By: Steve Dickinson

Preserving its track record of major defeats before the WTO, China recently lost its appeal of the WTO panel decision in the minerals export case. The appeal decision was issued on January 30 and can be found here. Briefly stated, the original panel report held that Chinese export duties and export quotas for certain industrial minerals violate WTO requirements. China was ordered to reduce its duties and dismantle its export quota system. China appealed and lost on all important issues.

This decision has important implications. As most observers have noted, the real issue is export quotas and the real target is China’s export quota system for rare earths. Under the terms of this decision, China’s rare earths quota system is in clear violation of the WTO. The U.S. and others expect China to now act on its own and terminate the rare earths quota system. If this is not done voluntarily, the U.S. and the European Union have threatened to bring a follow-up action in the WTO, targeting rare earths. After this victory in the metals case, such an action against China would almost certainly succeed.

More important, China has an extensive export quota system covering over 600 products. These are all basic materials considered by China to be vital to its internal security: energy, raw materials and food. Under the terms of the panel decision and appeal, it is now clear that China’s entire export quota system is in violation of the WTO. This recent decision on minerals therefore goes far beyond rare earths. It is a challenge to a vast and complicated system that the Chinese see as essential to national survival.

Ron Kirk, the U.S. Trade Representative, described the success of the appeal as as a “tremendous victory” for the United States.  In reality, the decision is bad for both the United States and China and for the members of the WTO as a whole.

This case is a very hot issue in China. After the decision, assessments have appeared from the Chinese government, the Xinhua News Service (the Chinese government’s propaganda arm) and from general business commentators. The universal conclusion of the Chinese is that China has no intent whatsoever to comply with the terms of this decision or any other decision relating to its export quota program or to any other regulatory regime China deems in its national interest (such as China’s restrictions on importing print and audio-visual materials).

The basic position set forth in the Chinese press has been as follows:

  • Control of domestically produced raw materials, energy and food are vital to China’s national interest. China will not allow a trade law like the WTO to impact its pursuit of policies such as export quotas that are vital to its national interests. The attempt by the developed countries to use the WTO as a way to attack China’s national interest is unfair and shows bad intent. Such attempts will be rejected.
  • China still intends to remain within the WTO so as to be able to obtain certain trade benefits. Rather than openly disregard the minerals decision, China will resort to “procedural games” (游戏规则) to render any response against China ineffective as a practical matter. China is proud of how it has  used “procedural games” to avoid its responsibilities to respond to adverse WTO decisions and it openly states that it will continue to use this approach in these “national interest” cases. In fact, the term “procedural games” has become a standard feature of China’s trade policy vocabulary.

This result is bad for supporters of the WTO trade system and it is bad for China. It is bad for the supporters because it exposes the weakness of the WTO dispute resolution process for resolving serious trade conflicts. China’s recent series of losses in the WTO justifies the US and other countries imposing major tariff and related trade sanctions against China, but no such sanctions have been imposed and China has concluded that no such sanctions will ever be imposed. China correctly believes that it can afford to ignore adverse WTO decisions because the complaining countries have no interest in actually imposing sanctions. We can thus expect China to continue ignoring most (all?) adverse WTO decisions against it. This will serve to progressively weaken the WTO trade system.

The odd thing about the export quota case, however, is that China itself is likely to be the biggest loser. China is the major importer in the world of raw materials, energy and food products. China therefore absolutely requires an open and fair export system for such products. By acting to support mercantilist export quotas and other restrictions on the export of critical raw materials, China is acting directly against its own economic and national security interest. China’s control of the rare earths export market has convinced it that it can become a rare earths version of OPEC, giving them power to finally dictate terms to the developed world. This dream has blinded China to the real risks of its plan.

Both China and the U.S. are acting recklessly in a way that serves to undermine the WTO trade system. The damage has been done. The WTO minerals ruling is just another nail in the coffin. The WTO has been murdered. China pulled the trigger and the U.S. and Europe supplied the gun.

What do you think?

For more on China and the WTO, check out the following:

For more on China’s rare earths, check out the following:

  • Alan Sykes

    I personally think you have miscalled this and have descended into more China trade doom for US consumers as has been your recent wont. This is far from being the case. A lot of the issues stated are to do with reactions following the allowing of China too much leverage on important global commodities – such as rare earths – produced mainly by them only to use their monoploy on production as a political weapon in punishing countries and companeis that have contrasting political views from China. In rare earths, we saw Japan get hit over suspended deliveries due to a disagreement over WW2 for crissakes. China’s abilities to use its trade power and use its commodities as a political weapon is precisely what this WTO action is to deal with. And I may remind you, this is a WTO issue, not a US-China bilateral issue, as you seem to suggest it is.
    Rare earths are now being taken up by Mongolia of all people, while China has to grow up and seperate its political arguments from global trade. That is what this is about and its a good thing. Plus you tended to view China and global trade as hinging on this, thats nonsense, both are clearly much bigger than that, as is the WTO. Other than that I agree with your description!

  • BT

    So what you are saying is that China isn’t following the rules? How is that anything new?

  • Andeli

    I agree with the part that China needs an open and fair trade system. I guess in 5 years when China is forced to import 7 to 8 % of its food supply the WTO system will look a lot better.

  • Patrick

    How is the U.S. acting recklessly by trying to enforce China’s obligations under the WTO? Perhaps it’s not an effective strategy and perhaps it’s all for show, but what’s reckless about trying to hold China to its WTO commitments?

  • Roger C

    I’m not sure that your conclusion about the death of the WTO is completely justified. The WTO survived the hormones cases, it’s well underway into surviving the very large aircraft cases and I’m pretty sure it’ll survive this. WTO inconsistency in case of certain national interest (US-Gambling, US-Copyright) is part and parcel of the game.
    What has changed, however, is the rhetoric on the Chinese side. Having learned how to play the legal game, China seems to behave like an uppity child with a new toy, by using “procedural games” and “sophistry”. (Henry Gao wrote a nice piece about this, see http://ictsd.org/downloads/2011/12/2011-ebook-on-china-and-wto.pdf ). The question is how important this is in the long run: will we see a China that will to a large extent play by the rules, and needs to get some nationalist flag-waving done every once in a while, or will we see a deep and comprehensive shift in China’s trading policy? And what would the consequences of this be on politics, individual business and international trade?

  • MHB

    Steve, you write as if this is a major shock to the system, but isn’t this what all nations do at some stage with international law? The US isn’t especially partial to the Geneva convention, if I recall, and the UN is laughable at times.
    The US and China have a very antagonistic relationship, which is unfortunate given they have so many common goals which benefit each of them. The US is evangelical in its free trade promotion and enforcement, and no doubt that US companies will benefit from rare earth free-trade, but are the monetary benefits so important?
    We all know (this is a trigger for me to be corrected) that many rare earths are abundant in many countries, just extraction is prohibitively expensive.
    OK, it’s a great bargaining chip for China. And there is no defence for China joining the WTO only to cherry-pick the bits it abides by. But must this be denied to them at all costs? China’s trade must be free, apparently, but its government must not. The US does not have strong arguments on its side – neither does China – but internal sovereignty is hard to deny.

  • RA

    How is this going to doom world trade? It certainly demonstrates the interests of China vs many other countries, but that is nothing new.

  • Alex

    What Patrick said. Great piece, and great analysis, but where do you get the conclusion that the US is being reckless by asking China to fulfill promises that it clearly made and is easily capable of fulfilling?

  • Anon

    I’m really not sure how you get US recklessness out of this…

  • PLS

    You’re rumors of World Trade’s death are greatly exaggerated. Yes, there have been several cases against China recently, but that is a result members’ decision to force China to act consistently with its obligations under the WTO agreements. Many thought China’s admission to the WTO would open China more, albeit gradually. China has demonstrated that it will do as it wants in its own time regardless of its WTO obligations. Simply put, China wants it both ways — all the benefits of the WTO agreements without true compliance.
    Also, I fail to see how the United States is acting “recklessly” by asking a country to play by rules to which it agreed (and is receiving handsome benefits therefrom). That is exactly what the WTO’s DSU is for.

  • HI

    The WTO is dead because the citizens and now the elites of the developed world don’t see what it’s in it for them when China and others don’t act in good faith. You see now open calls for trade and investment protectionism from elites in the United States and Europe, not just from unions, across the political spectrum. Andy Grove, Warren Buffett, Obama, Romney, Hollande, Krugman. Did you see the Chrysler and GE commercials during the Superbowl? What’s the chance you would have seen something like this 2 years ago? China has already killed the multilateral system that allowed it to grow. It just takes time and usually some symbolic event for the media to recognize changes of this magnitude. The Soviet system was dead in 1987, but it took some symbolic resignations and the TV images of the Berlin wall coming down for the reality to sink in.

  • Frank

    Without commenting on your conclusions, I’d like to point out that your translation of the word 游戏规则 (which you translated as “procedural games”) is wrong. The first two characters mean “game” and the latter two mean “rules”. The word means “rules of the game”, and resorting to WTO 游戏规则 means solving the problems within the framework of the WTO. It doesn’t refer to “procedural” tactics, at least not explicitly.

  • Tony Xiao

    i would say that for the moment, your statement that ” it is now clear that China’s entire export quota system is in violation of the WTO” is a little over-hyped when the WTO ruling was only against export quotas on nine raw materials.
    And as pointed out, your translation and inference of 游戏规则is incorrect.

  • SteveLaudig

    Allow me some poetic license here. Should it be a surprise that a sensible nation-state, or its government, would refuse to allow WTO to become [its and] history’s longest suicide note? The quasi-religious dispute between what is labelled ‘free/fair trade’ and other other irrational ‘ologies’ is rising to a battle for existence. People can live quite nicely without ‘trade’, living without a state is a different matter. again, allow me poetic license, we are seeing in the U.S. that the Supreme Court has refused to impose any boundaries on ‘money as speech’ and the republic is being torn apart by a group made up of those very similar to WTO fundamentalists who are transforming elections into auctions. All organisms are entitled to self-defense and that would include defenses against invading organisms. =end of poetry slam=

  • Twofish

    Dickinson: e universal conclusion of the Chinese is that China has no intent whatsoever to comply with the terms of this decision or any other decision relating to its export quota program or to any other regulatory regime China deems in its national interest (such as China’s restrictions on importing print and audio-visual materials).
    And this conclusion is wrong. In every single previous case in which China has lost a WTO decision (i.e. audiovisual case), it has revised its regulations to conform with the decisions of the WTO. In many of those cases, it could be argued that China really didn’t change anything of substance and merely reworded the regulations to comply with the specific WTO ruling, but compliance is still compliance. Trade law is all about procedural games, which is why there are so many lawyers involved.
    The other reason is that the reason WTO works is precisely *because* nation-states can ignore decisions they don’t like. There is no mechanism for WTO to force a nation-state to comply, but that’s not what WTO is all about. The rules are that if you refuse to comply with a WTO ruling, then WTO authorizes other nations to set up countervailing tariffs to compensate for the non-compliance. US and EU frequently refuse to comply with WTO rulings, but non-compliance is part of the process. China has actually had a good record of compliance, and there isn’t a single instance in which China has flatly refused to comply with WTO rulings (unlike US and EU has done this), but dealing with naked non-compliance is built into the system.
    Also, WTO is a framework for negotiations. It’s quite common for two parties to agree on mutual non-compliance.
    see http://www.ajicl.org/AJICL2007/Horlick%20article.pdf for a listing
    The WTO process is very messy, but it works surprisingly well. One important thing is to realize that the WTO is *not* some sort of world government, but a framework for negotiating disputes, and as a framework, it works quite well.

  • Twofish

    Also China wins some cases and loses some cases. The cases that it wins, people for some reason don’t talk about.
    The other thing about China is that in the accession agreement it accepted a huge number of restrictions that are not binding on other members, and agreed to forgo many of the remedies under WTO.
    http://www.worldtradelaw.net/articles/qinwtoplus.pdf
    Dickinson: China’s recent series of losses in the WTO justifies the US and other countries imposing major tariff and related trade sanctions against China, but no such sanctions have been imposed and China has concluded that no such sanctions will ever be imposed
    No trade sanctions ever been imposed because in *every single previous situation* where WTO had found Chinese regulations to be in non-compliance, China has changed them to the satisfaction of its trade partners. This was done even when those findings involved sensitive political issues like censorship (i.e. the AV cases)
    All of this discussion is based on stereotypes and generalizations that are *wrong*. If we are going to have a useful discussion on trade law, I’d prefer to do this based on facts, and we can start with this paper……
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1683083
    Also Julia Ya Qin has written numerous papers on the topic of trade law…..
    http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=625173
    Dickinson: China has an extensive export quota system covering over 600 products. These are all basic materials considered by China to be vital to its internal security: energy, raw materials and food. Under the terms of the panel decision and appeal, it is now clear that China’s entire export quota system is in violation of the WTO. This recent decision on minerals therefore goes far beyond rare earths. It is a challenge to a vast and complicated system that the Chinese see as essential to national survival.
    Look, if we are going to have a legal discussion, let’s talk about law. Trade law is a hugely complex beast, and there are hundreds of agreements and side agreements involved here. The decisions and agreements of WTO are generally narrowly tailored, and broad generalizations just don’t work when it comes to trade law. For example, the trade laws regarding food and fuel are *completely* different from those that are involved with mined raw materials, and you’ll find that some things are covered under the accession agreement. Talking about the specific rules involved in each of those things is fascinating but talking about “doom and gloom” fundamentally mischaracterizes how trade law works.
    Rare earths are nowhere as important as control over censorship, and China has complied with WTO rulings requiring its censorship system (not that it has made any difference).
    There is a broad national security exemption (Article XXI) to WTO rules, and it’s pretty obvious that China *doesn’t* consider these rules to be national security issues, because China hasn’t used national security arguments in any of its filings.

  • Andeli

    @Frank,
    Sorry but 游戏 is not only a noun it can also be used as a verb (不要游戏人生), so it can be used as “playing the rules”, while at the same time meaing “rules of the game”. In this case a very relevant distiction.

  • Twofish

    Also if we want to talk facts, here is a copy of China’s accession protocol
    http://www.worldtradelaw.net/misc/chinaaccessionprotocol.pdf
    Specifically Annex 6 and Annex 2A2
    The cases involved “bauxite, coke, fluorspar, magnesium, manganese, silicon carbide, silicon metal, yellow phosphorus and zinc” none of those were export taxes under Annex 6 or subject to state trading agreements under Annex 2A2. If we were talking about tungsten or steel, it’s already been agreed that those are OK. China’s argument was that Article XX overrode the accession agreement. It lost in this round, but it won that argument in the AV case. You win some, you lose some.
    This case hardly means the end of export quotas because in Annex 2A2 of the accession agreement, China was able to negotiate waivers for those industries (i.e. coal, oil, wheat, rice, etc. etc. etc.) The other issue is that the environmental argument didn’t work because WTO was unconvinced that this was the real reason for the quotas. There are regulatory changes that China could do to make things compliant (i.e. it’s clear that *production quotas*) are legal.
    Trade law is messy because you have all of these complicated arguments, but WTO is the forum in which people argue with each other, which is why it works.

  • Twofish

    Here is the trade dispute score board as of December, 2010
    http://chinatrack.typepad.com/files/china-wto-cases-1.pdf
    In all of the cases in which China has lost thus far, they have complied with the ruling, and I don’t see this being any exception.

  • Wakey Wakey

    Come on China Law Blog whats wrong with you these days? Wake up and smell the coffee!

  • Varun

    Why should China supply 95% of worlds Rare Earth’s when it has only 30% of the known World resources of Rare Earths.
    Where the hell were these complaints when the prices were crashed by the Chinese 20 years ago. Now that the West has become hungry on technology products and these Rare Earths suddely its against the WTO.
    Bull shit.
    US has massive reserves of these minerals, they should be picking up slack not whining like a baby. but they know doing so would ruin their environment so lets just keep China be the dustbin of the world.

  • Twofish

    I’m sort of a geek when it comes to trade law. Imagine a chess game with 300+ players, tens of thousands of pages of rules, with all sorts of alliances and double crosses. What’s more unlike other areas of law (i.e. human rights law), it’s just money and no one gets killed, so it’s as fun to watch as football or baseball.
    Anyways….. One shouldn’t overgeneralize these rulings. Right now, dozens of lawyers are going over the ruling with a fine tooth comb and trying to figure out the next move. One thing about this ruling is that a lot of it may not apply to the situation with rare earths. Now as far as why……
    The basic dispute involves China’s accession protocol (google for a copy). In that protocol, China promises to do a number of things. Now there is also the GATT 1994 treaty, in which Article XX has a list of exemptions under which nations can put in restrictions on free trade. Now the question which has come up several times over the last few years is to what extent those exemptions apply to China’s accession agreement. In a previous case, a WTO panel ruled that the exemptions in GATT allowed China to control cultural products under Paragraph 5.1, see Paragraph 276 of the report. Now in this ruling, the panel rules that these exemptions not apply to paragraph 11.3 in which China promised not to raise export duties. The logic was that Paragraph 5.10 was word differently.
    O.K. So the net result is that the Panel ruled that China can’t claim an exemption against its commitment not to impose export duties. However, the restrictions on the export of rare earths is *not* an export tax, so is *not* covered under Paragraph 11.3 therefore the logic of the appeals board does not apply, so if you want to get rid of those restrictions then it’s whole other ball game.
    Now for rare earths, these aren’t subject to an export *tax* and so China could still argue that Article XX applies and that the restrictions are for environmental reasons. In any event, if we want to talk about rare earths, that means another court case that will last 2-3 years.
    Now talking about the relationship of Article XX of GATT and Paragraph 11.3 may be “boring” but if one really wants to *understand* the legal situation as opposed to make comments that aren’t based on law, you have to go through these details.
    Finally, I think it’s pretty likely that China will comply and drop tariffs on these raw materials, and possibly replace them with some other restrictions. One point about trade law, is that *export* restrictions are covered under trade law, but *production* caps are not. But suppose China refuses, then what? Then there is a round of negotiations which will last for 15 months, and if they go nowhere, then what will happen is that WTO will calculate the economic loss due to these quotas and then authorize China’s trading partners to impose countervailing tariffs to recover the loss *and no more*. Also, WTO cannot authorize the recovery of *past* losses, which gives parties an incentive to draw out proceedings until the last moment.
    It’s something of a chess game, because this decision only effects the products under dispute. For anything else, you have to set up yet another set of WTO cases. One bit of strategy is that one set of decisions effect the next move (hence chess) so people don’t want to put all of their pieces out at ones.
    One thing that to point out that even when countries refuse to comply with WTO decisions, it still is useful. WTO keeps trade disputes from spinning out of control. With WTO, if a country refuses to comply, the retaliation is limited and countries can’t use minor disputes as an excuse to “go nuclear.”

  • Frank

    @Andeli. True that 游戏 can be used as a verb. But here it is not. Here it is said that China “will resort to [游戏规则]”, thus the phrase 游戏规则 is used as a noun–which means rules of the game–instead of a verb–which could mean game the rules.

  • Andeli

    @Frank. Correct and from the English text I cannot determine the context. I just notice that the argument is “the term “procedural game” has become a standard feature of the China’s trade policy vocabulary.” I am thus guessing that amoung a group of officials the verbum object 游戏规则 has been constructed to exprees not following the rules. A little like 打牌.
    Still in the first part “Rather than openly disregard the minerals decision, China will resort to “procedural games” (游戏规则) to render any response against China ineffective as a practical matter” it is stated to be a noun in plural.
    I tried to baidu and google the term, but I could not find the v.o anywhere just the the noun use…

  • Twofish

    Andeli: I think it’s the opposite. 游戏规则 looks like a direct translation from English “to game the rules” which is a standard bit of American management-speak.
    This has been standard practice. In every case in which China has lost a WTO ruling up to now, China has changed it’s regulations to comply with the decision, but it hasn’t made a real difference, because clever lawyers have been able to come up with WTO-compliant rules that gets China what it wants. But so does everyone else, and that’s why the system works.

  • LH

    @Twofish:
    I’m having a hard time following the high-level logic of your argument. You seem to be saying that violations are ok because (1) it allows a certain flexibility in the trading relations, and (2) there is a mechanism for dealing with violations that doesn’t require stopping the particular violation. Those things are true so far as they go. But if trading partners feel that the system is genuinely unfair, the WTO will gradually lose its place and prominence. There is a real danger that the U.S. will begin to withdraw unilaterally from its obligations under the WTO, in my opinion, because of mounting political pressure in the form of a negative public opinion about the cost vs. benefit to the U.S. of its WTO membership.
    To be specific, if it becomes the widespread view within the U.S. that even in cases where the WTO issues a clear ruling against it, China is able to “游戏规则” and find an alternative justification for the very situation that was ruled against, then pressure will mount for the U.S. to disengage from the WTO. In such cases, there is simply no remedy for a rule-abiding member of the WTO: countervailing duties can’t be applied if the WTO reverses its ruling because a 游戏规则 solution was found. There is a very real cost and disadvantage to taking rules seriously that your trading partners do not take seriously.

  • Andeli

    @LH
    Hehe If 游戏规则 did not exist as a v.o before then you just invented it….

  • rick

    If you think the U.S and Europe will not take action if China refuses to drop these illegal quotas and taxes you are dreaming. The majority of US citizens think poorly of China and will support punitive tariffs as allowed by WTO rules if China fails to comply. Finally, China begged to join the WTO about 15 yrs ago even though some Chinese leaders did not feel china was prepared for its obligations and its accession agreements including dropping these tariffs . So, it Chinese people are upset, blame your government for joining. You play by the rules of any club you join. Grow up.

  • Zygote

    The WTO needs to investigate why China keeps losing major cases.  It’s not in the WTO’s long-term interest to alienate China–the world’s looming superpower.  If China were to pull out of the WTO, the WTO loses relevance.  Let’s accept the facts here.  The US is no longer and can no longer be the sole economic superpower of the world.  How does the US expect to grow its economic pie without vigorous exports?  Unless the US is willing to sell the most sophisticated arms to China, there’s nothing China want from the US that it can’t manufacture itself.  So-called US innovation is overstated.  China can always copy anything that is made anywhere in the world and the beneficiaries of these copies will be Chinese copycats.  If China were to exit the WTO and other multilateral fora, it’ll render them less relevant to the rest of the world eager for Chinese trade.  The WTO will do well to ensure that it not be seen as having rules made by westerners to constrain China’s growth or else you can be sure that China will seek to change the rules.  The last time that happened, WWII ensued.  When China was poor in the 1950s, it still managed to hold back the US and its allies at the 38th parallel.  MacArthur was so pissed that his underestimation of the Chinese commies resulted in NKorean forces overcoming southern forces that he asked the US president for permission to nuke China. That was then. China is now 100x more powerful with 2nd and 3rd strike nuclear retaliation capabilities. China would be devastated in a nuclear war but the US would also be completely destroyed. It’ll be a quiet place (rid of human beings) on both sides of the pacific for a couple of hundred years.