WTO China Ruling Could Impact Rare Earths

China several years ago lobbied hard to be allowed to join the World Trade Organization (WTO). It saw membership as recognition of the emergence of China as a major world economic power. Now China has received a rebuke from the WTO over export limits on materials used in advanced energy and other high-tech equipment, but whether that will have an impact on Chinese government behavior remains uncertain. The ruling by the WTO in Brussels covered Chinese exports of coke, zinc, and bauxite (aluminum ore), but observers say it could signal how the trade tribunal might rule on cases brought against China for restrictions on rare earth exports.

The WTO case, begun in 2009, was brought by the United States, the European Union, and Mexico complaining about Chinese restrictions on exports of nine raw materials used in the automotive industry, refrigerators, batteries, ceramics, electronics, and other goods. The WTO ruled in July that the export controls violated international law and raised world prices for the materials, making it harder for non-Chinese producers to compete in global markets.

U.S. Trade Representative Ron Kirk said the WTO decision is "a significant victory for manufacturers and workers in the United States and the rest of the world. China’s extensive use of export restraints for protectionist economic gain is deeply troubling. China’s policies provide substantial competitive advantages for downstream Chinese industries at the expense of non-Chinese users of these materials. They have also caused massive distortions and harmful disruptions in supply chains throughout the global marketplace."

China is also facing charges at the WTO about its policies of restricting exports of 17 rare earth minerals, over which it has an effective monopoly, controlling some 95% of these minerals (see "Will Critical Materials Become a Green Roadblock?"). Rare earths are used in a variety of new energy technologies, including advanced turbines and batteries. The minerals don’t constitute a large portion of the costs of the equipment, but they do represent a potential production bottleneck, according to industry observers.

In an editorial, The New York Times commented, "The World Trade Organization’s ruling this month against China’s restrictions on the export of raw materials is a welcome decision that we hope will temper China’s mercantilistic strategy, in which every policy decision is designed to favor Chinese exporters. It also should serve as a warning to others about these protectionist tools."

China can either comply with the WTO ruling or, more likely, appeal it. If it fails to take either step and simply ignores the ruling, that could lead to WTO-approved sanctions allowing the U.S., Mexico, and Europe to impose tariffs on Chinese imports.

Attempting to resolve the dispute over rare earths, General Electric Co. in June led a group of U.S. companies asking Congress to spur U.S. production of the minerals. Despite the name, the minerals are not particularly rare, but U.S. production has shut down over the years, partly because of environmental issues, but also because of Chinese competition. The U.S. companies are seeking, among other things, reforms in federal permitting that will allow former and new mining properties on federal lands to begin operations. According to testimony at the House Natural Resources Committee, it can take seven to 10 years to permit a new mine.

Testifying for the National Association of Manufacturers, GE chief scientist Steve Duclos told the committee that "the federal government should play a vital role in strengthening the domestic rare earth minerals supply chain. By strengthening our domestic supplies we will have a more diversified supply chain for these minerals and this will help make U.S. manufacturers stronger and more competitive."

Several lawmakers, including Rep. Michael Coffman (R-Colo.), have been pushing a House bill to expedite the permitting process and increase the exploration and development of domestic rare earth elements. Their bill would also create a rare earth inventory and establish a federal loan guarantee program for new and renovated mines. Observers in Washington say the legislation has little chance of passage this year.

There is some U.S. government activity on rare earths. In June, the U.S. Department of Energy’s Ames Laboratory in Ames, Iowa, announced it had signed a memorandum of understanding with the Korean Institute of Industrial Technology, or KITECH, to boost international collaboration in rare earth research. "International challenges call for international collaborations, and this memorandum of understanding brings together the principal centers of rare-earth research from South Korea and the United States," said Ames Laboratory chief Alex King.

Looking at global commodity supply and demand issues, economist Joel Darmstadter of the Washington environmental think tank Resources for the Future highlights the risks of "resource wars" as a result of artificially created scarcity through trade policy. China’s control of rare earth supplies and development, he notes, may be creating conditions for a full discussion of the value of free trade. "In the U.S. domestic context," he writes, "in which green energy’s contribution to economic revival and job creation are an ever-present theme of the Obama administration, the seriousness of such a trade impasse—coming as it does on top of persistent and broader disputation over Chinese trade and currency practices—shouldn’t be reckoned as trivial. So, rare earths—themselves . . . a negligible factor in the cost of a wind turbine or other equipment—may be a harbinger, and maybe a healthy one, of more widespread trade and investment dilemmas that deserve to be addressed."

—Kennedy Maize is MANAGING POWER’s executive editor.