DISPUTE SETTLEMENT: DISPUTE DS431
China — Measures Related to the Exportation of Rare Earths, Tungsten and Molybdenum
This summary has been prepared by the Secretariat under its own responsibility. The summary is for general information only and is not intended to affect the rights and obligations of Members.
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On 13 March 2012, the United States requested consultations with China with respect to China’s restrictions on the export of various forms of rare earths, tungsten and molybdenum. The request refers to materials falling under but not limited to 212 eight-digit Chinese Customs Commodity Codes and over 30 measures. The request also refers to a number of Chinese published as well as unpublished measures that, operating separately or collectively, allegedly impose and administer export restrictions. These restrictions include export duties, export quotas, minimum export price requirements, export licensing requirements and additional requirements and procedures in connection with the administration of the quantitative restrictions.
The United States claims that these measures are inconsistent with:
On 22 March 2012, the European Union and Japan requested to join the consultations. On 26 March 2012, Canada requested to join the consultations. Subsequently, China informed the DSB that it had accepted the requests of Canada, the European Union and Japan to join the consultations.
On 27 June 2012, the United States requested the establishment of a panel. At its meeting on 10 July 2012, the DSB deferred the establishment of a panel.
Panel and Appellate Body proceedings
At its meeting on 23 July 2012, the DSB established a single panel pursuant to Article 9.1 of the DSU to examine this dispute, DS432 and DS433. Brazil, Canada, Colombia, the European Union, India, Japan, Korea, Norway, Oman, Saudi Arabia, Chinese Taipei and Viet Nam reserved their third party rights. Subsequently, Argentina, Australia, Indonesia, Peru, the Russian Federation and Turkey reserved their third party rights. On 12 September 2012, the United States, the European Union and Japan requested the Director-General to compose the panel. On 24 September 2012, the Director-General composed the panel. On 22 March 2013, the Chair of the panel informed the DSB that the panel expects to issue its final report to the parties by 21 November 2013, in accordance with the timetable adopted after consultation with the parties.
Summary of key findings
This dispute concerns Chinese export restrictions on rare earths, tungsten, and molybdenum. These are raw materials used in the production of various kinds of electronic goods. China argued that the restrictions are related to the conservation of its exhaustible natural resources, and necessary to reduce pollution caused by mining. The complainants disagreed, arguing that the restrictions are designed to provide Chinese industries that produce downstream goods with protected access to the subject materials.
China imposes three distinct types of restrictions on the export of rare earths, tungsten, and molybdenum: first, it imposes duties (taxes) on the export of various forms of those materials; second, it imposes an export quota on the amount of those materials that can be exported in a given period; third, it imposes certain limitations on the enterprises permitted to export the materials.
(1) Export Duties
The complainants alleged that China applies export duties on various forms of rare earths, molybdenum, and tungsten. The complainants argued that these duties are inconsistent with China’s WTO obligations because in its Accession Protocol, China undertook to eliminate all export duties, except for those imposed on a number of products listed in Annex 6 to China’s Accession Protocol. The complainants argued that, with the exception of tungsten ores and concentrates (which they excluded from the scope of their claim), none of the products at issue are included in Annex 6, and China is therefore not entitled to impose the export duties on them.
China acknowledged that the duties at issue were imposed on products that are not included in the relevant Annex, but sought to justify its imposition of export duties on the basis of the “General Exceptions” provision in Article XX of the GATT. Specifically, Article XX(b) allows WTO Members to maintain measures that would otherwise be inconsistent with the GATT 1994 if the measures are necessary to protect human, animal or plant life or health. In this case, China argued that the export duties are necessary to protect human, animal and plant life and health from the pollution caused by mining the products at issue. The complainants argued that the “General Exceptions” contained in Article XX of the GATT 1994 are not available to justify breaches of China’s obligation to eliminate export duties contained in China’s Accession Protocol and that, in any event, China’s export duties were not necessary for the protection of human, animal or plant life or health.
The majority of the Panel agreed with the complainants and found that the “General Exceptions” contained in Article XX of the GATT 1994 are not available to justify a breach of the obligation to eliminate export duties contained in China’s Accession Protocol. Accordingly, the majority held that China could not invoke the exception in Article XX(b) to seek to justify its export duties. One panelist disagreed and concluded in a separate dissenting opinion that the “General Exceptions” in Article XX of the GATT 1994 are available to justify all WTO obligations related to trade in goods unless an obligation explicitly provides otherwise, and the relevant obligation in China’s Accession Protocol does not explicitly provide otherwise.
The Panel nonetheless examined the merits of China’s Article XX(b) defence for its export duties on an arguendo basis so that, in the event of an appeal and reversal on the applicability of the provision, the Appellate Body would have on the record the Panel’s relevant factual findings in this regard. All of the panelists agreed that even if Article XX(b) were available to justify China’s export duties, those duties were not “necessary to protect human, animal, or plant life or health”, as required under Article XX(b). Under the circumstances, China’s imposition of the export duties in question was found to be inconsistent with China’s WTO obligations.
(2) Export Quotas
China also imposes quantitative limits (quotas) on the amount of rare earths, tungsten, and molybdenum that can be exported in a given period. Although it recognized that such restrictions are inconsistent with the GATT 1994, China argued that they are justified under the exception in Article XX(g) of the GATT 1994, since they relate to the conservation of an exhaustible natural resource.
The Panel did not agree. It found that China’s export quotas were designed to achieve industrial policy goals rather than conservation. The Panel agreed with China that the term “conservation” in Article XX(g) means more than simply “preservation” of natural resources, and that every WTO Member can take its own sustainable development needs and objectives into account when designing a conservation policy, in accordance with the general international law principle of sovereignty over natural resources reflected in various United Nations and other international instruments. However, the Panel held that “conservation” does not allow Members to adopt measures to control the international market for a natural resource, which is what the challenged export quotas were, in the view of the Panel, designed to do.
Additionally, the Panel found that the challenged export quotas do not work together with measures restricting domestic Chinese use of rare earths, tungsten, and molybdenum, as required by the second part of Article XX(g). After examining the various domestic measures that China claimed restricted domestic access to rare earths, tungsten, and molybdenum, the Panel concluded that the overall effect of the foreign and domestic restrictions is to encourage domestic extraction and secure preferential use of those materials by Chinese manufacturers. Under the circumstances, the Panel concluded that the “even-handedness” required by the Appellate Body under Article XX(g)had not been met, and hence the quotas could not be justified under that provision.
(3) Trading Rights
China imposes certain restrictions on the right of enterprises to export rare earths and molybdenum. Although China has committed to eliminating trading restrictions in its Accession Protocol, it argued that the restrictions in question are justified pursuant to Article XX(g), since they too relate to the conservation of exhaustible natural resources. Although the Panel found that China could rely on the Article XX exceptions to justify the restrictions in question, it found that China had not satisfactorily explained why its trading rights restrictions were justified under this provision. Accordingly, the Panel concluded that China’s trading rights restrictions breach its WTO obligations.
On 8 April 2014, the United States notified the DSB of its decision to appeal to the Appellate Body certain issues of law covered in the Panel Report and certain legal interpretations developed by the panel. On 17 April 2014, China filed an other appeal in the same dispute.
On 25 April 2014, China appealed the panel reports in the other two disputes, DS432 and DS433, brought by the European Union and Japan, respectively. The Appellate Body consolidated the appellate proceedings in DS431, DS432, and DS433 before a single Appellate Body Division, harmonized the timetable of the three appellate proceedings, and held one oral hearing for all three proceedings. On 24 June 2014, upon expiry of the 60-day period specified in Article 17.5 of the DSU for DS432 and DS433, the Appellate Body informed the DSB that the Appellate Body Reports in all three consolidated appeals will be circulated to WTO Members no later than Thursday, 7 August 2014. The Appellate Body issued three Appellate Body Reports in one single document on 7 August 2014.
Summary of key findings
China did not appeal any of the final conclusions of the Panel, but appealed only limited aspects of the Panel's reasoning and certain intermediate findings. According to China, its appeal was intended to obtain clarification of the systemic relationship between specific provisions in China’s Accession Protocol, and other WTO agreements, and of the rights of WTO Members to protect and conserve their exhaustible natural resources.
First, China appealed an intermediate Panel finding in reaching its conclusion that Article XX of the GATT 1994 is not available to justify a breach of Paragraph 11.3 of China's Accession Protocol. China contended that the Panel erred in rejecting China's interpretation of Paragraph 1.2 of China's Accession Protocol and Article XII:1 of the Marrakesh Agreement as meaning that each provision of China's Accession Protocol is an integral part of the Marrakesh Agreement or of the Multilateral Trade Agreement to which that provision “intrinsically relates”.
The Appellate Body declined to accept China's interpretation of Paragraph 1.2 of China's Accession Protocol and Article XII:1 of the Marrakesh Agreement, and found that the Panel did not err in rejecting China's “intrinsic relationship” test. The Appellate Body found that Article XII:1 of the Marrakesh Agreement, while providing the generalrule for acceding to the WTO, does not provide specific guidance on how individual terms of accession relate to the rights and obligations under the Marrakesh Agreement and the Multilateral Trade Agreements. The Appellate Body found that Paragraph 1.2 of China's Accession Protocol, which provides that the Protocol “shall be an integral part of the WTO Agreement”, serves to build a bridge between the package of Protocol provisions and the package of existing WTO rights and obligations. As a result, the Marrakesh Agreement, the Multilateral Trade Agreements, and China's Accession Protocol form a single package of rights and obligations that must be read together. Yet, such interpretation does not in itself answer the questions of whether there is an objective link between an individual provision in China's Accession Protocol and existing obligations under the Marrakesh Agreements and the Multilateral Trade Agreements, or whether China may rely on an exception provided for in those agreements to justify a breach of such Protocol provision. Such questions must be answered through a thorough analysis of the relevant provisions on the basis of the customary rules of treaty interpretation and the circumstances of the dispute.
Second, China appealed limited aspects of the Panel's interpretation and application of Article XX(g) of the GATT 1994, in connection with its findings that the export quotas at issue are not measures “relating to” the conservation of exhaustible natural resources, and are not “made effective in conjunction with” restrictions on domestic production or consumption. The Appellate Body found that, contrary to what China alleged, the Panel did not, either in its interpretation or in its application of Article XX(g), consider itself bound to limit its analysis to an examination of the design and structure of the measures at issue, to the exclusion of evidence of the effects of China's export quotas . Rather, the Panel rightly considered that it should focus on the measures' design and structure rather than on their effects in the marketplace. With respect to the “relating to” requirement, the Appellate Body found that the Panel did not err in its reasoning regarding the signals sent to foreign and domestic consumers by China's export quotas on rare earths and tungsten, or in rejecting China's argument that, by virtue of these signalling functions, China's export quotas on rare earths and tungsten “relate to” conservation. With respect to the “made effective in conjunction with” requirement, the Appellate Body found that the Panel erred to the extent that it suggested that “even-handedness” is a separate requirement that must be fulfilled in addition to the requirements expressly provided for in Article XX(g) , and to the extent that it suggested that Article XX(g) requires the burden of conservation to be evenly distributed, for instance in the case of export restrictions, between foreign consumers, on the one hand, and domestic producers or consumers, on the other hand. However, the Appellate Body also considered that any such error did not taint the remaining elements of the Panel's interpretation of the second clause of subparagraph (g). The Appellate Body also rejected multiple allegations by China that the Panel failed to comply with its duty, under Article 11 of the DSU, to make an objective assessment of the matter. Accordingly, the Appellate Body upheld the Panel's findings that China's export quotas on rare earths, tungsten, and molybdenum are not justified under Article XX(g) of the GATT 1994.
Finally, in its appeal in DS431, the United States requested the Appellate Body to find that the Panel's decision to reject 10 Panel Exhibits submitted by the complainants at a late stage of the Panel proceedings was inconsistent with Articles 11 and 12.4 of the DSU. As one of the conditions on which the United States' appeal was premised was not met, the Appellate Body did not rule on the United States' appeal.
At its meeting on 29 August 2014, the DSB adopted the Appellate Body report and the panel report, as upheld by the Appellate Body report.
Reasonable period of time
At the DSB meeting on 26 September 2014, China stated that it intended to implement the DSB's recommendations and ruling in a manner that respects its WTO obligations. China added that it would need a reasonable period of time to do so. On 8 December 2014, China and the United States informed the DSB that they had agreed that the reasonable period of time for China to implement the DSB recommendations and rulings shall be 8 months and 3 days from the date of adoption of the Appellate Body and panel reports. Accordingly, the reasonable period of time expired on 2 May 2015.
Implementation of adopted reports
At the DSB meeting on 20 May 2015, China informed the DSB that, according to notices by the Ministry of Commerce and the General Administration of Customs of China, the application of export duties and export quotas to rare earths, tungsten and molybdenum as well as restriction on trading rights of enterprises exporting rare earths and molybdenum which were found to be inconsistent with WTO rules, had been removed. In that regard, China had fully implemented the DSB's recommendations and rulings. However, the United States could not share China's assessment that it had fully complied with the DSB's recommendations and rulings.
On 21 May 2015, China and the United States informed the DSB of Agreed Procedures under Articles 21 and 22 of the DSU.
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