[author: Joseph Laroski]

On March 26, the World Trade Organization (WTO) released a dispute settlement panel report finding that China's imposition of export restraints on rare earths, tungsten, and molybdenum breach WTO rules. The United States, European Union and Japan had initiated this challenge in early 2012 claiming that China – through a variety of published and unpublished measures – imposed export duties, export quotas, limitations on the entities permitted to export, and other requirements on the export of rare earths, tungsten, and molybdenum in violation of commitments China made when it joined the WTO in 2001.

According to the three complaining Members, the export restraints at issue in this dispute artificially increase world prices for raw material inputs while artificially lowering prices in China. This lowers production costs for China's domestic downstream producers to produce lower-priced products from the raw materials, creating an unfair advantage for Chinese companies at the expense of U.S. and other producers. Such export restraints can also create pressure on U.S. and other producers to move their operations to China.

The WTO panel agreed with the three complaining Members that China's measures violated certain provisions of the General Agreement on Tariffs and Trade (GATT) and China's Accession Protocol. Specifically, the panel fund that China's measures:

• were inconsistent with China's explicit commitment in Paragraph 11.3 of its Accession Protocol not to apply export duties to these raw materials;

• were inconsistent with China's obligation under Article XI:1 of the GATT not to restrict exports; and

• violated China's commitments under Paragraphs 5.1 and 5.2 of its Accession Protocol to give all entities and individuals (both foreign and Chinese) the right to export most products.

In so ruling, the dispute settlement panel rejected China's arguments that its measures were justified either as environmental protection measures or as measures related to the conservation of exhaustible natural resources under Articles XX(b) and XX(g) exceptions of the GATT.

In 2011, the WTO had ruled that similar Chinese restrictions on exports of bauxite, coke, fluorspar, magnesium, manganese, silicon carbide, silicon metal, yellow phosphorous, and zinc violated WTO rules.

Rare earths, tungsten, and molybdenum are key inputs in the manufacture of a broad spectrum of manufactured products, including hybrid car batteries, wind turbines, energy-efficient lighting, steel, electronics, medical imaging equipment, automobiles, and chemicals. China reportedly accounts for 90% of the world's shipments of rare earths.

The United States and China have appealed aspects of the dispute settlement panel's decision. A decision by the Appellate Body is expected this summer.