The China— Raw Materials Case and Its Impact (or Lack Thereof). on U.S. Downstream Industries

Abstract

The recent rulings of the Dispute Settlement Body of the World Trade Organization in the China--Raw Materials (1) case have important legal, economic, and policy implications for China and other WTO members. My presentation introduces the special features of this case and discusses its potential impact (or lack thereof) on U.S. downstream industries, using Midwest companies as examples. The discussion seeks to elucidate the complexity confronting the world trading system. THE CHINA--RAW MATERIALS CASE (2) Background China--Raw Materials is a WTO dispute brought by the United States, the European Union, and Mexico against China in 2009. At issue were tariff and nontariff measures adopted by China to restrict the export of nine types of raw materials (bauxite, coke, fluorspar, magnesium, manganese, silicon carbide, silicon metal, yellow phosphorus, and zinc). The complainants challenged these measures as inconsistent with the provisions of the General Agreement on Tariffs and Trade (GATT) and of China's Accession Protocol (the Protocol). (3) China defended its measures by invoking GATT Article XX(g), which excuses measures relating to the conservation of exhaustible natural resources, and Article XX(b), which allows measures necessary to protect human, animal, or plant life or health. China's defense was rejected by the WTO judiciary. The WTO judiciary made two key findings. First, it found that China's export duties breached China's obligation to eliminate export duties under Paragraph 11.3 of the Protocol, and that China may not invoke GATT Article XX to justify this breach because there is no textual link between Paragraph 11.3 and the GATT provision. Second, it found that China's export restrictions violated GATT Article XI: 1, which prohibits all quantitative restrictions on imports and exports, and that the violation cannot be excused by the environmental exceptions under Article XX(b) or (g) because China failed to demonstrate that it has similarly restricted domestic consumption. Implications for China's Industrial and Environmental Policies The WTO rulings have serious implications for China's industrial and environmental policies. For years, China has overexploited its natural resources at the expense of environmental degradation and resource depletion. With only limited natural resources, China nonetheless has been exporting raw materials at cut-rate prices, driving out foreign competition and making itself a major supplier to the rest of the world. Meanwhile, rapid industrialization at home has increased domestic demand for raw materials tremendously. Realizing that China badly needs to conserve exhaustible natural resources and protect the environment, but not wanting to hinder development of domestic downstream industries, the government has resorted to export restrictions to reduce foreign consumption without simultaneously curbing domestic consumption. This policy, however, can no longer be pursued. Under the WTO rulings, China must treat domestic and foreign users evenhandedly in the distribution of its resource products. Domestic industries may not be given preference over foreign purchasers with respect to access to China's raw materials. If for whatever reason China is unable to implement proper environmental standards in the production of raw materials, resulting in subsidization of its domestic industries with low-priced resources, then it must do the same for foreign buyers, while bearing the consequences of environmental degradation at home. It is important to understand that China's predicament stems from its special commitment to eliminate export duties. Currently, GATT rules prohibit quantitative restrictions on exports, but permit the use of export tariffs. Since tariff and nontariff measures can achieve the same effect of limiting exports, the WTO discipline on export restrictions has been rendered largely ineffective. …