WTO to Fault China's Curbs

BRUSSELS—The World Trade Organization is set Tuesday to condemn China for limiting its exports of major raw materials, rebuffing Beijing's arguments that curbs are necessary to protect the environment, according to trade diplomats and lawyers.

The decision will help steelmakers and other industrial producers, but, more importantly, will set a precedent for the U.S. and the European Union to file another complaint against China over its quotas on the export of rare-earth materials, 17 minerals used in the high-tech industry.

The raw-materials case "is more a political issue than a trade issue," said Magnus Ericsson, a senior partner with Raw Materials Group, a consultancy based in Solna, Sweden.

The U.S., the EU and Mexico filed their complaint on raw materials in 2009. China and the West have faced off in recent years on issues ranging from the pirating of Hollywood movies to whether the U.S. can penalize Chinese companies for receiving state subsidies.

Under WTO law, China now can appeal the decision on raw materials. If it doesn't, or if it loses its appeal, it must remove its export restrictions or face retaliatory trade sanctions from the three complainants.

China pledged to get rid of export controls when it joined the WTO in 2001. However, the financial crisis has increased pressure on all countries to retain as much of their raw materials as possible, and Beijing has gradually returned to clamping down on exports.

That matters. China is the No. 1 producer in the world of cadmium, gold, indium, iron ore, lime, lead, manganese, mercury, molybdenum, phosphate, tin, tungsten and zinc.

It has consistently cut exports of these minerals.

Chinese exports of phosphorus—used to make matches, but also herbicide and other chemicals—fell to 39,665 tons in 2010, from 102,346 tons in 2005, according to Global Trade Information Services, a Geneva-based trade company.

In a letter sent to the U.S. Trade Representative's office this year, U.S. steel lobbies accused China of again cutting its export quota for bauxite to 830,000 tons in 2011, from 930,000 tons in 2010.

After its three trading partners complained, China invoked the WTO's Article 20, which allows its 153 members to limit exports for reasons such as environmental protection.

The WTO has rejected that argument, said trade diplomats and lawyers familiar with the case.

The victory will pave the way for a case on rare earths, said U.S. and EU trade officials.

The raw-materials case "will considerably strengthen the position of the European Union" for a case on raw earths, EU trade commissioner Karel De Gucht said in a speech at a recent conference on raw materials in Brussels.

Rare-earth minerals, which are essential to many industrial applications, have become a special problem. China has some 30% of the world's supply but is responsible for more than nine-tenths of the world's exports.

Analysts such as Mr. Ericsson said that the rest of the world will soon catch up, as companies in the West reopen old mines.

That will take a decade or so and will eventually secure steady supplies, he said.

But for now Chinese rare earths "are crucial to global supply," he said.

Meanwhile, China is gobbling up raw materials from all around the world. It now imports roughly half of all iron ore traded around the world.

Imports of all ores, slag and ash grew to $108 billion in 2010, from $25.9 billion in 2005.

The EU said that, for legal reasons, it couldn't comment on the case until after the final report was issued Tuesday.

A senior official at the Ministry of Commerce's news office said it would make a comment in the next couple of days.

July 5, 2011

Source: The Wall Street Journal