The WTO Rare Earths Trade Dispute: An Analysis

Introduction

As those who follow the rare-earths sector will know, on March 13, 2012, the United States, the European Union and Japan (the complainants) filed simultaneous and near-identical complaints with the World Trade Organization (WTO), in which they requested consultations with China (the respondent) on the measures that it has in place related to restrictions on the export of rare earths, tungsten and molybdenum.

The following article presents an overview of the WTO dispute process, the specific details of the rare-earths-related complaints, and looks at how China might respond to the specific complaints made. It also looks at various criticisms of the complainants for filing the disputes. In addition, the article looks at the consequences of the various potential outcomes of the disputes, once they have been concluded, and looks at clues as to how things might actually turn out, gleaned from a similar WTO trade dispute.

The WTO Dispute Process

The precursor to the WTO (and later subsumed into it), the General Agreement on Tariffs and Trade (GATT) had a mechanism for dispute resolution, but it had significant limitations. The Marrakech Agreement (also known as the Uruguay Round agreement) in 1994 established the WTO itself, as well as the WTO’s Dispute Settlement Body (DSB). The WTO describes the rationale for the process thus:

WTO members have agreed that if they believe fellow-members are violating trade rules, they will use the multilateral system of settling disputes instead of taking action unilaterally. That means abiding by the agreed procedures, and respecting judgments.

Much of the recent commentary on the disputes has accused the complainants of cynical motives for their initiation (perhaps understandably so, depending on one’s perspective). The fact remains, however, that the four parties involved are all members of the WTO, and have all formally agreed to the above process for dispute resolution. It is thus far from inappropriate for the complainants to use the legal mechanisms at their disposal in order to further their collective interests.

Under the normal rules of the DSB (which actually consists of all members of the WTO in general session), the first stage of any dispute is the consultation process, which may last up to 60 days. If these consultations fail, then the DSB will appoint a Dispute Panel, whose final report can only be rejected by the consensus of the DSB. Rejection is thus highly unlikely. This is the opposite of the old GATT approach, in which rulings could only be adopted by consensus, which meant that the objection of a single member (such as the respondent in the dispute) could block such a ruling.

Either side may appeal the findings of the Dispute Panel, primarily on the basis of the way that existing rules have been interpreted. No new evidence may be presented at that time. Such appeals are heard by a subset of the permanent Appellate Body, which can uphold, modify or reverse the findings of the Dispute Panel. The DSB is required to accept or reject the report of the Appellate Body within 30 days. Again, rejection of the findings requires full consensus of the DSB, so is highly unlikely.

Under normal circumstances, disputes are expected to be concluded within 12 months of initiation. Any appeals are expected to be concluded within a further three months, so that the whole process is supposed to be completed within 15 months of initiation. The process does allow for flexibility in these timelines, and in reality, disputes often take longer. A recent dispute (that we’ll come back to later in this article) initiated by Mexico, the European Union and the United States in August 2009, concerning the export of bauxite, coke, fluorspar and other materials from China, was finally deemed to have been settled in February 2012, some 30 months after initiation.

Details of the Recent Complaints

The complainants each filed near-identical requests for consultation with China, “with respect to China’s restrictions on the export of various forms of rare earths, tungsten, and molybdenum.” The requests made reference to numerous Harmonized System (HS) codes (used for classifying products, materials and services for international import and export) for specific rare-earth, molybdenum and tungsten products and compounds. In the case of rare earths, forms referenced in the documents include (but are not limited to):

  • Rare-earth ores;
  • Thorium ores and concentrates (presumably by virtue of their rare-earth content?);
  • Individual rare-earth metals, including so-called “battery-grade” rare-earth metals;
  • Individual and mixed rare-earth oxides, carbonates, chlorides, fluorides and other compounds (including cerium hydroxide & cerium cyanide);
  • Rare-earth-containing phosphorescent powders;
  • Rare-earth-containing ferroalloys; and
  • A variety of rare-earth-containing magnetic powders and alloys.

Yttrium and scandium are included in the HS code classifications for rare earths, alongside the lanthanides.

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