3Qs: International trade law and the WTO

The World Trade Organization announced last week that a panel has been created to probe China’s rare earth export policies, in response to complaints from the United States, the European Union and Japan. We asked Sonia Rolland, an expert in international trade law and associate professor in the School of Law, to explain what the WTO investigation means and its potential impact.

What are the contents of the complaints filed against China by the U.S., the European Union and Japan? Why are they significant?

The United States, the European Union and Japan filed complaints with the WTO in March regarding various Chinese measures restricting the exportation of “rare earth metals.” These materials are in fact neither rare, nor are they metals, but a vast quantity of the deposits found to date are in China, and these materials are used in many high-tech products ranging from cell phones and computers to solar panels. As a result, countries reliant on these materials for their high-tech manufacturing are very worried about shortages. They are also concerned about being at a disadvantage compared to competing Chinese producers who would get preferential treatment.

The complaints in the rare earth cases allege that China is imposing export duties, export quotas, minimum export price requirements, export licensing requirements and additional requirements and procedures that hinder exports of rare earth materials, as well as tungsten and molybdenum, in violation of their WTO obligations and China’s additional obligations under its WTO membership.

Countries as varied as Brazil, Canada, Colombia, India, Korea, Norway, Oman, Saudi Arabia and Vietnam joined the case as “third parties,” which gives them the right to present their interests and legal positions in written and oral arguments.

Interestingly, this series of complaints follows closely another case (titled “China – Raw Materials”) involving export restrictions and other measures imposed by China on natural materials. The U.S., the EU and Mexico were the complainants in that case and won both in the panel proceedings and on appeal in January.

What authority does the WTO have over its member nations’ trade regulations? What level of sovereignty do governments have over their natural resources?

When a state becomes a WTO member, it agrees to abide by the WTO agreements, a set of rules seeking to limit restrictions on the free trade of goods and services, as well as some intellectual property rules that affect trade. In a way, states exercise their sovereignty by deciding to join the organization, and often have many different reasons, domestic and international, for doing so. Once they join, governments can further negotiate WTO rules with the other members, and they can also use the dispute settlement process if they think another state is violating its obligations.

The dispute settlement is quite robust and has had considerable success in ensuring compliance with the agreed-upon rules. According to international law, states have sovereignty over their natural resources, which was a particularly important principle at the time of decolonization. States can freely decide whether to extract their resources, whether to sell them and at what price — though most countries let the market determine price and customers.

Tension does rise between this principle and WTO rules, which prohibit favoring domestic producers over foreign producers, for instance. On the one hand, states are free to limit the exercise of their sovereignty over natural resources by joining the WTO. On the other hand, states sometimes are coaxed into wholesale acceptance of commitments that go beyond what they would have liked. It can also be difficult to anticipate the implications of the WTO rules — or how they will be interpreted in disputes — so states sometimes don’t fully realize the consequences of their commitments. It has happened to the U.S. before in a dispute over offshore gambling services.

What are the implications of the WTO’s investigation on this matter?

The earlier case, “China–Raw Materials,” resulted in a ruling that China had to bring its law into compliance with WTO obligations. This should give foreign importers of the materials better access to the resources, and it should also give foreign industries manufacturing products in Chinese facilities better access to the local supply of those raw materials. There is no monetary compensation for past damages at the WTO.

The U.S., Japan and the EU are seeking similar remedies in the new “China–Rare Earth” cases. A panel was established last week even though China tried to block that process over the past few months. It can take from six months to a year or even more for the panel to issue its report, including written and oral arguments by the parties. The parties can then appeal the findings of the panel to the Appellate Body, which can take three to six months.