China’s export restrictions of raw materials (WTO dispute DS394)

November 1, 2011

Better late than never, here is a post on the recently published report of a WTO Panel on the dispute between the United States, the European Communities and Mexico against the People’s Republic of China. The dispute –which official transcripts are available here– flows from forty measures restricting the exportation of raw materials including certain forms of bauxite, coke, fluorspar, magnesium, manganese, silicon carbide, silicon metal, yellow phosphorus and zinc. The complainants identified the following as four types of restraints that China imposes on the exportation of these raw materials: (1) export duties; (2) export quotas; (3) export licensing; and (4) minimum export price requirements.

An interesting aspect of this claim is that China defended its export restriction policy by emphasising the essential impact of those measures on their economic development (sovereignty of natural resources was used here as the major legal argument), resource conservation and environmental protection. This, of course, was rather interpreted by the complaining parties as purely protectionist measures breaching China’s commitments under WTO rules.

Note: this post only provides a summary of the main arguments of the parties and the related findings of the Panel, it does not provide an extended analysis of the case.

“Essential products”

China largely relied on two Articles of the 1994 GATT Convention to suggest that some restrictions could be applied to the trade of a product deemed important to domestic industries. Article XXXVI:5, on the one hand, suggests that “[t]he rapid expansion of the economies of the less-developed contracting parties will be facilitated by […] the avoidance of an excessive dependence on the export of primary products”. Article XI:2(a), on the other hand, makes it clear that export prohibitions or restrictions may be “temporarily applied to prevent or relieve critical shortages of foodstuffs or other products essential to the exporting contracting party” (both can be read here). China, in addition, suggested that the “essential” role that natural resources play in the progress and development of states that possess those resources was overall significantly protected under customary international law through the principle of sovereignty over natural resources was developed and could therefore justify those measures (at 7.265).

The complaining parties (especially the United States) however interpreted the above as clearly showing that China’s export quotas on raw materials (especially refractory-grade bauxite) could not be about natural resource conservation policy but rather indicated the presence of “efforts to foster development of the domestic industry” (at 7.271).

Compatibility with Article XI:2(a) GATT 1994

Limiting shortage of resources

China argued that the export quotas aimed at resource conservation. It said that the restrictions were applied to “avoid or prevent the occurrence of a critical shortage of essential products”, and overall claimed that Article XI:2(a) allowed exceptions to the general no-barrier rule for measures adopted “to ease and mitigate the negative consequences resulting from a critical shortage of essential products, once that shortage has occurred” (at 7.283). Article XI:2(a), furthermore, was described as leaving WTO members with a “margin of appreciation to determine their own appropriate level of protection and level of risk tolerance” (at 7.286).

The complainants of course emitted abjections as to the very existence of a ‘critical shortage’ of raw materials in China, and thereby forced the Panel to comment on the concept. The Panel actually defined shortage as a “deficiency in quantity”, whist “critical” was characteristic of the existence of a crisis (i.e. “a turning-point, a vitally important or decisive stage; a time of trouble, danger or suspense in politics, commerce, etc.”) of “decisive importance” and “involving suspense or grave fear as to the issue” (at 7.295). Interpreting Article XI:2(a), it also found that the notion of “critical shortage” was inherently related to the requirement that exceptional measures be applied “temporarily”:

“In this sense, as noted by the European Union, if there is no possibility for an existing shortage ever to cease to exist, it will not be possible to “relieve or prevent” it through an export restriction applied on a temporary basis. If a measure were imposed to address a limited reserve of an exhaustible natural resource, such measure would be imposed until the point when the resource is fully depleted. This temporal focus seems consistent with the notion of “critical”, defined as “of the nature of, or constituting, a crisis” (at 7.297).

As a result, the Panel concluded that “China’s interpretation cannot be correct” (at 7.298), and overall emphasised that although Article XX GATT 1994 sets out several “general exceptions” to the non-barrier rational, the right to put in place measures relating to the conservation of exhaustible natural resources was “not open-ended” (at 7.299-7.302).

‘Essential’ nature of the resource as a development argument

As a reminder of a debate on the right to development which used to animate much controversies on sovereignty and natural resource management, China also presented the restrictions as a significant means to protect their nationals industries. The argument was not brought forwards in such a way because it would have clearly given the debate a protectionist dimension, but China nevertheless clearly submitted that the resources were “essential” to the economy’s progress.

It for instance presented refractory-grade bauxite as being “essential” in terms of contribution “to a range of quantitative and qualitative factors, including geological, technical, environmental, social, economic, and political factors”. It also argued that refractory-grade bauxite is indispensable for producing glass, ceramics, and cement, but was even more essential to its iron and steel industry (70% of refractory-grade bauxite is consumed by China’s iron and steel industries; at 7.340) which produces over one-third of worldwide stocks. China also defended the idea that it had a “more pressing” needs for raw materials than other countries on the ground that those contribute “to the creation of considerable economic activity in the manufacturing and construction sectors” and are therefore key to the “stable” development of the country, including GDP growth, jobs creation, but also education, healthcare, infrastructure, technological progress, and scientific research (from 7.310 to 7.314). The point was essentially rejected by the complaining parties on the ground that a number of substitutes for refractory-grade bauxite were actually available (at 7.317), and that China had overall failed to demonstrate the existence of a “critical shortage” of refractory-grade bauxite whilst “significantly understat[ing]” worldwide reserves (at 7.328 – 7.330).

Although the WTO Panel actually admitted that refractory-grade bauxite is “essential” to China because of its important industrial role (at 7.340), it however rejected to validate China’s measures’ conformity with Article XI:2(a) GATT 1994 because of (i) the lack of temporariness and (ii) the failure of China to demonstrate the physical existence of a shortage:

“The Panel does not consider China’s application of the measure to be “temporarily applied” within the meaning of to justify its imposition under that provision as a measure to either prevent or relieve a “critical shortage” […] a “shortage” refers to a deficiency in the quantity of goods. The product’s importance in use, though relevant in an assessment of whether a product is “essential” to a Member, and perhaps indicative of future demand for a product, does not inform whether a shortage currently exists” (at 7.346)

It therefore conluded:

The Panel does not consider that China’s restriction on exports of refractory-grade bauxite, which has already been in place for at least a decade with no indication of when it will be withdrawn and every indication that it will remain in place until the reserves have been depleted, can by any definition be considered to be “temporarily applied” to address a critical shortage within the meaning of Article XI:2(a). On this basis, the Panel concludes that China cannot justify its export quota pursuant to Article XI:2(a) [and] cannot agree with China that it currently faces a “critical shortage” of refractorygrade bauxite in the sense of Article XI:2(a)” (from 7.346 to 7.351).

Compatibility with Article XX(g) GATT 1994

The Panel also considered the need to assess the compatibility of China’s restrictions with Article XX(g) GATT 1994, which states that measures aiming at the conservation of exhaustible natural resources are only deemed acceptable if made “in conjunction with restrictions on domestic production or consumption” (at 7.361).

On this point, the parties once again debated to which extent China’s own social and economic development should prevail over WTO rules. The complainants, in fact, argued that the principle of sovereignty over natural resources was not relevant to the debate (see 7.364-7.367), a point which was significantly confirmed by the Panel. Having emphasised that any interpretation of Article XX(g) should “take into account” the sovereignty principle, the later indeed observed that the decision to enter into international agreements would prevail:

“the ability to enter into international agreements −such as the WTO Agreement is a quintessential example of the exercise of sovereignty. In joining the WTO, China obtained significant commercial and institutional benefits, including with respect to its natural resources. It also committed to abide by WTO rights and obligations. Exercising its sovereignty over its own natural resources while respecting the requirements of Article XX(g) that China committed to respect, is an efficient way for China to pursue its own social and economic development. These considerations support the view that “a comprehensive policy comprising a multiplicity of interacting measures” is an appropriate policy to conserve natural resources” (at 7.381-7.383)

Beyond the sovereignty issue, the major point of discussion actually dealt with whether China had in practice applied restrictive measures on the exploitation of raw minerals to its own industries and economy. In the Panel’s view, Article XX(g) indeed requires that the export restrictions operate at the same time as parralel domestic restrictions.

“This is, in fact, the very essence of the conservation objective set forth in Article XX(g): if a WTO Member is not taking steps to manage the supply of natural resources domestically, it is not entitled to seek the cover of Article XX(g) for the measures it claims are helping to conserve the resource for future generations […] In sum, paragraph (g) of Article XX can justify GATT-inconsistent trade measures if such measures along with parallel domestic restrictions aimed at the conservation of natural resources and are primarily aimed at rendering effective parallel domestic restrictions operating for the conservation of natural resources. A contrario, Article XX(g) cannot be invoked for GATT-inconsistent measures whose goal or effects is to insulate domestic producers from foreign competition in the name of conservation” (at 7.398 – 7.408)

“The domestic policy on raw materials presented by China was twofold. First, China seems to have considered that the export restriction would inherently reduce domestic production because of a decrease in demand. Second, it argued that reducing domestic exploitation without restraining exports would not be equitable and would “undermine China’s sustainable development” (at 7.427). This argumentation however failed to convince the Panel, which concluded that China had not only failed to restrict its domestic consumption of raw materials, but actually ‘substantially’ increased its domestic consumption of certain raw materials (fluorspar and refractory-grade bauxite) and therefore failed to put in place even-handed measures” (at 7.429, 7.435-7.465)

Protection of health and the environment?

The question as to whether the restriction on EPRs (Energy-intensive, highly-Polluting, Resource-based products, including coke, magnesium metal, manganese metal and silicon carbide) genuinely aimed at achieving development by protecting health and the environment was also considered.

The complainants challenged China’s claim that its export restrictions on EPRs were motivated by the need to reduce pollution / improve the health of the Chinese population (see 7.519), and argued that the argument was “merely a post hoc rationalization developed solely for purposes of this dispute”. To the opposite, they contended that China’s restrictions aimed at ensuring that domestic industries would have preferential access to the raw materials compared to their foreign counterparts whilst promoting “increased production of high value-added downstream products that use the raw materials at issue in this dispute as inputs [and served] to lower the price for these inputs in China and thereby facilitate the production of downstream products” (at 7.498-7.499, 7.522).

Noting that the measures imposing the export restrictions made no mention of environmental or health concerns, (at 7.501) the Panel concluded that “neither the measures implementing the export restrictions, nor the contemporaneous laws and regulations, convey[ed] in their texts that the export restrictions [were] contributing to, or form part of, a comprehensive programme for the fulfilment of its stated environmental objective”, so that China failed “to substantiate its claim that its export restrictions on EPRs or scrap products [were] part of a comprehensive programme maintained in order to reduce pollution resulting from the production of EPRs” (at 7.512-7.516, 7.538).

Trade restrictiveness of the measure

The issue of whether those allegedly development-motivated measures would have consequences on the international trade of raw materials and “severely distort the conditions of competition in the global market place” was finally considered. Acknowledging that the incriminated measures were are “less restrictive than full bans”, the Panel rejected the idea of qualifying these as non-restrictive. The quotes below speak for themselves:

“First, the impact of an export restriction on the world market does not depend on the global availability of the raw natural resources to manufacture EPR products, but on a country’s export market share in the EPR market. In this respect, the evidence before the Panel appears to show that China’s share of global exports in some of these products is quite significant (43.5% for coke, 74.2% for magnesium containing 99.8% by weight of magnesium, 57.9% for magnesium containing <99.8% by weight of magnesium, and 74.2% of manganese). Thus China’s export restrictions, even if modest, can have an important impact worldwide” (at 7.558)

“As far as the long-term effects of export restrictions are concerned, China’s argument is that these measures are not too trade restrictive in the long term because the high world market prices will provide an incentive to new producers to enter the market. As a consequence of this entry, China argues, world prices will return to their initial level […] Although this is theoretically possible, given that higher world prices could make it profitable to start EPR production, it is important to take into account that long-term effects do not counterbalance short-term effects. In other words, the fact that in the long run the trade-restrictive effects of a measure may vanish does not imply that the short-term costs associated with the measure are not highly restrictive(at 7.561-7.562)

So, what’s next?

It is hard to predict what shall come next. Various commentators (see for instance an article by China Daily here) suggest that China should Appeal this decision and a procedure is actually ongoing (available on theWTO page with the Panel’s report). Its results, however, will most likely be a matter of suspense for a while.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: