WTO has been asked to arbitrate in a dispute settle request, which is the first step before a full trade case.
“This will be a very fact-intensive case,” Konstantinos Adamantopoulos, partner at law firm Holman Fenwick Willan, said. He believes the case could run for some time.
The country has imposed a quota on the export of rare earths. However, because of the economic backdrop, the quota has not been met.
Its rare earth exports totalled 14,750 tons during the first 11 months of 2011, accounting for only 49pc of the total quota. China set the 2012 rare earth export quota at roughly the same level as 2011.
“China will argue that the quota is so generous that it is not a quota at all. They will point to the fact that last year the quota was not used up,” Mr Adamantopoulos explained.
Then there’s the issue of a restriction on exports. “Goods may not be subject to export restrictions. This is not allowed under the WTO,” he said.
“The question will be: is the 42pc tax on exported metals a quantitative export restriction or is it an export duty?” Mr Adamantopoulos said. “The WTO does not prohibit duties, but says they must agree a multilaterally negotiated solution. The WTO hates ‘unilaterally’ when it comes to tariffs.”
“As a second line of defence, China may invoke special clauses in the WTO rules,” Mr Adamantopoulos noted.
These clauses mean production can be restricted to protect the environment or to ensure security of supply to the domestic industry.
“The US used this in its oil trading agreement in NAFTA and China may wish to put forward such an argument,” said Mr Adamantopoulos.
Indeed, it already has. China needs to limit environmental damage and conserve scarce resources, Liu Weimin, a Chinese foreign ministry spokesman, said. “We think the policy is in line with WTO rules. Despite such huge environmental pressure China has been taking measures to maintain rare earth exports. China will continue to supply rare earths to the international market.”
China plans to consolidate its rare earths industry into two to three companies, according to the Shanghai Securities News, which cited Miao Wei, minister of industry and information technology (MIIT). This is ahead of the country’s plan to develop new rare earth materials to boost manufacturing capacity.
China will “make full use of its rare earth resources to expand the industrial scale of new materials made with rare earth”, said a MIIT publication issued last month.
Because this battle is set to drag on, it is essential that countries other than China start to produce more of these metals. Until then, we are likely to have to live with Chinese restrictions.