Late last month, the World Trade Organization (WTO) reversed its past finding and ruled in China's favor on countervailing duty and anti−dumping measures in U.S.−China trade. The decision rankled the United States and validated the view among some Chinese that international rules can work in their favor. But it also points to the need for Washington to be more strategic about taking China to the WTO on trade disputes in the future and to think critically about the best approach to use.
One future U.S.−China trade battleground to ponder about is rare earths, a group of 17 elements scattered across the Earth's crust that are essential components of important technologies like cell phones, precision−guided missiles and hybrid cars. China, which accounts for 97 percent of global rare earth production and 60 percent of consumption, has slashed export quotas over the last few years and imposed a de facto ban on all rare−earth exports to Japan in 2010. Some argue that Beijing is deliberately attempting to hoard the strategic resources for political reasons, but China retorts that it needs to regulate rare earths both because it is a finite substance and because it contributes to environmental degradation. The Office of the U.S. Trade Representative has repeatedly threatened to seek a WTO dispute settlement.
While Article XI of the General Agreement on Trade and Tariffs (GATT) does prohibit quantitative restrictions on products, Article XX(g) provides that it is acceptable for a state to use export restrictions if the quota relates to the conservation of exhaustible natural resources and is adopted in conjunction with a domestic program that imposes similar restrictions on domestic producers.
China could make a convincing case that the export quota is designed to conserve a finite resource. Since some industry forecasts already project that rising demand may cause a 40,000−ton annual global shortfall by 2015, China may wish to control its exports lest it be forced to import rare earths in a few years. And with Beijing powering 97 percent of the world's output with just 36 percent of global rare earth reserves, one could argue that China is currently supplying far too much rare earth elements. Furthermore, Beijing could reasonably assert that such conservation is required to regulate the environmental degradation that results from rare earth mining, including instances of water pollution and deforestation that are well−documented in China.
On the issue of equal international−domestic treatment, however, Beijing appears to be on thin ice. In a speech at the Fletcher School of Law and Diplomacy last month, Mr. Gu Bin, a Fulbright visiting scholar at Harvard Law School and a research fellow at the Chinese Ministry of Commerce, argued that the Chinese government's attempts to encourage mergers and acquisitions in the rare earth sector to slash the number of firms involved constitutes a domestic restriction. But it is hard to see how one could equate quantitative international restrictions on the one hand with the domestic reorganization of China's rare earth sector on the other. Government−backed mergers and acquisitions may represent repackaging or even reform, but they are not direct restrictions in the same way that quotas are. The crux of any U.S. case against China on rare earths should thus be on this point.
Mr. Gu was quite adamant in suggesting that "the solution of mineral trade disputes is beyond the WTO." But given the WTO's recent reversal and the fact that a strong case exists, an increasingly protectionist U.S. Congress may be itching for another fight. If Washington chooses to take Beijing on in another round, it should make sure it understands the nuances of both sides in order to deliver the legal knock−out punch. For as Chinese military strategist Sun Tzu once averred, "If you know the enemy and know yourself, you need not fear the results of a hundred battles."
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