A WTO dispute settlement panel issued a critical decision on March 26 faulting China for its export quotas and export duties for rare earths, tungsten and molybdenum. These raw materials are essential for the production of key industrial products such as smartphones, electric car batteries and defense-related items.

The complaint was lodged by three WTO members ― the United States, the European Union and Japan ― back in June 2012, who argued that Beijing’s export restraints and restrictions of these raw materials constituted a violation of trade rules. Assertions were made that the real intention of the restrictions was to disadvantage and discriminate against foreign users of the materials. 

China countered that its measure had been introduced to conserve the three exhaustible natural resources. It also pointed out that this dispute was about its sovereign right to develop and control its own natural resources. Last Wednesday, the WTO panel ruled for the three complainants in all key respects.

This dispute is a sequel to a 2012 dispute involving export restrictions for nine raw materials ― bauxite, coke, fluorspar, magnesium, manganese, silicon metal, silicon carbide, yellow phosphorus and zinc. Similar export restrictions were challenged by Mexico, the United States and the EU at that time and were ultimately found by the WTO to be inconsistent with its rules in February 2012.

As the successive legal actions imply, this issue carries important commercial implications for many countries and industries. In the three items covered by last week’s decision, China is the dominant leading source for the global market, accounting for almost 90 percent of global production. The export restrictions were claimed to have led to continuing global scarcity and higher prices, and forced manufacturers in other countries to suffer discriminately. Meanwhile, Chinese companies have enjoyed easier access to the three materials and artificially enhanced competitiveness in the global market. According to one U.S. estimate, Chinese manufacturers ended up paying only one-third of the price charged to their U.S. competitors for the same materials.

In fact, one of the three panelists filed a separate opinion, disagreeing with the majority ― a rarely seen occasion. This alone shows how controversial the dispute was. In any event, the decision confirmed again that China, as a WTO member state, is not permitted to restrict exportation of its raw materials. Not surprisingly, the decision was welcomed by other countries and business entities.

Last week’s decision has helped to clarify the outer parameters of a country’s legitimate authority in formulating and administering its policies regarding natural resources within its territory. The critical question raised here is whether the issue of natural resource conservation falls under a country’s inherent sovereignty and is not subject to the WTO agreements. The WTO has reaffirmed that such policies are within its jurisdiction. With the companion 2012 decision, last week’s ruling will provide clearer guidelines for other countries as to how they can exercise their sovereign right to regulate the exportation of natural resources in a WTO-consistent manner.

In an apparent effort to deal with the aftermath of the decision and show that the rare earths prices are determined by market forces, China just opened a rare earths exchange in Inner Mongolia province. So, Beijing is also contemplating changing the platform for rare earths trading.

Turning to the Korean Peninsula, North Korea is another known global pocket of rare earths materials. Given the fierce competition among major countries to secure rare earths, a stable supply chain of these materials will be critical to sustainable economic activity in the future. This may be yet another reason why the present administration has called Korean reunification a “bonanza.”

There is one caveat: The dispute is not over yet and China can appeal the decision within the next 60 days.

By Lee Jae-min

Lee Jae-min is an associate professor of law at Seoul National University. ― Ed.