The Rare Earths Trade Dispute was a trade dispute between China on one side and several countries led by the US on the other. The dispute was over China's export restrictions on rare earth elements, plus Tungsten and Molybdenum, which are used to make many electronics such as smartphones. China controls 97% of the production of these elements. The US, EU and Japan argued that the restrictions were a violation of the WTO trade regulations. In 2012, the Obama administration filed a case with the Dispute Settlement Body of the WTO. In 2014, the WTO ruled against China, which led China to drop the export quotas in 2015.
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Products at issue
The rare earth elements (or rare earths) are 17 elements that have magnetic and conductive properties. They are used extensively in electronic gadgets such as cellphones, and in national defense equipment. Despite their name, the elements are not so rare, as they can be found widely. However, they are not often found in economically exploitable concentrations. Also, their mining is environmentally hazardous. The rare earths were discovered and first put to industrial use in the United States. But lower labor costs and less strict environmental regulations in China have now enabled the country to be the world’s predominant supplier of rare earths, accounting for 97% of the currently supply.
History of the dispute
China used to levy duties and enforce quotas for the export of the elements since 2006. Dispute arose when the Chinese government reduced its export quotas by 40% in 2010, sending the rare earths prices in the markets outside China soaring. The government argued that the quotas were necessary to protect the environment. Critics charged, however, that the move was protectionism in disguise. The difference in prices inside and outside China gave unfair advantage to Chinese firms.
The American news program 60 Minutes broadcast a segment on the dispute in which the news anchor said that, due to the ubiquity of the use of the rare earths, especially in weaponry, the Chinese restrictions posed a national security threat to the US.
China was accused of unofficially banning of rare earths exports to Japan during a diplomatic standoff between the two countries after the 2010 Senkaku boat collision incident, though China denies such reports. Critics pointed at this incident to argue that China was not above using its dominance in rare earths production to gain leverage in international negotiations.
The WTO case
The US brought a case to WTO’s Dispute Settlement Body against the Chinese restrictions. The European Union and Japan also joined the case on the US side. The US argued that the Chinese restrictions were in breach of the accession treaty that China had signed when it joined the WTO in 2001. The treaty disallowed export duties and quotas, except for goods specifically listed. Rare earths were not among the goods specifically listed.
China argued that its restrictions were legal because WTO regulations allow countries to impose export duties and quotas for reasons of conservation and to protect plant, animal, and human safety.
The Dispute Settlement Panel ruled against China. Though the Panel acknowledged that countries are allowed to restrict exports for reasons brought up by China, the Panel was not persuaded that the Chinese restrictions served those reasons. It is true that countries have the right to restrict mining for reasons conservation and safety, but once the material is out of the ground, WTO member governments could not discriminate between domestic and foreign firms in giving access to the mined resource. China’s restrictions gave its domestic firms preferential access to the rare earths, which was against the principle of “non-discrimination” that WTO members are obligated to follow.
Response to the WTO ruling
China expressed disappointment with the ruling (NYT) and filed an appeal repeating its conservation argument. The Appellate panel of the WTO, however, upheld the ruling. The US Trade Representative hailed the ruling as a victory for openness and fairness around the world. China dropped its export restrictions in January 2015.
China was losing its dominance in the rare earths markets anyway, as higher prices had led many users to develop alternatives and increase their use of recycled elements. (Reuters)
In popular culture
The rare earths dispute formed part of the storyline in Season 2 of the Netflix series House of Cards. (Real Clear World)
From February to May 2015, the Thyssen Bornemisza Museum is running an art exhibition titled RARE EARTHS related to the dispute, featuring seventeen commissioned works, one for each element. Contemporary artists from The European Union, China, Mexico, Congo and Russia contributed works. Artist and political activist Ai Weiwei is among the artists who have contributed.