The EC brings WTO case against China¡¯s export restrictions on raw materials

The EC, the US and Mexico have requested the establishment of a WTO Panel related to Chinese export restrictions on raw materials, in the form of export quotas, export duties and additional export restraints. The EC and the US requests for WTO consultations were circulated on 25 June 2009. Mexico decided to join consultations at a later stage. The three WTO Members allege, inter alia, that China’s imposition of export duties on certain raw materials (i.e., bauxite, coke, fluorspar, magnesium, manganese, silicon metal, yellow phosphorus and zinc), which can be used for the manufacturing of aluminium, cars, light bulbs, microchips, mobile phones, pesticides, planes, steel and other products, violates its WTO obligations under the Accession Protocol of China to the WTO.
 
Whereas quantitative export restrictions are covered by Article XI of the GATT, export restrictions in the form of export duties are not regulated by the WTO. An earlier attempt was made to bring such measures under the scope of the WTO Agreement on Subsidies and Countervailing Measures in the case US – Measures Treating Export Restraints as Subsidies. In that dispute, the Panel was asked to consider whether export restraints could be seen as subsidies under Article 1 of the WTO Agreement on Subsidies and Countervailing Measures, for which two conditions have to be fulfilled (i.e., the export tax imposed on certain products should confer a benefit upon domestic industries that use such products and, in addition, it should meet the requirements to qualify as a financial contribution). Whereas in the case at stake the first condition was deemed to have been fulfilled, the second one was deemed not to have occurred, inter alia, because the Panel considered that not only the effect of the measure has to be taken into account, but also the fact that ‘an explicit and affirmative action, be it a delegation or command, is needed’. Therefore, the Panel rejected such attempt.
 
Because this grey area of interpretation affected Members’ rights and obligations under the relevant WTO Agreements, WTO Members increasingly demanded acceding Members to undertake commitments regarding such measures in their Accession Protocols. According to the Panel in the WTO case on China – Measures Affecting Imports of Automobile Parts, the Accession Protocol is to be considered as an integral part of the WTO Agreement. In Paragraph 11 of the Accession Protocol of China to the WTO, it is stated that China has to eliminate all such export taxes and charges unless they are specifically provided for in Annex 6 of said Accession Protocol. The Annex 6 contains a list of 84 products that can be subjected to export duties up to a maximum level of export duty rates, which is specified therein. In addition, China confirmed that it would not increase the applied rates, except under exceptional circumstances, in which case China would consult with the affected member prior to such proposed increases. Furthermore, in its Accession Protocol to the WTO and in the Working Party Report, China committed to progressively liberalize the availability and scope of the right to trade in these products. The EC, the US and Mexico allege that China is in violation of the above mentioned obligations because of the imposition of duty rates, ‘temporary’ export duty rates and/or ‘special’ export duty rates of various magnitude on raw materials that either are not in the above mentioned Annex 6 or that exceed the maximum rates designated in Annex 6. In addition, the three complainants claim that the bidding system, used by China to allocate export quotas, requires enterprizes to pay a charge in order to export these materials, which allegedly is similar to an export duty.
 
Export subsidies have a number of obvious commercial consequences. Chinese traders in these raw materials of basic products find themselves in a constant state of fierce downward domestic competition as they are forced to sell their products on the internal market. This causes prices on the internal market to be isolated from the world prices and be kept artificially low, while they are very high on world markets as a consequence of (inter alia) China’s export taxes. Countries like the EC, Mexico and the US are highly dependent on the imports of raw materials. In particular, the EC in its Raw Materials Initiative (2008) states that its objective is to ‘secure reliable and undistorted access to raw materials, as it is increasingly becoming an important factor for the EC’s competitiveness.’ Because of the export restrictions, foreign importers have only limited (and expensive) access to Chinese raw materials, with the consequence that Chinese products manufactured with the lower-priced raw materials enjoy a competitive advantage compared to the products made outside of China. These indirect subsidies, like those conferred by other countries through so-called differential export taxes (DETs), are increasingly becoming a matter of contention among WTO Members and this case, if fought out to the end within the WTO dispute settlement mechanism, may provide much needed clarification and interpretative guidance. Key questions will be whether such trade and fiscal policies do confer a benefit (albeit indirectly) to the domestic industries that use such products and, whether such export taxes or restrictions do amount to financial contributions. Commercial operators involved in this trade or in other sectors where similar policies are maintained should follow with attention the evolution of such dispute.

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