Bridges Weekly Trade News DigestVolume 16Number 4 • 1st February 2012

WTO Appellate Body: China Raw Material Export Restrictions Illegal

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In a high-profile dispute over access to natural resources, the WTO’s Appellate Body on Monday confirmed that China violated WTO law and its accession protocol by restricting the exportation of nine raw materials (DS394395398).

In appealing a panel ruling from July 2011 (see Bridges Weekly, 6 July 2011), China had challenged the panel’s finding that Beijing’s export restrictions could not be justified as resource conservation or environmental protection measures, or as a way to manage critical supply shortages.

While a victory for the US, EU, and Mexico as co-complainants had largely been expected, the ruling provides some clarifications that could have landmark value in future cases.

Beijing has established a system of export duties and quotas for a number of raw materials, including coke, zinc, and bauxite, as well as some that are only available in China. The resulting high export prices and limited supply impact foreign steel, aluminium, and chemical industries, and their downstream clients.

The EU estimates Chinese export prices are between 50 and 100 percent higher than domestic prices, affecting four percent of the EU’s industrial activity and approximately 500,000 jobs.

“This final ruling is a great success in our efforts to ensure fair access to the much needed raw materials for EU industry,” EU Trade Commissioner Karel de Gucht said in a statement. “It sends a clear signal that such measures cannot be used as a protectionist tool to boost domestic industry at the expense of foreign competition,” he added.

US Trade Representative (USTR) Ron Kirk similarly welcomed the ruling as a “tremendous victory.”

“Today’s decision ensures that core manufacturing industries in this country can get the material they need to produce and compete on a level playing field,” he said.

Resource depletion is not critical; no justification

While the complainants portrayed the restrictions as protectionist measures, China had maintained that they were necessary to conserve the finite resources and to ensure domestic supply, as some of the resources face depletion in the near future. The Appellate Body confirmed the panel ruling when rejecting these justifications.

In times where resource-rich developing countries are increasingly eager to maintain their resources for domestic production, the EU, US, and other WTO members had anxiously sought clarification from the global trade arbiter on the issue.

In evaluating this concern, the WTO’s highest court, for the first time ever, addressed WTO rules on export restrictions taken with the aim of managing critical shortages of essential products.

Article XI 2(a) of the WTO’s General Agreement on Tariffs and Trade (GATT) provides that the general prohibition of quantitative restrictions, including bans and quotas, shall not apply where they are taken temporarily to prevent or relieve a critical shortage of foodstuff or other essential products.

This provision’s relationship with another section of the GATT, Article XX - which establishes a number of justifications for otherwise illegal measures, on the basis of greater public policy objectives, such as public health or resource conservation - was particularly controversial, as China argued that the foreseeable depletion of finite resources was indeed a critical shortage.

Unlike Article XX(g) on resource conservation measures, Article XI 2(a) does not require that external measures be linked with restrictions on domestic production and consumption.

During the proceedings, China had argued that the Article XI 2(a) exception should also apply to long-term preventive measures. The Appellate Body disagreed, however, deeming that Article XI 2(a) only “applies in the interim, to provide relief in extraordinary conditions in order to bridge a passing need.”

It further noted that “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 scenario would make it impossible for an export restriction to relieve or prevent a shortage, the judges explained.

The finding that general resource conservation efforts do not permit export restrictions through Article XI 2(a) is likely to shape global trading patterns in essential raw materials in the coming decade. This is particularly true for trade in the highly precious rare earths materials - another subject that has lately generated heated debate between China and its trading partners.

De Gucht has already called upon China “to bring its overall export regime - including for rare earths - in line with WTO rules.”

Article XX no fall-back option

Another matter before the Appellate Body was the applicability of Article XX to claims based on paragraph 11.3 of China’s accession protocol, which obliges China to eliminate all its export duties. The dispute panel had denied the article’s applicability, a ruling which the Appellate Body now confirmed.

The Appellate Body ruled that, since Article XX was not specifically addressed in the paragraph in question, there was no basis for the article to apply. “Had there been a common intention to provide access to Article XX, language to that effect would have been included in paragraph 11.3 or elsewhere in China’s accession protocol,” the judges noted.

Whether Article XX is available as a justification for claims brought under agreements other than GATT has long been a subject of debate among trade observers.

Many have argued in favour of using Article XX as a general “fall-back option” in order to resolve questions at the intersection of environment and trade on those grounds, rather than in a fragmented way under individual WTO law provisions. This is an issue of particular relevance to recently acceded countries that have agreed to “WTO+” commitments in their accession protocols.

While the Appellate Body was careful in limiting its analysis to the dispute in question, rather than generally ruling on the applicability of Article XX, the ruling is an important indication for future cases. This is particularly true for the ongoing dispute over the Canadian province of Ontario’s feed-in tariff for renewable energy and its consistency with the WTO subsidy agreement.

For acceding countries, the ruling means that they will have to carefully ensure that Article XX is referenced in all those provisions that they want covered by the article’s justifications for measures taken in the interest of the environment, resource conservation, human health, or public morality - a monumental task.

The alternative would be to incorporate Article XX as an umbrella clause in the accession protocols - an issue that could be very difficult to negotiate.

Referring to these difficulties, Beijing released the following statement on Monday: “China takes the view that the WTO rules, at the time of liberalising trade, allow a member to take necessary means to realise its policy objectives, such as protection of the exhaustible resources and the environment. A solution should be found by balancing different policy objectives.”

Next steps

The panel and Appellate Body reports will go before the Dispute Settlement Body for formal adoption within thirty days. China will then have to bring its measures into compliance within a reasonable period of time.

ICTSD reporting.

One response to “WTO Appellate Body: China Raw Material Export Restrictions Illegal”

  1. Ritesh Kumar Singh

    The Decision of WTO Appellate Body on Export Restraints is welcome judgement. China was using exceptions provided under article XX to indirectly subsidize its manufacturers by keeping the prices of the 9 inputs lower in domestic market while higher outside. This adversely affected the cost competiveness of industries dependent on import of these inputs e.g. Fluorspar or coke…which seemed unfair.
    Besides, China has committed not to maintain export duties on items not covered under annex 6 of its accession protcol.

    China must comply with its commitment at WTO.

  2. Anonymous

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