Next WTO Battleground: PRC Resource 'Hoarding'

Boy, these certainly are interesting days. A recurring complaint of China regarding bellyaching over trade imbalances is that many Western high-technology goods the Chinese would like to buy are off limits to it. That is, many are hands-off to the PRC over "dual use" concerns [1, 2]. True, the West often fans these fears of growing Chinese military power. However, if the West were to act more consistently in both security and trade domains, then it would at least consider lifting restrictions on more of these technologies in the interest of alleviating global economic imbalances. As Tesco's slogan says, every little helps.

Or does it? Call it tit-for-tat of a sort, but China has long been an important source of materials necessary in the production of these "dual use" technologies the West has wanted to keep from China and other goods. Given increasing resource scarcity--they call many of them "non-renewable" for excellent reasons--China has begun applying stricter controls of the export of these key materials. As a matter of historic precedent, the World Trade Organization has primarily been concerned with import restrictions, not export restrictions. However, there is already agitation that limits on the export of these key materials will be the next trade battleground. Indeed, many developed countries are mulling a case against China at the WTO. James Bacchus, former chairman of the WTO's Appellate Body, explains why in the Wall Street Journal:

The international trading system is about to encounter an entirely new challenge. The global hunger for natural resources is inspiring a surge in restrictions on exports of crucial raw materials. As with so much else in trade nowadays, the focus of this emerging conflict is on China. The Chinese stand accused by some trading partners of hoarding rare elements and other raw materials that are essential to many globally traded products.

But China is hardly the only country considering export restrictions as the race for natural resources heats up in the wake of the recession. The sharp increase in restraints is happening world-wide, and raises fundamental questions about the rules and the resiliency of the World Trade Organization...

Historically, however, conflicts over trade have almost always been about import barriers. It remains to be seen whether the current rules of the WTO-based trading system are strong enough to resolve the growing number of disputes over restrictions on exports.

The first test will likely come from a pending lawsuit in the WTO by the United States, the European Union and Mexico, challenging alleged Chinese export restrictions on nine key raw materials such as coke, bauxite, fluorspar and magnesium. These are vital to the production of steel, aluminum and certain chemicals. China produces 60% of the world's coke, and is a major producer of the other raw materials.

A second, and much tougher test, will come if the U.S., the EU, Japan and other affected countries follow up by filing a WTO complaint challenging increasing Chinese restrictions on the export of "rare earth elements." These are basic and so far irreplaceable parts of electronics that are bought and sold throughout the global economy.

China mines 93% of the total world production of 17 rare earth elements in the middle of the periodic table. Global demand for them is rising. They are used, often in small amounts, to make magnets, lasers, computer monitors, fiber-optic cables, cell phones, ceramics, stainless steel and much more. Importantly, rare earth elements are critical to new green technologies. Their magnetic properties are important to low-energy light bulbs and wind turbines, and essential to producing batteries for hybrid and electric cars. And, ominously, these elements have extensive military uses. Missiles, radar, navigation, jet engines, "smart" weapons and other cutting-edge military hardware all require rare earth elements [my emphasis obviously].

The General Agreement on Tariffs and Trade prohibits all measures that restrict the quantity of exports of a product unless they are applied as export duties, taxes or other charges ["made quantifiable"]. Thus, WTO member states are free under the current rules to impose export taxes instead of bans, quotas or other quantitative export restrictions.

However, as a condition of membership in the WTO, China agreed to eliminate taxes and other charges on all exports except those on a list of 84 products included in its WTO accession agreement. Neither the nine raw materials in the current WTO case nor the 17 rare earth elements are among the products that China listed.

The GATT permits measures that would otherwise violate WTO rules if they are "relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption," and if they are not applied as a means of "arbitrary or unjustifiable discrimination." This is likely to be China's defense in the raw materials case, and, should there be one, a rare earth elements case as well.

Ooh, the irony of it--Western countries claiming that China isn't exporting enough! Well here's my latest modest suggestion for setting matters right and it's pretty simple if you follow: if these developed countries want guaranteed access to these materials, isn't it only fair that the high-technology goods they are used in be made available to China?

"Dual use" = "protectionism." Nuff said.