This week, the World Trade Organization (WTO) issued its much anticipated ruling on whether China’s export policies for critical metals violated the agreement it first entered in 2001 to be part of the WTO. The highest court within the WTO, known as the Appellate Body, found China was in violation of WTO requirements and had breached its original agreement. The decision marks a huge victory for the many automotive, high tech and alternative energy manufacturers globally that rely on China’s rare earth metal deposits to produce their goods.
As stated in a piece I published at Big Government in November, China has a complete monopoly on the 14 critical rare earth metals producing 97% of current world production. Products as fundamental to America’s industrial future as mobile phones, automobiles, televisions, fluorescent lighting, fiber optics and most of our advanced military hardware require rare earths. This monopoly has the potential to allow China to control production within all these trillion dollar industries by simply selling rare earths in China for far less than they sell them outside of China.
The situation had reached a critical state in 2011. Prices for metals such as neodymium have increased 20 fold in just the last 2 years making their use outside of China prohibitively expensive. The system of export quotas, tariffs and minimum export prices made the cost of rare earths nearly half within China then what they are outside China giving Chinese producers and companies China allows to build plants within China, an overwhelming cost advantage over other global producers; an advantage the WTO now says is illegal. The decision is also a major victory for our military which relies on Chinese rare earths to produce everything from Bradley Tanks and F-22 Fighter Jets to Body Armor and Night Vision Goggles.
Of significant note, the Appellate Board found that China could not use environmental considerations as an excuse to restrict the volumes that its producers exported. Over the last 5 years, China has progressively lowered its total export quota which has the effect of driving up prices, claiming it was doing so for environmental protection. The WTO found that the agreement it signed to join the organization prohibited it from making such a claim.
Some commentators are questioning whether China will in fact honor the ruling. My feeling is they will. China has a history of respecting WTO decisions to maintain their good standing and yesterday China’s Geneva mission issued a statement that while it “deeply regrets” the decision, it would respect it.
The decision on its face only applies to a group metals that does not include the rare earths. It includes such materials as silicon, manganese and magnesium, as well as, minerals such as coke and bauxite. However, the export restrictions on these metals are identical to the ones on rare earths and international pressure to apply them to rare earths has already begun. EU Commisioner Karel De Gucht stated after the ruling was published that, “China now must comply by removing these export restrictions swiftly and furthermore, I expect China to bring its overall export regime — including for rare earths — in line with WTO rules.”