The initiative directly builds upon earlier work conducted by ICTSD’s Legal Capacity Project, first and foremost the outcome of a series of regional and national dialogues as summarised in the CUP volume “Dispute Settlement at the WTO: The Developing Country Experience” edited by Gregory Shaffer and Ricardo Meléndez-Ortiz. It also marks the beginning of the second phase of ICTSD’s Legal Capacity Project, paving the way for another series of regional and national dialogues.

The tripartite partnership deploys a novel, interactive approach to legal capacity building that targets the ability of developing countries to manage international trade disputes.

Three innovative characteristics are particularly noteworthy:

1. Training through South-South exchange.
2. Focus on the practical challenges of dispute settlement.
3. Three organisation cooperation.

During the first three days of the training course, coordinated by the WTO and the ACWL, the participants attended interactive sessions on WTO dispute settlement. Experts on each of the stages of WTO dispute settlement provided instruction on their respective areas of expertise. The aim of the training was also to get the delegates ‘up to speed’ in order to enable them to participate in the following high-level experience exchange and to benefit from the identification of best practices.

At the South-South Dialogue on Managing Trade Litigation organised by ICTSD, which followed on 3-4 May, fifty senior experts from 26 developing countries focus their discussions on commonly faced, practical challenges. Discussions range from interagency coordination and the use of private counsel to pre-litigation conflict management, with the aim of jointly identifying challenges and solutions.

According to ICTSD research, 88 percent of developing countries cited legal capacity as the major advantage of developed trading nations in dispute settlement.

But there are some true dispute settlement masters among developing countries. To learn from their experiences can be vital for countries’ efforts to build the domestic systems needed for managing litigation. This starts with inter-agency coordination and ends with public-private partnerships to implementing authorised countermeasures.

The group of experts that attended the South-South Dialogue comprises senior dispute settlement delegates, independent experts and the delegates that attended the earlier training workshop. The experts plan to identify best practices for conflict resolution in the multilateral trade system as well as litigation techniques and pitfalls. These will be shared at a later stage in the form of a comprehensive meeting report and a detailed guide to managing trade litigation. The latter is meant to inform governmental and non-governmental stakeholders in their efforts to shape trade litigation.

Views & Opinions

A participant called the Dialogue a “South-South conversation where the trainers are also the trainees, which has a different feel from a North-South exchange or classroom setting”. “The countries represented here are diverse but share common challenges, and learning how your peers recently overcame the same problems you face today is a fruitful way to learn.”

Lauding the three institution partnership during Wednesdays kick-off reception, Miguel Rodriguez Mendoza, Senior Associate at ICTSD said:  “The opportunity to partner with the WTO and ACWL and bring all these countries together is crucial for shifting our focus from information gathering to information dissemination and active trade litigation capacity building.”

“This is also a new way of capacity building in the WTO” said WTO Deputy Director General Alejandro Jara.  “Bringing together three institutions with shared interests towards developing countries, but with distinct knowledge, expertise and experience in dispute settlement, can only enrich our TA beneficiaries.  We are keen to take this partnership forward into other areas and other regions.”

Frieder Roessler, Executive Director at the ACWL finally explained the format of the event as follows: “The handling of WTO dispute settlement procedures is becoming increasingly complex, and this increasing complexity poses a challenge in the training of government officials from developing countries and LDCs,” Roessler said. “Nowadays training requires a combination of hands-on experience and the ability to transmit and share that know-how.  This is the underlying philosophy of this workshop, and the ACWL is firmly committed to this approach.”

The 17 controversial rare earth elements have unique magnetic, heat resistant, and phosphorescent properties and are crucial ingredients in the manufacturing process of many high-tech and green energy products, including wind turbines, engines for electric and hybrid vehicles, and medical equipment.

The complainants in the case argue that China’s export quotas on the elements, combined with its near-monopoly over global production - some 97 percent of the world’s supply, according to EU estimates - are highly disruptive to domestic industries and result in higher production costs. Market prices experienced a 20-fold price increase between mid-2010 and mid-2011, but have since fallen back in line.

They further complain that the policy offers Chinese competitors an advantage by providing them with cheaper and easier access to the elements compared to foreign manufacturers.

Environmental grounds

In line with its rationale on restricting raw materials, China argues that the extraction process for producing rare earth elements is highly damaging to the environment and that the quota restrictions have nothing to do with trade disruptions.

“In previous communications, China has emphasised that the purpose of these measures is to protect exhaustible natural resources and environment as well as maintain sustainable development,” China’s Ministry of Commerce (MOFCOM) said in a statement. “China does not intend to protect domestic industry by distorting trade.”

While environmental grounds can be used in some instances to justify trade barriers at the WTO, the Appellate Body earlier this year ruled that Beijing’s export restriction policies for nine raw materials failed to meet the requirements set out by WTO law (DS394, 395, 398).

The Appellate Body ruled that these environmental exceptions could not be applied, as they were not explicitly referred to in the section of China’s accession protocol that prohibits export duties (see Bridges Weekly, 1 February 2012). They also confirmed that quantitative export restrictions for finite natural resources taken with conservation aims could only be justified if they were coupled with similar limitations on domestic consumption and production.

For its part, Brussels argues that, despite the intended environmental protection goal of China’s rare earth export policies, Beijing’s approach is unlikely to achieve such an outcome.

“The EU supports and encourages all countries to promote an environmentally friendly and sustainable production of raw materials,” the EU said in a 13 March press release. “However, the EU believes that export restrictions do not contribute to this aim; there are more effective environmental protection measures that do not discriminate against foreign industries.”

But this case might be different from the 2009 raw materials spat. As recently as this past January, China reformed its rare earths quota system, introducing additional environmental protection requirements as a prerequisite for receiving export permits.

The export restrictions are also part of a broader campaign by Beijing to address the pollution challenges that come with rare earths extraction. The government has wrestled with rampant illegal mining around the country for many years - a practice that will likely be exacerbated by any clampdown on production.

Meanwhile, some experts say that Beijing’s perceived stranglehold on rare earths extraction as a means to boost local downstream industries may not be as straightforward as previously thought.

A recent article by Indiana University professor Scott Kennedy for GK Dragonomics suggests that the policymaking process on rare earths in China is so fragmented among different levels of government that Beijing’s intentions may have little to do with reality on the ground.

“The general pattern has been for local governments to pretend to agree with central aims, and then go about doing whatever is needed to help their local firms,” Kennedy writes.

This fragmentation of rare earths policy prevents China from achieving many of its major objectives, including consolidating the industry and obtaining downstream technologies from foreign competitors, Kennedy argues, despite the country’s dominance in rare earths mining.

US election year

The joint challenge is the latest in a series of road bumps in China-US trade relations and the issue is likely to intensify as President Barack Obama shores up his defence from Republican accusations that he is not doing enough to improve the domestic job market.

Republican presidential candidates, particularly Mitt Romney - considered by many to be the frontrunner for his party’s nomination - have been hammering Obama on his China policies on the campaign trail, a strategy that will likely intensify as the November election draws nearer.

Obama, however, says he is on firm ground vis-à-vis China, recently boasting that his administration has brought trade cases against China at almost double the rate of that of previous president George W. Bush. In addition to recent skirmishes over China’s solar panel and wind power subsidies, Obama in February announced the creation of a new agency tasked with identifying unfair practices by US trading partners.

The president noted the new Trade Enforcement Unit in a statement Tuesday, suggesting that the US has taken on a new, less tolerant position on alleged trade violations.

“Our competitors should be on notice:  You will not get away with skirting the rules,” Obama said in a statement. “When we can, we will rally support from our allies.  And when it makes sense to act on our own, we will.”

China is also facing a once-in-a-decade leadership change this year, with Wen widely expected to be replaced by Vice President Xi Jinping. Trade featured prominently in discussions between Xi and Obama when the two met in Washington last month (see Bridges Weekly, 22 February 2012).

The request for consultations on the rare earths issue is the first step in the WTO dispute settlement process. Should the parties to the dispute be unable to reach a resolution after 60 days of talks, the EU, US, and Japan will have the right to ask that a WTO panel be established to hear the complaint.

ICTSD reporting; “AP source: US brings new trade case against China,” ASSOCIATED PRESS, 13 March 2012; “Obama Takes Aim at China With Plan for WTO Case on Rare-Earth Export Caps,” BLOOMBERG, 13 March 2012; “US to challenge China over rare earths,” FINANCIAL TIMES, 13 March 2012; “Trade Issues With China Flare Anew,” THE NEW YORK TIMES, 12 March 2012; “Deals Shows China’s Sway in Rare-Earth Minerals,” WALL STREET JOURNAL, 11 March 2012; “U.S. and Europe Move on China Minerals,” WALL STREET JOURNAL, 13 March 2012.

Agenda

12:30 Welcoming lunch and introductory remarks

13:00 Panel discussion

• Moderator, Christophe Bellmann (ICTSD)
• Key issues, overview, and comments, Hannes Schloemann (WTI Advisors)
• The availability of Article XX to non-GATT claims, Cherise Valles (ACWL)
• Implications for resource conservation in the mining sector, Gilles Carbonnier (HEID)
• Implications beyond extractive resources; an outlook for future disciplines, Baris Karapinar (WTI)

13:45 Open Discussion

Registration required. Please register by Monday, 6 February with Matt Fleszar at mfleszar@ictsd.ch

Environmental regulations tightened for rare earths extraction

The start of the new year has brought increased uncertainty regarding the 2012 global rare earths supply. Rare earths are used in essentially every area of high-tech production, including pharmaceuticals, military equipment, green energy technology, and information technologies.

In late December, Beijing announced its new export quota on the precious materials, which seem to suggest that the market could see a slight increase in exports throughout 2012. However, China has also introduced a new approach to allocating the quotas that could indeed reduce supply of the most precious materials.

As of 2012, Beijing will distinguish between the fairly accessible light rare earths and the most precious heavy rare earths, allocating only about 15 percent of the quota to the latter category.

While light rare earths are generally available for lower prices in the global market, heavy rare earths are as scarce as they are needed. In addition, four of the six main rare earths materials that are expected to face supply shortage by 2015 are heavy rare earths, including europium, terbium, dysprosium and yttrium.

Dysprosium and neodymium are jointly required for virtually every magnet used in modern technology, including renewable energy technology. Europium, on the other hand, is needed for TV screens. Exports of the only light rare earths materials that are of equal importance and that might face shortage over the coming years (neodymium) have already been strategically limited over the past years by China. Neodymium is needed for wind turbines and electric vehicles, among other products.

This new distinction and its impact for rare earths exports are expected to reduce supply in heavy rare earths in the foreseeable future.

The 2012 quota is further subject to a new environmental protection regime. Export licenses can only be allocated to companies that comply with tightened environmental regulations. At this stage, according to data from the Financial Times, nearly two-thirds of all allocated licences for 2012 are pending - meaning that the already allocated quotas may only be used once environmental compliance has been approved.

As an example, Baotou Steel, which accounts for nearly half the world’s rare earth production and which has been found guilty of environmental violations in the past, will have to implement additional environmental regulations by July 2012 in order to be able to execute its allocated quota.

The initial 2012 batch gives 10,546 tonnes of rare earth exports to nine companies that have met environmental protection standards.

The new policy comes after a turbulent year that was characterised by large price fluctuations and a tight export quota from China that accounts for about 97 percent of global rare earths supply. Many analysts, along with importing countries such as Japan, the EU, and the US, saw this as a strong signal of the country’s willingness to implement export restrictions to control domestic supply and manipulate world market prices.

Even when prices and demand crashed in mid-2011 the protests continued, further fuelled by a WTO panel decision that outlawed a similar Chinese export restriction regime (DS394, DS395, and DS398; see Bridges Weekly, 6 July 2011). Although panel and Appellate Body reports have no precedential effect in the WTO, the China-Raw Materials case was generally seen as a ‘testing ground’ for a potential rare earths dispute.

Beijing continuously rejected these accusations, justifying its export restrictions with environmental protection objectives. Indeed, throughout 2011 Beijing implemented a new environmental policy by limiting the illegal extraction of rare earths in China and establishing cleaner extraction policies through enforcing technology updates and limited extraction.

The announcement of the new policy comes only weeks before the appeal report in China-Raw Materials is expected to be released by the WTO. As China argued in favour of its export restriction regime subject to that dispute on the basis of environmental justifications, the Appellate Body’s position might provide important guidance for China’s new rare earths quota.

Appellate Body upholds distilled spirits panel report

On 21 December 2011, three members of the WTO Appellate Body issued a final report in the Philippines-Spirits case(DS396 and DS403), upholding an earlier panel finding that had ruled the archipelago’s differential taxes for foreign and locally distilled spirits illegal (see Bridges Weekly, 7 September 2011). The Appellate Body agreed with the panellists that the products in question were ‘like’ for the purpose of WTO law, even though different feedstock was used to produce them.

In March 2010, the EU and the US sought WTO dispute settlement panel rulings on Filipino tax laws for distilled spirits. These laws gave favourable tax treatment to spirits produced from ‘designated’ raw materials, which included only local resources like sugarcane and coconut. Spirits from ‘non-designated’ raw materials - the majority of which were imported - were subjected to tax rates up to 40 times higher (see Bridges Weekly, 31 March 2010).

Nonetheless, local coconut or sugar cane based spirits are marketed and sold as brandy, whiskey, tequila, and gin.

The Appellate Body now confirmed the panel’s position that the products had to receive the same favourable treatment, as they were essentially ‘like’ due to their “directly competitive or substitutable” nature. The ruling once more confirms that the competitive nature of products, generally speaking, determines “likeness” more than the natural input. The finding further informs discussion on other natural resource-based products and their relationship, such as that of different biofuels or of different bio-diesels produced from different feedstock.

US appeals clove cigarettes decision

In other trade dispute news, Washington has decided to appeal the WTO panel ruling in the clove cigarette case (DS406) between the US and Indonesia. The report from 2 September 2011 found that the US 2009 Family Smoking Prevention and Tobacco Control Act banning flavoured cigarettes was in violation of WTO law, as it discriminated among domestic and foreign products (see Bridges Weekly, 7 September 2011).

Indonesia had complained that the ban discriminated against its clove flavoured cigarettes, as the law did not ban menthol flavoured cigarettes. Indonesia accounts for almost 100 percent of the US clove cigarette market, while nearly all menthols sold in the US are produced domestically.

The case was the first out of three cases dealing with the Technical Barriers to Trade (TBT) Agreement in 2011 and the first out of three consumer protection cases that the US lost at the panel stage that same year due to flawed policy implementation. The panel ruling had provoked an outcry among advocacy groups in the US that saw the ruling as an attack on US’ public health regulation. A decision is expected in spring 2012. The US’ submissions are already available online.

Deadline in origin labelling dispute extended

The WTO Dispute Settlement Body also agreed at its 5 January meeting to extend the deadline for adoption or appeal of the panel rulings in the country-of-origin labelling requirements (COOL) cases (DS384 and DS386) to 23 March 2012.

The COOL disputes involved challenges by Canada and Mexico to the US Farm Bill, which requires sales packaging to inform consumers about the country of origin of meat. The panel reports in these cases found the labelling requirements inconsistent with Washington’s WTO obligations (see Bridges Weekly, 23 November 2011).

ICTSD reporting; “China rare earths move unlikely to buoy prices,” FINANCIAL TIMES, 29 December 2011; “China’s Rare Earths Export Quotas for 2012: Rules and Regulations - Part Two,” METAL MINER, 10 January 2012; “Investing in Rare Earth: Heavy vs. Light,” RARE EARTH INVESTING NEWS, 24 March 2011.

Questions on the consistency with WTO provisions have been frequently raised as sustainability criteria and implementation measures were defined and adopted under the RED and FQD. However, no thorough analysis has been carried out on this topic. The objective of the worksho is to engage in an informed and constructive discussion on the technical and legal arguments surrounding the compatibility of the EU sustainability requirements with international trade rules. Special attention will be given to recent WTO jurisprudence.

Speakers include Andrew Shoyer, chair of Sidley Austin’s international trade and dispute resolution practice; Dr. Alan Swinbank, Emeritus Professor of Agricultural Economics at Reading University; Malena Sell, Senior Programme Officer, Environment and Natural Resources, ICTSD; and high-level representatives from the European Commission and the European Parliament.

The issue formally entered the halls of the WTO when a dispute was lodged with the WTO’s Dispute Settlement Body (DSB) in September 2010 over Ontario’s feed-in tariff scheme (Canada-Renewable Energy (Japan)). A second case on the same measure followed in August 2011 (Canada-Feed-in Tariff (EU)).

The FIT programme in question contains a controversial local-content provision which requires up to 60% of project input to be sourced in Ontario. Japan and the EU argue that this disadvantages producers outside Ontario and amounts to an illegal subsidy. In particular this decision to file the dispute under the WTO’s subsidy accord has attracted great attention.

The aim is to serve the needs of professors, researchers and lawyers who require updated and specific analysis on WTO Law. The monograph series is intended to support teaching on this subject-matter.

Materials can be freely accessed here.