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Originally published Wednesday, March 26, 2014 at 6:03 PM

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China quotas on rare-earth metals violate law, WTO says

The WTO found the export taxes, quotas and bureaucratic delays Beijing imposes on overseas sales or rare-earth elements and other metals artificially raise prices and create shortages for foreign buyers.

The New York Times

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PARIS — China has broken international trade law by restricting the export of rare-earth elements and other metals crucial to modern manufacturing, a World Trade Organization panel said Wednesday. That finding opens the possibility that Beijing will face trade sanctions from the U.S., which initiated the case, the European Union and Japan.

The panel considering the case in Geneva found that the export taxes, quotas and bureaucratic delays Beijing imposes on overseas sales of the minerals artificially raise prices and create shortages for foreign buyers. It concluded “China’s export quotas were designed to achieve industrial policy goals” rather than to protect its environment, as Beijing had argued.

China produces more than nine-tenths of the global supply of the strategically important metals, which are essential to such modern products as smartphones, wind turbines, industrial catalysts and high-tech magnets.

Prices soared in 2010 after Beijing cut export quotas by about 40 percent, to just over 30,000 tons, saying the restrictions were necessary because mining rare earths creates many environmental hazards.

U.S. and European officials hailed the ruling. Michael B. Froman, the U.S. trade representative, said the trade restrictions had bolstered Chinese industry at the expense of businesses in other countries, forcing them “to pay as much as three times more than what their Chinese competitors pay for the exact same rare earths.”

Karel De Gucht, the European trade commissioner, said, “China cannot use export restrictions to protect its own industries or give them a helping hand on the global market at the expense of foreign competitors.”

The U.S., which is almost totally dependent on China for the metals, filed the case in March 2012, and the EU and Japan joined it soon after. They challenged the export restrictions on 17 rare earths, as well as two metals used in steel alloys: molybdenum and tungsten.

An interim report by the WTO panel last October had indicated the panel would rule against China.

In a statement Wednesday, the Chinese Commerce Ministry expressed “regret” at the ruling, saying it believed its regulatory measures “are perfectly consistent with the objective of sustainable development promoted by the WTO.”

China has amply demonstrated the damage caused at each step of the production process, from mining and refining the metals to disposing of the waste, and Beijing has been shutting down some of the worst-offending producers, among them criminal enterprises.

The soil in parts of China is scarred from the concentrated acids used to leach the ores, making farming impossible, while giant tailing ponds full of toxic and sometimes radioactive chemicals attest to the fact that the recovery of every pound of rare- earth metals entails the creation of hundreds or thousands of pounds of waste.

China had also argued that the export quotas were justified under trade rules allowing exceptions where such steps “relate to the conservation of exhaustible natural resources.”

But the complainants argued that the restrictions were inconsistent with China’s obligations under the rules of the WTO, which it joined in 2001, because they were handled “in a manner that is not uniform, impartial, reasonable or transparent,” distorting the market in favor of China’s domestic industry.

Critics also argued that despite the claims of environmental protection, China was using its monopoly to create a cost advantage for companies operating within its borders. They said that because the price was lower for domestic users, the arrangement caused foreign companies to set up shop in China to be competitive, creating local jobs and transferring technology.

The panel ruled against China’s arguments on all counts. While it did not rule that nations may not impose quotas to protect scarce resources, it argued that once a commodity is extracted from the ground it should be treated in accordance with the global rules.

World trade rules do not prohibit export taxes. But the agreement China signed with other countries when it joined the WTO allowed for only a limited number of such duties and did not include rare earths, the panel noted.

Beijing has about two months to appeal the case, as do the complainants if they think the outcome is not entirely in their favor. Any challenge would be heard by the Appellate Body, the WTO’s permanent appeals tribunal.

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