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Challenging China's Trade Practices

Interviewee: Elizabeth C. Economy, Senior Fellow and Director for Asia Studies, CFR
Interviewer: Christopher Alessi, Associate Staff Writer, CFR.org
March 15, 2012

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The United States, the European Union, and Japan filed a "request for consultations" with China (LAT) at the World Trade Organization this week over its restrictions on exporting rare earth metals. China supplies more than 90 percent of the world's demand for the rare metals, which are used in the production of hybrid cars, smart phones, and high-tech military equipment. China claims to limit the export of rare earths because of "concerns over long-term supply and the environmental ramifications," explains Elizabeth C. Economy, CFR's director of Asia Studies. However, Economy says, many countries that rely on rare earths believe China is "attempting to use its dominance as a rare earth supplier to force companies that need rare earths to manufacture in China." She notes that the United States and its allies have previously been successful in using the WTO's adjudication system to pressure China to abide by international trade norms.

What are rare earths and why are they significant? How much of the earth's supply does China possess?

Rare earths are specific metals such as neodymium and lanthanum that are used in a wide variety of consumer products. They have garnered a lot of attention recently because several of them are essential to products that we think of as "green" or environmentally friendly, such as hybrid cars, energy-efficient light bulbs, and wind turbines. They are also found in very popular products such as iPhones. One particular area of importance for the United States is the use of rare earths in our military supply chain: they are components in the magnets that are used in missiles, smart bombs and satellite systems, as well as in the laser guidance systems for tanks and missiles.

Over time, China has come to supply over 90 percent of the global demand for rare earths, and its reserves--most of which are located in Inner Mongolia--are the largest in the world, almost triple those of the United States.

What are the United States, the EU, and Japan trying to achieve by challenging China's restriction on exports of rare earth minerals at the World Trade Organization?

Over the past few years, China has progressively cut its exports of rare earths, citing concerns over long-term supply and the environmental ramifications of the rare earth mining. Many in the international community believe, however, that China is attempting to use its dominance as a rare earth supplier to force companies that need rare earths to manufacture in China. There appears to be some credibility to this argument: Toyota, Hitachi, and Showa Denko K.K., among others, have all indicated over the past year that they may develop production capacity in China for products that use rare earths. Moreover, Chinese Vice Premier Li Keqiang has reportedly pressed the Japanese to bring technology to China that would help develop rare earth products.

The WTO plays a crucial role in helping ensure that all parties play by the agreed-upon trade rules. It is not simply about China.

The United States and European Union are claiming that China's export controls violate WTO rules as well as China's accession protocol to the World Trade Organization.

Are there other precedents for this kind of coordinated international action against China at the WTO? What does it say about the WTO's role in mediating international trade disputes?

Last year, the EU, the United States, and Mexico won a similar WTO case in which they challenged China's export quotas on other raw materials, including coke, zinc, and bauxite; the Chinese lost their appeal early this year. In addition, the United States, EU, and Canada won a WTO case against China for import tariffs on car parts, and the same set of countries came to an agreement with China through the WTO on Chinese regulation of foreign financial information services. Recently, the United States and the EU have also coordinated with Japan to press China to fulfill its WTO commitments to open its financial services market.

The WTO plays a crucial role in helping ensure that all parties play by the agreed-upon trade rules. It is not simply about China. There have been many WTO cases brought against the United States. What matters is that there is an international adjudication system that works to hold all parties to account.

If the United States and its allies are successful in getting China to lift its quota on the export of rare earths, what are potential policy implications in China, which has come under increasing pressure to loosen its grip on its slowing economy? And what are potential policy implications for the United States?

This is only the first step in the WTO adjudication process. It took the previous case about two years to come to fruition. The hope among the United States, Japan, and the EU is certainly that they can arrive at some settlement with China and avoid moving the case to the WTO dispute panel for a ruling. If the United States and its allies are successful, China will lose the ability to lure or force multinationals to bring more rare earth-dependent manufacturing to China. It could also complicate China's nascent efforts to ramp up environmental protection surrounding rare earth mining, as well as give added incentive to small-scale rare earth mines that China has sought to close down to come back to life.

The U.S.-China trade and broader economic relationship is characterized by deep integration and frequent conflict.

For the United States, it will give a wide range of U.S. companies, as well as the U.S. government, some breathing room and security of supply. It should also serve as a cautionary note about over-reliance on any single supplier for such essential metals. It should boost U.S. efforts to explore rare earth recycling as well as exploration of our own reserves. And, as the United States engages in its own debate over whether to limit exports of natural gas, this case of rare earths should probably be kept in mind.

How is this move by the United States going to affect U.S.-China trade relations, which have been hampered by imbalances?

The U.S.-China trade and broader economic relationship is characterized by deep integration and frequent conflict. This trade dispute is simply one in what will continue to be a proliferating number of challenges that the two countries will confront. China may retaliate by bringing cases against the United States, EU and Japan, but this is all part of the way the system works. It is important to remember, as well, that this is not really about the United States and China. This case is about whether China is violating WTO rules.

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