CHINA'S EXPORT RESTRICTIONS OF RAW MATERIALS AND RARE EARTHS: A NEW BALANCE BETWEEN FREE TRADE AND ENVIRONMENTAL PROTECTION?
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\\jciprod01\productn\J\JLE\44-4\JLE401.txt unknown Seq: 1 28-JAN-13 10:30 CHINA’S EXPORT RESTRICTIONS OF RAW MATERIALS AND RARE EARTHS: A NEW BALANCE BETWEEN FREE TRADE AND ENVIRONMENTAL PROTECTION? RUTH JEBE* DON MAYER** YONG-SHIK LEE*** ABSTRACT On March 13, 2012, Japan, the United States, and the European Union filed Requests for Consultations (Requests) with the World Trade Organization (WTO), contesting China’s export restrictions on rare earth elements (REE). The Requests were long expected, given the grow- ing importance of REE, coupled with China’s near-total dominance in the REE market. This Article predicts that, in light of the WTO’s recent Appellate Body decision in the China – Raw Materials case, China will not successfully defend its REE export restrictions under the General Agreement on Tariffs and Trade (GATT 1994). The legal issues that arise in both China – Raw Materials and China’s export restrictions of REE are significant for WTO jurispru- dence because they address long-standing tensions between free trade and environmental protection. This Article discusses the Raw Materials Appellate Body’s analysis of the environmental and conservation defenses China raised under GATT 1994 Articles XI, XX(b), and XX(g). While China’s export restrictions were held to violate its WTO obligations, the interpretation of Articles XX(b) and XX(g) left WTO jurisprudence largely unchanged and demonstrated the Appellate Body’s willingness to uphold legitimate environmental and conservation mea- sures. This Article then evaluates the factual and evidentiary issues China faces in the REE dispute, in light of China – Raw Materials, and identifies potential hurdles that will impair China’s ability to prevail in the REE case. * Senior Lecturer in Business Ethics and Legal Studies, Daniels College of Business, University of Denver. Member of the Connecticut and Colorado bars. M.S.M. 2004, Dan- iels College of Business, University of Denver; J.D. 1986, University of Minnesota Law School; B.A. 1979, University of Minnesota. ** Professor in Residence, Daniels College of Business, University of Denver. Mem- ber of the North Carolina bar. LL.M. 1985, Georgetown University Law Center; J.D. 1973, Duke University Law School; A.B. 1970, Kenyon College. *** Professor (Chair) of International Economic Law, University of Manchester, United Kingdom. Ph.D. 2004, University of Cambridge, United Kingdom; M.A. 1997, B.A. 1993, B.A. 1991, University of California at Berkeley. 579
\\jciprod01\productn\J\JLE\44-4\JLE401.txt unknown Seq: 2 28-JAN-13 10:30 580 The Geo. Wash. Int’l L. Rev. [Vol. 44 TABLE OF CONTENTS I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 580 R II. RARE EARTH ELEMENTS AND THEIR IMPORTANCE IN WORLD TRADE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 586 R A. Overview of the Global REE Market. . . . . . . . . . . . . . . . . . 586 R B. Environmental Problems of Rare Earth Mining . . . . . . . 589 R C. Overview of China’s REE Export Regime . . . . . . . . . . . . . 591 R III. THE WTO CONSULTATIONS ON CHINA’S REE EXPORT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 592 R IV. THE CHINA – RAW MATERIALS DISPUTE . . . . . . . . . . . . . . . . 594 R A. Article XI Issues and Defenses . . . . . . . . . . . . . . . . . . . . . . . 596 R B. Article XX Issues and Defenses . . . . . . . . . . . . . . . . . . . . . . 599 R 1. China’s Article XX(b) Defense . . . . . . . . . . . . . . . 600 R 2. China’s Article XX(g) Defense Claims . . . . . . . 608 R a. Relating to the Conservation of an Exhaustible Natural Resource . . . . . . . . . . . . 609 R b. What is “Effective in Conjunction with Domestic Restrictions”? . . . . . . . . . . . . . . . . . . 612 R c. The Broader Context of Article XX(g): Sovereignty Over Natural Resources . . . . . . 618 R V. IMPLICATIONS OF THE CHINA – RAW MATERIALS DECISION FOR RAW MATERIAL EXPORTS . . . . . . . . . . . . . . . . 619 R VI. THE TENSIONS BETWEEN FREE TRADE AND ENVIRONMENTAL PROTECTION IN CHINESE EXPORT RESTRICTIONS CASES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 621 R VII. LEGAL IMPLICATIONS OF THE CHINA – RAW MATERIALS DECISION FOR THE CURRENT REE DISPUTE . . . . . . . . . . . . 627 R A. China’s Article XX(b) Defense . . . . . . . . . . . . . . . . . . . . . . . 628 R B. China’s Article XX(g) Defense . . . . . . . . . . . . . . . . . . . . . . . 635 R VIII. CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 639 R I. INTRODUCTION On March 13, 2012, Japan, the United States, and the European Union filed Requests for Consultation (Requests) with the World Trade Organization (WTO) contesting China’s export restrictions on rare earth elements (REE).1 REE are critical raw materials for 1. Request for Consultations by the United States, China—Measures Related to the Exportation of Rare Earths, Tungsten and Molybdenum, WT/DS431/1 (Mar. 15, 2012) [herein- after Request for Consultations by the United States]; Request for Consultations by the European Union, China—Measures Related to the Exportation of Rare Earths, Tungsten and Molybdenum, WT/DS432/1 (Mar. 15, 2012) [hereinafter Request for Consultations by the European Union]; Request for Consultations by Japan, China—Measures Related to the Expor-
\\jciprod01\productn\J\JLE\44-4\JLE401.txt unknown Seq: 3 28-JAN-13 10:30 2012] China’s Export Restrictions 581 both “high-tech” and “clean tech” products (for example, products as diverse as cell phones, hybrid automobiles, and wind turbines all rely on REE as basic materials), as well as for certain defense appli- cations.2 The Requests came as no surprise, given the growing importance of REE coupled with China’s near-total dominance in the REE market.3 China produces upwards of 95% of the global supply of REE and, in 2010, instituted export restrictions on its REE.4 These export restrictions had the effect of constricting for- eign access to REE, while increasing the availability of REE to Chi- nese downstream processors. As the world’s primary REE supplier, China’s export restrictions are enormously important for busi- nesses that rely on REE in their product technologies and require consistent supply of these minerals. The legal issues presented by China’s REE export regime are equally important. As a WTO member, China is bound by obligations created under the most recent General Agreement on Tariffs and Trade (GATT 1994), as well as by obligations in its Accession Protocol with the WTO. The REE controls were preceded in 2009 by a similar set of export restrictions placed on a variety of China’s raw materials, including bauxite, fluorspar, and coke.5 Several nations chal- lenged China’s export restrictions in a WTO panel proceeding, tation of Rare Earths, Tungsten and Molybdenum, WT/DS433/1 (Mar. 15, 2012) [hereinafter Request for Consultations by Japan]. Although the requests and pending consultations also address tungsten and molybdenum along with rare earth elements (REE), this paper will focus solely on Chinese export restrictions of REE. REE (sometimes referred to as rare earth minerals) are a group of seventeen chemical elements in the periodic table, specifi- cally the fifteen lanthanoids plus scandium and yttrium. CINDY HURST, INST. FOR ANALYSIS OF GLOBAL SEC., CHINA’S RARE EARTH ELEMENTS INDUSTRY: WHAT CAN THE WEST LEARN? 3 (2010), available at http://www.iags.org/rareearth0310hurst.pdf. 2. MARC HUMPHRIES, CONG. RESEARCH SERV., R41347, RARE EARTH ELEMENTS: THE GLOBAL SUPPLY CHAIN 2–4 (2010); GORDON B. HAXEL ET AL., DEP’T OF THE INTERIOR, USGS FACT SHEET 087-02, RARE EARTH ELEMENTS – CRITICAL RESOURCES FOR HIGH TECHNOLOGY (Peter H. Stauffer & James W. Hendley II eds., 2002), available at http://pubs.usgs.gov/fs/ 2002/fs087-02/fs087-02.pdf. 3. See infra notes 30–52 and accompanying text. R 4. See, e.g., Keith Bradsher, China Said to Widen Its Embargo of Minerals, N.Y. TIMES, Oct. 20, 2010, at B1; R. Colin Johnson, Rare Earth Supply Chain: Industry’s Common Cause, ELEC. ENG’G TIMES (Oct. 24, 2010), http://www.eetimes.com/electronics-news/4210064/ Rare-earth-supply-chain—Industry-s-common-cause; N.V., The Difference Engine: More Pre- cious than Gold, ECONOMIST (Sept. 17, 2010), http://www.economist.com/blogs/babbage/ 2010/09/rare-earth_metals; Rodd Zolkos, China’s Move on Metal Exports Presents Big Supply Chain Risk, BUS. INS. (Jan. 16, 2011), http://www.businessinsurance.com/article/999999 99/NEWS060101/399999925?tags=%7C331; Digging in: China Restricts Exports of Some Obscure but Important Commodities, ECONOMIST, Sept. 2, 2010, at 82. 5. See infra Part IV.
\\jciprod01\productn\J\JLE\44-4\JLE401.txt unknown Seq: 4 28-JAN-13 10:30 582 The Geo. Wash. Int’l L. Rev. [Vol. 44 which the Appellate Body ruled on in January 2012.6 This Article predicts that China will not successfully defend its REE export restrictions under the GATT 1994 and China’s other WTO obliga- tions, especially in light of the WTO’s recent Appellate Body deci- sion in the China – Raw Materials case (Raw Materials). The legal issues present in both China’s REE export restrictions and the Raw Materials case are especially significant for WTO jurisprudence. In particular, these legal issues relate to long-standing tensions between free trade and environmental protection that have been richly debated in both scholarly journals and the popular media.7 Free trade advocates, who tend to see disguised protectionism behind every claimed environmental measure, are at one extreme of this debate; environmentalists, who tend to view the GATT 1994 and the WTO as consistently subordinating environmental values to the interests of free trade, are at the other extreme. The Tuna-Dolphin Case, a pro-free trade GATT Panel decision, markedly increased discontent with GATT Panel decisions on the environment.8 In this case, the U.S. government—after considera- ble pressure by environmentalists—sought to limit its domestic 6. Appellate Body Reports, China—Measures Related to the Exportation of Various Raw Materials, WT/DS394/AB/R, WT/DS395/AB/R, WT/DS398/AB/R (Jan. 30, 2012) [here- inafter Appellate Body Reports, China]; Panel Report, China—Measures Related to the Expor- tation of Various Raw Materials, WT/DS394/R, WT/DS395/R, WT/DS398/R (July 5, 2011) [hereinafter Panel Report, China]. 7. See infra notes 15–28 and accompanying text. R 8. The controversy is well described in Nancy Kubasek et al., Protecting Marine Mam- mals: Time for a New Approach, 13 UCLA J. ENVTL. L. & POL’Y 1, 3–12 (1994–1995). See Report of the Panel, United States—Restrictions on Imports of Tuna, ¶ 5.36, DS21/R (Aug. 16 1991), GATT B.I.S.D. (39th Supp.) at 155, 201 (1992) [hereinafter Tuna/Dolphin I]. Mexico did not seek the adoption of this report at the time of its release, and the General Agreement on Tariffs and Trade (GATT) Council rejected a request by the European Union to adopt the report. See Timothy Goplerud, The Struggle to “Green” GATT: Free Trade and Environmental Responsibility in the Wake of the United States-Mexico Tuna-Dolphin Dispute, 17 WM. & MARY J. ENVTL. L. 215, 219–20 (1993) (“Because Mexico did not press the GATT Council to adopt the panel report, the ruling has no legal force.”). The European Union and the Netherlands subsequently initiated their own challenge to the secondary import ban, which is designed to discourage “tuna laundering” by intermediary nations that purchase yellow fin tuna abroad and export it to the United States. Report of the Panel, United States—Restrictions on Imports of Tuna, ¶¶ 2.1–2.2, DS29/R (June 16, 1994) [hereinaf- ter Tuna/Dolphin II]. This panel report, like the first, found that the secondary import prohibition is inconsistent with the United States’ obligations pursuant to the GATT. Id. Neither report was adopted by the GATT Council, which ceased to exist as of the end of 1995. Hence, these two reports do not represent authoritative interpretations of GATT/ WTO obligations by the contracting parties to the GATT. The literature reacting to the apparent conflicts under the GATT between free trade and environmental protection mushroomed. Part of this discussion in the early 1990s was a reaction to perceived defi- ciencies in the Tuna/Dolphin I panel decision, and some of these concerns were remedied in Tuna/Dolphin II.
\\jciprod01\productn\J\JLE\44-4\JLE401.txt unknown Seq: 5 28-JAN-13 10:30 2012] China’s Export Restrictions 583 market for tuna not deemed “dolphin safe” tuna.9 In the Eastern Tropical Pacific, tuna fishing fleets would often use purse seine nets to encircle pods of dolphins, with the aim of catching yel- lowfin tuna that would often swim in schools just beneath the pod.10 Such purse-seine netting of tuna may have killed over six million dolphins in the Eastern Tropical Pacific over the past fifty years.11 Tuna boats registered in the United States, Mexico, or Vanuatu often set upon the same dolphin pods repeatedly, impos- ing serious levels of death and injury to the dolphins that could easily become disoriented and get caught in the nets or the blocks as the net was raised.12 The GATT Panel, however, determined that the United States could not impose its environmental stan- dards extraterritorially by excluding from its market certain prod- ucts that were not produced or processed according to U.S. standards.13 For GATT purposes, a tuna was a tuna, regardless of how it was “harvested” from the ocean.14 9. See Tuna/Dolphin I, supra note 8, ¶¶ 2.7–2.8. R 10. Id. ¶¶ 2.1–2.2. 11. Over six million dolphins have died as a result of purse-seine netting operations since the late 1950s, when purse-seine netting began. See The Tuna-Dolphin Issue, SW. FISH- ERIES SCI. CTR., http://swfsc.noaa.gov/textblock.aspx?Division=PRD&ParentMenuId=228& id=1408 (last updated Nov. 6, 2008). 12. See Tuna/Dolphin I, supra note 8, ¶¶ 2.1–2.2. Dick Russell has described part of R the purse-seine netting operations as follows: When the seiner closes to within a mile of the activity, speedboats are dispatched. These race in to circle the dolphins, forcing them into an ever-tighter array. A heavy skiff is launched off the seiner’s stern to anchor its enormous net. The seiner then moves away from the skiff and begins to release the massive, mile-long fence of red-mesh net buoyed by large yellow floats and reaching a depth of sev- eral hundred feet. From cables the net is drawn taut at the bottom—similar to drawstrings on a purse—to prevent any escape of the frantic dolphins. The ves- sel’s powerful hydraulic system hauls the net close and pulls it upward. Dozens of dolphins are slung together in the middle. Nursing calves are separated from their mothers. Some dolphins are severely injured, others are utterly exhausted. A tapered flipper bends precariously, a white-tipped beak gasps for air. The great spool conveys the dolphins ever higher. Dick Russell, Tuna-Dolphin Wars, DEFENDERS, Summer 2002, at 18, 20. 13. Tuna/Dolphin I, supra note 8, ¶ 6.2 (“[U]nder these provisions, a contracting R party is free to tax or regulate imported products and like domestic products as long as its taxes or regulations do not discriminate against imported products or afford protection to domestic producers, and a contracting party is also free to tax or regulate domestic pro- duction for environmental purposes. As a corollary to these rights, a contracting party may not restrict imports of a product merely because it originates in a country with environ- mental policies different from its own.”). 14. Id. ¶ 2.3 (noting that the Marine Mammal Protection Act governs “the taking of marine mammals incidental to harvesting of yellowfin tuna in the ETP, as well as importa- tion of yellowfin tuna and tuna products harvested in the ETP”).
\\jciprod01\productn\J\JLE\44-4\JLE401.txt unknown Seq: 6 28-JAN-13 10:30 584 The Geo. Wash. Int’l L. Rev. [Vol. 44 Those who saw environmental interests as losing to free trade broke into two broad camps.15 Environmental activist organiza- tions depicted the international trade regime as “GATTzilla,” a free trade monster that destroyed all other interests.16 These groups saw trade and environmental issues as inevitably conflicted, with the forces of business as represented by the international trade regime always the winner.17 Many called for the GATT/WTO regime to be disbanded or, at least, for the U.S. to withdraw.18 Andrew Strauss refers to this approach as “environmental isolationism.”19 A somewhat different approach was taken by certain academic commentators who were dissatisfied with the GATT’s environmen- tal record identified institutional issues that they argued would consistently tip the balance in favor of trade. Some of these writers identified issues with the GATT text or with the interpretation of GATT provisions.20 The arguments advanced by these writers have resulted in multiple suggestions for amending specific GATT provi- sions, most notably Article XX, to more specifically incorporate environmental and resource criteria.21 Some environmentalists in this camp have called for a “green round” of GATT negotiations 15. See DANIEL C. ESTY, GREENING THE GATT: TRADE, ENVIRONMENT, AND THE FUTURE 34–35 (1994). 16. See id. 17. See id.; Belinda Anderson, Unilateral Trade Measures and Environmental Protection Pol- icy, 66 TEMPLE L. REV. 751, 751–52 (1993). 18. Andrew Strauss, From GATTzilla to the Green Giant: Winning the Environmental Battle for the Soul of the World Trade Organization, 19 U. PA. J. INT’L ECON. L. 769, 770 (1998). 19. Id. at 769–70. Contra Daniel C. Esty, GATTing the Greens, Not Just Greening the GATT, FOREIGN AFF., Nov.–Dec. 1993, at 32, 35 (calling the GATT “not hostile to the envi- ronment but agnostic”). 20. See, e.g., Matthew Hunter Hurlock, The GATT, U.S. Law and the Environment: A Proposal to Amend the GATT in Light of the Tuna/Dolphin Decision, 92 COLUM. L. REV. 2098, 2010 (1992) (identifying the absence of the word “environment” as suggesting that the Agreement fails to address environmental issues); Janet McDonald, Greening the GATT: Harmonizing Free Trade and Environmental Protection in the New World Order, 23 ENVTL. L. 397, 422–23 (1993) (arguing that GATT jurisprudence to date seemed to bode ill for environ- mental regulation as they indicated that discriminatory practices would not be tolerated under GATT, even if there was some environmental justification for them). 21. See, e.g., Hurlock, supra note 20, at 2145 (Article XX can be amended to better R protect the environment); McDonald, supra note 20, at 466 (recommending revisions of R Articles I and III to include distinctions based on production); Robert Housman & Durwood Zaelke, Trade, Environment, and Sustainable Development: A Primer, 15 HASTINGS INT’L & COMP. L. REV. 535, 606 (1991–1992) (advocating a broadened definition of “neces- sity” in Article XX(b) to encompass a cost–benefit analysis).
\\jciprod01\productn\J\JLE\44-4\JLE401.txt unknown Seq: 7 28-JAN-13 10:30 2012] China’s Export Restrictions 585 that “would specifically address international environmental issues.”22 Commentators also identified institutional issues that they saw as inevitably advancing trade interests ahead of environmental inter- ests. Belinda Anderson argues that if decision makers view trade and environmental policy goals as mutually exclusive, the trade goals will prevail because of trade’s well-established institutional framework,23 while Steve Charnowitz contends that there is no inherent conflict between the environment and trade, but there is conflict between environmental protection and GATT rules.24 San- ford Gaines identifies the weakness in international environmental institutions and robustness in internal trade institutions as influ- encing the prioritization of trade over environmental norms.25 These institutional biases were strengthened by the fact that dis- pute settlement panelists lacked expertise in social welfare or envi- ronmental issues, and that there are limited opportunities for environmental groups to participate in disputes.26 Further, trade ministries of member countries generally control the WTO, rein- forcing the institutional bias in favor of trade issues.27 These con- cerns with the strong institutional structure of the international trade regime have given rise to calls for the creation of a corre- sponding international environmental organization. Proponents of this approach include Daniel Esty, C. Ford Runge, and Steven Charnovitz.28 22. See Carol J. Miller & Jennifer L. Croston, WTO Scrutiny v. Environmental Objectives: Assessment of the International Dolphin Conservation Program Act, 37 AM. BUS. L.J. 73, 82 (1999). 23. See, e.g., Anderson, supra note 17, at 752. R 24. See Steve Charnovitz, The Environment vs. Trade Rules: Defogging the Debate, 23 ENVTL. L. 475, 477 (1993). 25. See Sanford E. Gaines, The Problem of Enforcing Environmental Norms in the WTO and What to Do About It, 26 HASTINGS INT’L & COMP. L. REV. 321, 323 (2003). 26. See Myung Hoon Choo, An Institutionalist Perspective on Resolving Trade-Environmen- tal Conflicts, 12 J. ENVTL. L. & LITIG. 433, 438 (1997); Strauss, supra note 18, at 800–02. R 27. See David M. Driesen, What Is Free Trade? The Real Issue Lurking Behind the Trade and Environment Debate, 41 VA. J. INT’L L. 279, 314, 324 (2001). 28. See, e.g., Esty, supra note 19, at 36 (the formation of an International Environmen- R tal Organization would help define general environmental principles); C. FORD RUNGE ET AL., FREER TRADE, PROTECTED ENVIRONMENT: BALANCING TRADE LIBERALIZATION AND ENVI- RONMENTAL INTERESTS 100–07 (1994) (calling for creation of a “World Environmental Organization”); Steve Charnovitz, A World Environment Organization 16–18 (U.N. Univ. Inst. of Advanced Studies Project on Int’l Envtl. Governance Reform, Feb. 2002), available at http://archive.unu.edu/inter-linkages/docs/IEG/Charnovitz.pdf. Variations on this insti- tutional theme include proposals for the United Nations Environmental Programme to play a larger role in trade and environment disputes and the creation of a new forum to hear trade-environment disputes. See Choo, supra note 26, at 457 (first suggestion); Jeffrey R L. Dunoff, Institutional Misfits: The GATT, the ICJ & Trade-Environment Disputes, 15 MICH. J. INT’L L. 1043, 1108–09 (1994) (second suggestion).
\\jciprod01\productn\J\JLE\44-4\JLE401.txt unknown Seq: 8 28-JAN-13 10:30 586 The Geo. Wash. Int’l L. Rev. [Vol. 44 This Article begins with a general discussion of REE including an overview on extraction, processing, and uses of the elements. It also provides background on the global REE market, environmen- tal problems associated with REE mining, an overview of China’s REE export regime, and the request for consultations on China’s export restrictions on REE. The Article then turns specifically to the Raw Materials WTO dispute. It focuses on the defenses China raised to its export restrictions under the GATT 1994 Articles XI:2(a), XX(b), and XX(g) and describes the implications of the dispute on China’s REE export controls given that China is likely to raise all of these defenses in the pending REE dispute. The Article then discusses the new WTO jurisprudential balance between free trade and environmental protection after the Raw Materials case. The Article concludes with an analysis of the legal and business implications of the Raw Materials dispute. II. RARE EARTH ELEMENTS AND THEIR IMPORTANCE IN WORLD TRADE REE are not truly “rare”—they are relatively abundant in the earth’s crust.29 Because of their geochemical properties, however, most REE deposits are not concentrated enough to be exploitable economically.30 The complex and costly method for mining and processing REE further complicates commercial exploitation.31 Additionally, REE have unique properties, making their applica- tions very specific and very valuable.32 A. Overview of the Global REE Market Global demand for REE has risen dramatically over the past two decades along with the increase in innovative new technologies that rely on the unique properties of REE. Global demand in 2010 was estimated at 134,000 tons per year and was projected to exceed 200,000 tons annually by 2014.33 At the same time, global produc- tion has lagged behind demand.34 REE reserves are dispersed worldwide, with the largest reserves in China (36% to 48% of global reserves), the Commonwealth of Independent States (17% 29. See HUMPHRIES, supra note 2, at 1. R 30. See id. at 2. 31. See HURST, supra note 1, at 4–5. R 32. See HUMPHRIES, supra note 2, at 4. R 33. See id. at 3. 34. See id. (noting that the shortfall is covered using stockpiled REE inventory).
\\jciprod01\productn\J\JLE\44-4\JLE401.txt unknown Seq: 9 28-JAN-13 10:30 2012] China’s Export Restrictions 587 of global reserves) and the United States (12% of global reserves).35 Despite the presence of REE reserves in a variety of countries, China is the dominant global producer of REE concentrates, pro- viding in excess of 95% of world supply.36 China’s rise to domi- nance is astounding, considering that until the 1980s, China’s REE production was “insignificant.”37 Several historical factors com- bined to propel China to the forefront of REE production. China began an overall push for technological innovation in the 1980s, and the use of REE was an important component of this push.38 Chinese scientists developed improved techniques for rare earth products and this, combined with increasing global demand, fueled China’s focus on REE.39 In 1990, the Chinese government declared REE to be protected and strategic minerals, then took a larger role in regulating the REE industry.40 During the 1990s, high profit margins on REE attracted many start-up enterprises in China.41 The resulting competition and oversupply pushed REE prices downward, even though exports of REE increased.42 The low prices for Chinese REE placed price pressure on producers outside of China that they simply could not 35. See id. at 6; see also BRITISH GEOLOGICAL SURVEY, RARE EARTH ELEMENTS 24–25 (2011) (showing China’s REE reserves at 48% of world totals). Estimates of China’s rare earth reserves vary. WAYNE L. MORRISON & RACHEL TANG, CONG. RESEARCH SERV., R42510, CHINA’S RARE EARTH INDUSTRY AND EXPORT REGIME: ECONOMIC AND TRADE IMPLICATIONS FOR THE UNITED STATES 8 n.21 (2012) (“The U.S. Geological Survey estimates this level at 50% . . . while China’s own estimate puts it at 36%. . . .”). 36. See, e.g., id. at 27; HURST, supra note 1, at 3; LUISA MORENO, JACOBS SEC. INC., RARE R EARTH ECONOMIC WAR 1 (2011), available at http://research.jacobsecurities.com/wp-con- tent/uploads/2011/10/Rare-Earths-Economic-War-Oct-17-2011-JSI.pdf. 37. See MORRISON & TANG, supra note 35, at 9 (noting that the U.S. was the top pro- R ducer of REE until 1986, when China surpassed the United States and has remained the dominant supplier ever since). 38. See HURST, supra note 1, at 6, 8–9 (noting that, for example, China has two govern- R ment laboratories that focus on REE, the primary of them, the State Key Laboratory of Rare Earth Resource Utilization, was established in 1987; these government laboratories made significant progress in developing new processes for the separation of REE during the 1980s). 39. MORRISON & TANG, supra note 35, at 9–10. R 40. PUI-KWAN TSE, U.S. GEOLOGICAL SURVEY, OPEN-FILE REPORT 2011–1042, CHINA’S RARE-EARTH INDUSTRY 5 (2011). Examples of government involvement included the gov- ernment prohibition on foreign investment in mining or processing REE except in joint ventures with Chinese firms and the requirement of government permits for all REE min- ing or processing operations, regardless of size. Id. 41. MORRISON & TANG, supra note 35, at 10. R 42. Id. Production overcapacity was so severe that, between 2002 and 2005, average rare earth prices dropped to $5.50 per kilogram, an historic low. Id.
\\jciprod01\productn\J\JLE\44-4\JLE401.txt unknown Seq: 10 28-JAN-13 10:30 588 The Geo. Wash. Int’l L. Rev. [Vol. 44 meet.43 Thus, most of the world’s REE mines outside of China were closed by the early 2000s.44 China continued to invest resources in developing better extraction and refining technolo- gies and, as a result, currently has the most advanced technologies for REE processing.45 At the same time, China moved to expand its REE capabilities beyond mining and refining to capture more of the downstream REE value chain.46 China soon took the lead in the production of REE alloys, magnetic parts, and components.47 China’s rise to prominence as a global REE provider was not without problems. The rush to develop REE mines resulted in a fragmented industry consisting of thousands of mines, some of them illegal (i.e., operating without government permits).48 Smaller mines tended to ignore safety and environmental regula- tions to maximize profits, which were especially important in the 43. Id. 44. Id. A case in point is the U.S. REE mining company Molycorp Inc., which had operated a mine in Mountain Pass, California until costs associated with environmental issues, coupled with the low price of Chinese REE, caused the mine to close in 2002. See Katherine Bourzac, Undermining China’s Monopoly on Rare Earth Elements, MIT TECH. REV. (Dec. 22, 2010), http://www.technologyreview.com/energy/26980/?mod=related. 45. MORRISON & TANG, supra note 35, at 10. Chinese innovations include developing R a process called in-situ mining, which does not require drilling or blasting, thereby reduc- ing environmental damage resulting from mining. BRITISH GEOLOGICAL SURVEY, supra note 35, at 12. Chinese processing technology now delivers REE concentrates at 99.9999% R purity. Id. at 15. Such processing innovations are significant. See infra Part VIII. 46. BRITISH GEOLOGICAL SURVEY, supra note 35, at 32. R 47. Id. The expanded capacity had proved critical to China’s dominance of the REE industry as the primary uses for REE shifted from traditional areas of metallurgy, machin- ery, and petroleum and chemical industries to new materials such as magnets, phosphors, catalysts for automobile exhausts, and polishing powder. TSE, supra note 40, at 5. By 2007, R 53% of REE use was in new materials. Id. This shift is nowhere more evident than in the permanent magnet industry. HURST, supra note 1, at 12–13. In 1998, 90% of world perma- R nent magnet production was in the United States, Europe, and Japan. Id. By 2007, leader- ship in permanent magnet production had shifted to China, which had approximately 130 permanent magnet manufacturers. Id. The United States has only one remaining perma- nent magnet manufacturer. Kevin Craft, Grant Helps Make U.S. Rare Earth Magnets More Common, ENERGY.GOV (Aug. 6, 2010), http://energy.gov/articles/grant-helps-make-us-rare- earth-magnets-more-common. Industry commentators have also recognized the impor- tance of building a vertically integrated supply chain to revitalize the REE industry outside of China. HUMPHRIES, supra note 2, at 10. One REE investor analyst stated that “it is not R enough to develop REE mining operations alone without building the value-added refin- ing, metal production, and alloying capacity” needed to turn REE ores into components for end-use products. Id. U.S. REE mining company Molycorp Inc. acted on this advice early in 2012 when it acquired Neo Material Technologies, a Canadian company that processes REE that it sells to Chinese customers. Julie Gordon, DEALTALK— Molycorp, Neo Material Deal a Rare Earth Game Changer, REUTERS (Mar. 11, 2012), http://www.reuters. com/article/2012/03/11/neomaterial-molycorp-idUSL2E8E9AZW20120311. 48. MORRISON & TANG, supra note 35, at 11. R
\\jciprod01\productn\J\JLE\44-4\JLE401.txt unknown Seq: 11 28-JAN-13 10:30 2012] China’s Export Restrictions 589 hotly competitive REE industry of the time.49 Additionally, the operation of illegal mines led to smuggling of REE out of the coun- try in contravention of export regulations.50 At the same time, the environmental issues consequent to REE mining were multiplying, particularly in regions with many illegal mines, which, like small mines, ignored relevant environmental regulations.51 Finally, the Chinese government was concerned with the depletion of China’s REE reserves; producing over 95% of global supply with at most 48% of global reserves was simply not a sustainable production level.52 B. Environmental Problems of Rare Earth Mining Because of the way in which REE are dispersed throughout rock and ores, they are more complicated and costly to extract than most other minerals.53 In addition to the environmental issues cre- ated by any mining operation, REE processing also results in envi- ronmental concerns specific to REE. Most REE now come from open pit mines.54 Ore is extracted from these mines and then crushed into small particles.55 These small particles begin the process of separating into the different elements that comprise the ore.56 The crushing and screening process leaves huge amounts of ore particles that will not be fur- ther refined.57 Ordinarily, tailings are graded into large piles.58 As with any mining operation, the extraction process creates air pollu- tion through dust emitted into the air and results in destruction of vegetation and consequent soil erosion.59 The crushing process 49. Id. 50. Id. In 2008, estimated smuggled REE accounted for approximately one-third of total REE leaving China that year. Id. Illegal production and smuggling are often the reason for discrepancies between official data and actual data of REE production and exports. Id. 51. See, e.g., Keith Bradsher, After China’s Rare Earth Embargo, A New Calculus, N.Y. TIMES (Oct. 29, 2010), http://www.nytimes.com/2010/10/30/business/global/30rare. html?pagewanted=all&_r=0. 52. MORRISON & TANG, supra note 35, at 11. R 53. HURST, supra note 1, at 4. This dispersed nature of REE means that they are fre- R quently processed as a by-product of other mining activity. BRITISH GEOLOGICAL SURVEY, supra note 35, at 11. R 54. BRITISH GEOLOGICAL SURVEY, supra note 35, at 11–12. R 55. Id. at 13–14. 56. HURST, supra note 1, at 4. R 57. Id. 58. See U.S. ENVTL. PROT. AGENCY, OFFICE OF SOLID WASTE, EPA530-R-94-038, TECHNI- CAL REPORT: DESIGN AND EVALUATION OF TAILINGS DAMS 1, 4–5 (1994). 59. Chen Zhanheng, News: Outline on the Development and Policies of China Rare Earth Industry, CHINESE SOC’Y RARE EARTHS (Apr. 7, 2010), http://www.cs-re.org.cn/en/modules.
\\jciprod01\productn\J\JLE\44-4\JLE401.txt unknown Seq: 12 28-JAN-13 10:30 590 The Geo. Wash. Int’l L. Rev. [Vol. 44 poses an additional problem in the release of radioactive uranium or thorium; both are commonly embedded in the ores that also have REE.60 Once the ore has been crushed and screened, the REE must still be separated from the non-REE particles.61 The initial separation process can include up to six separate treatments with different toxic chemical reagents, all of them toxic.62 The high value of REE depends on their separation into individual elements of the high- est purity.63 Because each individual REE has its own unique properties, each also has its own unique separation process.64 Thus, processing to attain what is called a rare earth concentrate of an individual REE entails more highly specialized steps.65 Once the elements are separated, the resulting elements are dried to be processed into metals and alloys, which involves an additional set of steps.66 The refining process for REE can be particularly hazardous for the environment due to the many steps involved and the chemicals necessary to separate REE. The primary environmental issues involve chemical solutions running off into surface water sup- plies.67 The initial separation process usually takes place in large chemical impoundments that are constructed close to the mine site; tailings are sometimes disposed of in the original mining pit.”68 If the sides of the impoundment are not high enough or php?name=news&file=article&sid=35. REE mining practices in China have threatened worker health. See Chris Buckley, China’s Green Dream for Rare Earths Masks Reality, CHINA POST (Nov. 4, 2010), http://www.chinapost.com.tw/china/china-business/2010/11/04/27 8572/Chinas-green.htm. 60. BRITISH GEOLOGICAL SURVEY, supra note 35, at 17. R 61. Id. at 13–16; HURST, supra note 1, at 4–5. R 62. BRITISH GEOLOGICAL SURVEY, supra note 35, at 14–15 (noting that the primary R chemicals used are hydrochloric acid, sulfuric acid, and caustic soda). 63. Id. at 15. 64. HURST, supra note 1, at 5 (noting that it takes approximately ten days from ore R extraction to REE production). 65. See id. (explaining that REE is first separated as an oxide using a unique extraction process). 66. See id. (explaining that REE is next turned into a metal, then alloys). The REE metals and alloys are then processed into a variety of components, such as permanent magnets for electronic devices, wind turbines, and hybrid cars, phosphors for television and computer screens, and cerium for petroleum refining. HUMPHRIES, supra note 2, at 2. R 67. See BRITISH GEOLOGICAL SURVEY, supra note 35, at 17 (“Reports indicate that the R chemicals used in the refining process have been responsible for disease and occupational poisoning of local residents, water pollution and destruction of farmland.”). 68. See, e.g., Mine Tailings, GROUND TRUTH TREKKING (Dec. 15, 2010), http://www. groundtruthtrekking.org/Issues/MetalsMining/MineTailings.html; Gretchen Gavett, Tail- ings Dams: Where Mining Waste Is Stored Forever, PBS FRONTLINE (July 30, 2012), http://www. pbs.org/wgbh/pages/frontline/environment/alaska-gold/tailings-dams-where-mining-
\\jciprod01\productn\J\JLE\44-4\JLE401.txt unknown Seq: 13 28-JAN-13 10:30 2012] China’s Export Restrictions 591 their integrity is breached by chemical solution soaking through the tailings, the chemical solution can escape and contaminate nearby surface water.69 The dumping of tailings into local water supplies is an additional concern.70 Chinese companies have devel- oped a process called “in situ” mining, in which the ore is left in the ground, and is injected with the chemicals to separate the REE from the non-rare earth elements.71 While this process eliminates the environmental hazards associated with open pit extraction, it does not ameliorate the concerns about chemicals seeping into water supplies or contaminating farmland.72 The amount of illegal mining occurring in China only exacerbates environmental problems associated with REE mining and processing.73 These ille- gal mines operate without any regular environmental inspections and are often the worst polluters.74 C. Overview of China’s REE Export Regime In 2005, the Chinese government decided to overhaul its existing REE regime and, in the ensuing years, employed a series of restrictions to begin to manage its REE industry. China began its overhaul by abolishing the rebate of the value-added tax assessed on REE exports75 and instituting annual reductions in REE export quotas.76 In 2007, China introduced a tax on REE exports of waste-is-stored-forever (describing “upstream” design of tailings impoundments, which often uses tailings for physical support). 69. See, e.g., Zhang Jiawei, The Plight of China’s Rare Earth Mining, CHINA DAILY (Mar. 24, 2011), http://usa.chinadaily.com.cn/china/2011-03/24/content_12225592.htm (pro- viding as an example a mine in Gengbei Mountain closed in 2009 for contaminating a river). 70. See Buckley, supra note 59. R 71. BRITISH GEOLOGICAL SURVEY, supra note 35, at 12. R 72. Id. 73. See MORRISON & TANG, supra note 35, at 11 (noting illicit mines ignore safety and R environmental regulations for higher profits). 74. See id. (finding repeated instances of water and farmland contamination in several provinces). 75. A value-added tax of 10% was levied on foreign exporters of Chinese REE in 2006, and over the next two years was raised to rates ranging from 15% to 25% depending on the REE. See Jane Korinek & Jeonghoi Kim, Export Restrictions on Strategic Raw Materials and Their Impact on Trade 21 (Org. for Econ. Cooperation & Dev., Trade Policy Working Paper No. 95, 2010). Prior to 2007, the Chinese government had rebated 16% of this tax to the foreign exporting entity. See id. The effect of abolishing the tax rebate when combined with the export taxes on REE was to increase the price of REE raw materials for foreign REE processors. See id. 76. Export quotas were reduced anywhere from 4% to 12% annually between the years 2006 and 2009. Id. By 2011, the annual export quota was less than one-half of what the 2005 export quota had been. See MORRISON & TANG, supra note 35, at 17. R
\\jciprod01\productn\J\JLE\44-4\JLE401.txt unknown Seq: 14 28-JAN-13 10:30 592 The Geo. Wash. Int’l L. Rev. [Vol. 44 10%.77 Since then, the government has increased the number of REE products subject to export taxes and has increased tax rates.78 Export tax rates now range from 15% to 25%.79 Finally, China began a gradual reduction in the number of REE export licenses granted, beginning in 2006. That year, the government granted fifty-nine licenses (forty-seven licenses to Chinese companies and twelve to domestic-foreign joint venture enterprises).80 By 2009, the number of licensed companies had shrunk to thirty-four (twenty-three Chinese companies and eleven joint venture companies).81 With the imposition of Chinese REE export restrictions, Chinese export quotas decreased 40% between 2008 and 2010.82 This decline concentrated more power in the Chinese REE supply chain, as non-Chinese REE processors and magnet manufacturers were unable to obtain the REE ore they needed at competitive prices.83 Countries with REE deposits (including the United States and Australia) began the process of revitalizing their REE mines to attain some independence from Chinese sources.84 However, new mining activity does not sufficiently increase supply to provide sig- nificant relief in the short term.85 III. THE WTO CONSULTATIONS ON CHINA’S REE EXPORT RESTRICTIONS With no apparent relief from domestic REE supply and no change in the Chinese REE export picture, Japan, the United States, and the European Union sought relief from China’s export restrictions through the WTO dispute settlement process. The first step in this process is a request for consultations; requests are mechanisms for the disputing countries to attempt to “obtain satis- 77. Id. at 16. 78. Id. The new product categories are largely customs codes for ores that may con- tain REE as a secondary product. For example, China recently added an export tax for ferroalloys containing more than 10% of REE. Id. 79. Korinek & Kim, supra note 75, at 21. R 80. MORRISON & TANG, supra note 35, at 16. R 81. Id. 82. MORENO, supra note 36, at 1. R 83. See id. The market prices of many REE increased more than 1,700% in the two years between 2008 and 2010. Id. 84. See Katherine Bourzac, The Rare Earth Crisis, MIT TECH. REV., May–June 2011, at 58, 60–61. 85. Id. at 61.
\\jciprod01\productn\J\JLE\44-4\JLE401.txt unknown Seq: 15 28-JAN-13 10:30 2012] China’s Export Restrictions 593 factory adjustment of the matter” by themselves.86 The requests are confidential between the countries involved and are without prejudice to the rights of member countries in the event additional proceedings are required.87 The Requests filed by Japan, the United States, and the Euro- pean Union claim that China has violated its WTO obligations through a variety of export restrictions related to REE.88 China has imposed taxes on its REE exports, limited exports of REE through quotas, imposed export licensing requirements, and maintained a minimum export price system for REE.89 The complaining coun- tries argue that these export restrictions violate China’s obligations under the GATT 1994 and under its Accession Protocol, both by imposing prohibited quantitative restrictions on REE and by administering its restrictions in a manner that is not “uniform, impartial, reasonable, or transparent.”90 Specifically, the Requests claim violations of Articles VII (Valua- tion for Customs Purposes), VIII (Fees and Formalities connected with Importation and Exportation), X (Publication and Adminis- tration of Trade Regulations), and XI (General Elimination of Quantitative Restrictions) of the GATT 1994.91 With regard to China’s Accession Protocol, the Requests claimed violations of paragraphs 2(A)2 and 2(C)1 (Administration of the Trade Regime and Transparency), 5.1 and 5.2 (Right to Trade), 7.2 (Non-Tariff 86. Understanding on Rules and Procedures Governing the Settlement of Disputes arts. 4.2, 4.5, Apr. 15, 1994, Marrakesh Agreements Establishing the World Trade Organi- zation, Annex 2, 33 I.L.M. 1226, 1869 U.N.T.S. 401 [hereinafter DSU]. 87. Id. art. 4.6. 88. See generally Request for Consultations by the United States, supra note 1; Request R for Consultations by the European Union, supra note 1; Request for Consultations by R Japan, supra note 1. The requests refer to materials falling under but not limited to 212 R eight-digit Harmonized Schedule Chinese Customs Commodity Codes. Request for Con- sultations by the United States, supra note 1, at 1, 2 nn.1–3; Request for Consultations by R the European Union, supra note 1, at 1, 2 nn.1–3; Request for Consultations by Japan, R supra note 1, at 1, 2 nn.1–3. R 89. See Request for Consultations by the United States, supra note 1, at 2; Request for R Consultations by the European Union, supra note 1, at 2; Request for Consultations by R Japan, supra note 1, at 2; MORENO, supra note 82, at 1; Korinek & Kim, supra note 75, at 13, R 20–21. 90. Request for Consultations by the United States, supra note 1, at 2; Request for R Consultations by the European Union, supra note 1, at 2; Request for Consultations by R Japan, supra note 1, at 2. R 91. See Request for Consultations by the United States, supra note 1, at 5; Request for R Consultations by the European Union, supra note 1, at 5; Request for Consultations by R Japan, supra note 1, at 5. See generally General Agreement on Tariffs and Trade 1994, Apr. R 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, 33 I.L.M. 1154, 1867 U.N.T.S. 187 [hereinafter GATT 1994] (incorporating by reference the General Agreement on Tariffs and Trade, Oct. 30, 1947, 61 Stat. A-3, 55 U.N.T.S. 194).
\\jciprod01\productn\J\JLE\44-4\JLE401.txt unknown Seq: 16 28-JAN-13 10:30 594 The Geo. Wash. Int’l L. Rev. [Vol. 44 Measures), 8.2 (Import and Export Licensing) and 11.3 (Taxes and Charges Levied on Imports and Exports).92 The nature of the WTO consultation process does not require responding countries to file formal defenses to the allegations in requests.93 Thus, the arguments China made during the consulta- tion process are unknown. However, public statements made by the Chinese government since the imposition of its REE export restrictions provide a basis for educated speculation as to China’s defenses. In addition, the recent WTO case regarding similar types of export restrictions that China placed on a variety of raw materi- als provides a framework to anticipate China’s defenses to the REE action and predict the likely outcome of any further WTO pro- ceedings in the REE case. IV. THE CHINA – RAW MATERIALS DISPUTE China has large deposits of many important raw materials. How- ever, these deposits are not sufficient for the demands of China’s growing economy, and “the amount of natural resources available per capita in China is far below the international average in most cases.”94 China has also awakened to the environmental consequences of the extraction of raw materials and has instituted measures directed to reducing the environmental degradation associated with mining. Ostensibly to further such ends, China instituted export restrictions in 2009 on nine raw materials, including baux- ite, coke, and manganese.95 The export restrictions included both 92. See Request for Consultations by the United States, supra note 1, at 5; Request for R Consultations by the European Union, supra note 1, at 5; Request for Consultations by R Japan, supra note 1, at 5; see also World Trade Org., Protocol on the Accession of the Peo- R ple’s Republic of China, ¶ 11(3), WT/L/432 (Nov. 10, 2001) [hereinafter Protocol on China’s Accession]. 93. See DSU, supra note 86, art. 4.3–4. The World Trade Organization (WTO) Under- standing on Rules and Procedures Governing the Settlement of Disputes requires that a request be in writing and identify the basis for the complaint, including identification of the measures at issue, but does not require the member country to whom the request is addressed to file or otherwise publicly disclose defenses to the claims. See id. 94. KARIN GREGOW, THE RAW MATERIALS RACE: HOW THE EU USES TRADE AGREEMENTS TO GRAB RESOURCES IN AFRICA 12, 18 (2010), available at http://comhlamh.org/assets/ files/pdfs/alternatrade/Raw%20Materials%20Race_report.pdf (“China accounted for more than half of the growth in world consumption of industrial metals between 2002 and 2005.”); see also supra note 47 and accompanying text. R 95. See Panel Report, China, supra note 6, ¶¶ 2.1–2.2. The nine minerals were: baux- R ite, coke, fluorspar, magnesium, manganese, silicon carbide, silicon metal, yellow phos- phorus, and zinc. Id.
\\jciprod01\productn\J\JLE\44-4\JLE401.txt unknown Seq: 17 28-JAN-13 10:30 2012] China’s Export Restrictions 595 temporary and special export duties on certain raw materials and export quotas on other raw materials.96 On June 23, 2009, the United States and the European Commu- nities and on August 21, 2009 Mexico (the Complainants) each requested consultations under the relevant provisions of the World Trade Organization Understanding on Rules and Procedures Gov- erning the Settlement of Disputes (Dispute Settlement Under- standing, or DSU) with the People’s Republic of China.97 The issues focused on China’s export restraints (duties and quotas) on nine raw materials.98 On November 4, 2009, the Complainants requested the Dispute Settlement Body establish a panel pursuant to Article 6 of the DSU, and in March 2010 a panel was created.99 The Complainants argued that the Chinese export quotas were contrary to Article XI:1 of the GATT 1994.100 That article prohibits WTO members from imposing quantitative restrictions on the import or export of any product to or from another WTO mem- ber.101 China defended its export restraints by invoking both Arti- cle XI:2(a) and provisions from Article XX of the GATT 1994.102 The Panel ultimately concluded that China had failed to demon- strate that its export restrictions were justified under either Article XI:2(a) or Article XX(g).103 Following the Panel’s issuance of its final report in July 2011, China appealed certain issues of law and legal interpretation to the 96. Id. ¶ 2.1. Export duties applied to bauxite, coke, fluorspar, magnesium, manga- nese, silicon metal, yellow phosphorus, and zinc. Id. ¶¶ 3.2–3.3. Export quotas applied to bauxite, coke, fluorspar, and silicon carbide. Id. 97. Id. 98. Id. ¶ 1.1. The United States, the European Union, and Mexico (the Complain- ants) had each brought separate complaints against China. Id. The three Complainants requested that the WTO Dispute Settlement Body establish a single panel to hear the claims against China. Id. ¶ 1.3. A panel to hear the combined complaints of the three parties was established in March 2010 (the Panel). Id. ¶¶ 1.3–1.4. 99. Id. A number of other WTO members reserved their rights to participate in the Panel proceedings as third parties. Id. ¶ 1.6. These countries were Argentina, Brazil, Canada, Chile, Colombia, Ecuador, India, Japan, Korea, Norway, Chinese Taipei, Turkey, and the Kingdom of Saudi Arabia. 100. Id. ¶ 3.2. 101. GATT 1994, supra note 91, art. XI:1. The Complainants also claimed that the R export duties violated China’s obligations under paragraph 11.3 of its Accession Protocol. Panel Report, China, supra note 6, ¶ 7.52. Paragraph 11.3 of China’s Accession Protocol R requires China to eliminate “all taxes and charges applied to exports unless specifically provided in Annex 6 of this Protocol.” Protocol on China’s Accession, supra note 92, ¶ R 11.3. None of the raw materials that were the subject of this dispute were included in Annex 6 of the Accession Protocol. See id. annex 6. 102. Panel Report, China, supra note 6, ¶ 3.5. R 103. Id. ¶¶ 8.2–8.3.
\\jciprod01\productn\J\JLE\44-4\JLE401.txt unknown Seq: 18 28-JAN-13 10:30 596 The Geo. Wash. Int’l L. Rev. [Vol. 44 WTO Appellate Body.104 The Appellate Body agreed with the Panel’s ultimate conclusion that China had failed to demonstrate that its export restrictions were justified and agreed with its inter- pretation of Article XI:2(a).105 However, the Appellate Body took a different view as to the correct interpretation of Article XX(g). The next Sections explain the details of the Chinese defenses and the WTO Panel and Appellate Body findings. A. Article XI Issues and Defenses China had established an export quota regime for bauxite that consisted of an overall annual quota for bauxite exports accompa- nied by allocation of quota amounts to bauxite exporters.106 China’s export quota regime involved annual reviews of the total amount of export quota and of the allocation of that quota.107 Article XI:1 of the GATT 1994 forbids import and export restric- tions or prohibitions, including those “made effective through . . . quotas . . . on the exportation . . . of any product.”108 Article XI:2(a), however, allows certain exceptions for measures “tempora- rily applied to prevent or relieve critical shortages of foodstuffs or other products essential” to the exporting country.109 The Panel agreed with the Complainants that the provisions of Article XI:2 are affirmative defenses and that the burden was therefore on China, as the respondent, to demonstrate that Article XI:2 was applicable.110 The Panel ultimately found that China’s export quota regime for raw materials was inconsistent with China’s Arti- cle XI:1 obligations,111 using an analysis of three principal terms in Article XI:2. 104. See generally Appellate Body Reports, China, supra note 6. Specifically, China asked R the Appellate Body to reverse the Panel’s interpretation of Article XI:2(a) of the GATT 1994, alleging that the Panel erred in its interpretation of the terms “temporarily” and “critical shortages.” Id. ¶ 40. China also asked the Appellate Body to find that the Panel erred in its interpretation of the requirements of Article XX(g). Id. ¶ 46. 105. Id. ¶ 362. 106. Panel Report, China, supra note 6, ¶ 7.201. This quota was administered by the R Chinese Ministry of Commerce (MOFCOM) through a system involving both direct alloca- tion of quotas and through a quota bidding system. Id. ¶¶ 7.172, 7.173, 7.176. MOFCOM determines and announces the total amount of annual export quota for bauxite by Octo- ber 31 of each year. Id. ¶ 7.173. Parties wishing to export bauxite apply to MOFCOM for a portion of the export quota for the following year. Id. ¶ 7.174. 107. Id. ¶¶ 7.172–7.173. 108. Id. ¶¶ 7.161, 7.205. 109. Id. ¶ 7.163. 110. Id. ¶ 7.210. 111. Id. ¶ 7.224.
\\jciprod01\productn\J\JLE\44-4\JLE401.txt unknown Seq: 19 28-JAN-13 10:30 2012] China’s Export Restrictions 597 Article XI:2 permits restrictions that are (1) “temporarily applied” to (2) prevent or relieve “critical shortages” of foodstuffs or (3) other products “essential” to the country imposing the restrictions.112 This dispute was the first opportunity for a panel to consider Article XI:2 in the context of a mineral resource. The Panel determined that bauxite was an “essential” product for China within the meaning of Article XI:2.113 The Panel found the ordinary understanding of the term “essential” to mean impor- tant, necessary, or indispensable, and concluded that a product could fall within the scope of Article XI:2(a) when it was impor- tant, necessary, or indispensable to a particular country.114 Fur- ther, the Panel found nothing in the terms of the Article that excluded products that might be an “input” to a product or indus- try, such as bauxite or other raw materials.115 On the facts presented by China as to the importance of bauxite to its economy, the Panel found that bauxite was an “essential” product for China within the meaning of Article XI:2(a).116 The Panel determined, however, that the restrictions were not “temporarily applied.”117 Complainants had argued that there could be no such thing as temporary measures to remedy shortages of finite resources, claiming that, “[g]iven that the availability of such a good would keep decreasing until the exhaustion of the good’s reserves,” this type of shortage could not be alleviated by any kind of temporary measure.118 The Complainants also argued that the term “critical shortage” must necessarily be understood in the context of the entire provision of Article XI:2(a), including its clear reference to the limited time element.119 Thus, for a shortage to be “critical” the shortage must be temporary, with availa- bility of the good returning to normal levels at some future time. By definition, Article XI:2(a) would not apply if the shortage will never cease to exist because, under that circumstance, it would not 112. GATT 1994, supra note 91, art. XI:2(a). R 113. Panel Report, China, supra note 6, ¶¶ 7.283, 7.340. R 114. Id. ¶ 7.275. 115. Id. ¶ 7.277. China had proposed a broad interpretation of the concept of “essen- tial products,” arguing that the article did not limit the types of “other products” that may be subject to restrictions, except that the products must be “essential.” Id. ¶¶ 7.261–7.262. Thus, the phrase “other products essential to the exporting [Member]” could include “minerals, metals, and other commodities, as well as initial processed downstream products thereof.” Id. 116. Id. ¶ 7.340. 117. Id. ¶¶ 7.346–7.350. 118. Id. ¶ 7.253. 119. Id. ¶ 7.290.
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