There is no explicit language in this clause of Article XX that relates to or requires the application of measures to domestic production or consumption, in order for them to be legitimately applied to exported materials as well. China may therefore be able to use this measure to successfully justify the export quotas and licensing processes, even if non-domestic customers are disadvantaged by them, if they can demonstrate that such actions are not a “disguised restriction on international trade“, as stated in the pre-amble for Article XX.
“(g) relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption;“
Another oft-cited argument for the implementation of rare-earth export restriction relates to the disparity between the proportion of rare-earth supply that originates in China (around 95% these days), and the proportion of global rare-earth resources located within China (approximately 30%-35% depending on who you talk to). Proponents of this argument say that this places an undue burden on China, which is unfairly expected to meet the demand for rare earths out of proportion with its resources, which are rapidly being depleted.
There are a number of issues with these arguments:
The first is that again, over two-thirds of overall demand is coming from end users located in China, and thus the comparison should perhaps be between proportion of supply (95%+) to proportion of demand (65%-70%), rather than to proportion of resources (30%-35%). Granted, a significant fraction of those end users are exporting end products back out of China to the rest of the world. Those end users would of course argue that they were ‘forced’ to locate their operations in China in order to be competitive with Chinese market participants. We can also be pretty sure that the Chinese authorities didn’t resist the opportunity for the creation of jobs and tax revenues, when those foreign companies set up shop in their country.
The second issue relates again to the fact that it is difficult to see how controls on the ultimate destination of finished rare-earth materials through export restrictions, have any effect on efforts to conserve China’s rare-earth resources, since overall rare-earth production levels have not decreased in recent years, and numerous companies which previously received rare earths outside of China, have relocated operations to be within China.
The third issue relates to the question of whether or not the rare-earth resources in China can be deemed to be “exhaustible”. Of course, any specific finite natural resource deposit that is removed from the ground, will at some point be exhausted. In the case of the rare-earth deposits in northern China however, where the vast majority of the world’s light rare earths come from, estimated mine lives in the hundreds of years are frequently quoted, with little disagreement.
In contrast, the ion-adsorption clays in the southern part of China, from where the world’s heavy-rare-earth supplies originate, are frequently referred to as being rapidly depleted, with mine lives estimated by the authorities to be in the order of anything from six to 20 years. While I am aware of more than one source that privately disputes these numbers, nevertheless, there would appear to be legitimate concern in China regarding potential exhaustion of the southern deposits.
This contrast in depletion rates between deposits in the north and south of the country, is perhaps one reason why this year, for the first time, the authorities in China divided the export quotas into separate allocations for light and for medium + heavy rare earths, in anticipation of the WTO trade dispute. Unlike for medium + heavy rare earths, significant new sources of light rare earths are expected to come on-stream in the next 12 months, from outside of China, and it is likely that the allocations by the Chinese for the export of light rare earths will be adjusted accordingly. In addition though, having a separate allocation for the rarer medium + heavy rare earths could well make for a strong fall-back position for China, if it fails to make the “conservation of exhaustible natural resources” argument for the rare earths as a whole.
The fourth issue (and frankly the most problematic) relating to reliance on clause (g) above, is the explicit expectation that any measures taken with respect to foreign consumers, will only be deemed valid if those measures are also applied to domestic consumers as well. In my mind, this is the single biggest flaw in any attempt by the Chinese authorities to use the ”conservation of exhaustible natural resources” argument to justify export restrictions, since by their very definition, they apply only to foreign consumers. It may smack of a technicality, but it’s a pretty significant one, and frankly will undermine any attempt by China to use clause (g) to counteract the complaints filed.
“(j) essential to the acquisition or distribution of products in general or local short supply; Provided that any such measures shall be consistent with the principle that all contracting parties are entitled to an equitable share of the international supply of such products, and that any such measures, which are inconsistent with the other provisions of the Agreement shall be discontinued as soon as the conditions giving rise to them have ceased to exist [...].”
In some ways, this clause is a variation of the previously discussed clause (g) of Article XX. While it would not hold much water with respect to the northern light-rare-earth deposits, it is possible that it might be used with respect to the supply of heavy rare earths, although it would be a bit of a stretch to equate the future potential exhaustion of deposits, with “general or current local short supply.” I therefore think that it is unlikely that China will use this clause in its arguments, and that such a claim is even more unlikely to stand up to scrutiny if it does.