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China may end rare earth tariffs but impose new taxes which would increase prices if it loses WTO appeal

Out-Law News | 09 Jun 2014 | 10:01 am | 2 min. read

China may end export tariffs and quotas on its rare earth minerals next year if it loses its appeal against a recent World Trade Organisation (WTO) ruling that the restrictions violate its WTO obligations, a Chinese official has said according to China Daily.

However it is considering introducing new measures which would levy taxes on producers which are based on the value of the minerals rather than on volume, as is the case at present, said the newspaper. The shift would result in higher prices at producer level resulting in higher prices for the minerals.

Chen Zhanheng, deputy secretary-general of the China Rare Earths Industry Association, told China Daily that the government is formulating contingency plans to accommodate a possible end to the current tariffs and quotas.

Du Shuaibing, an analyst with Baichuan Information which supplies information on bulk raw materials in the Chinese market, told the newspaper that removing the current restrictions and introducing increased taxes will result in a rise in production costs and rare earth prices.

A system of environmental compliance certificates could also be introduced under new measures, in a move designed to better manage the rare earth industry, Chen told the newspaper.

Rare earths are a set of 17 metal elements which have magnetic and optical properties. They are essential for the manufacture of a range of high tech products including mobile phones, wind power turbines, disk drives and defence technology. China is home to 23% of the world's rare earth reserves and accounts for 90% of global annual supply, according to the Chinese state press agency Xinhua.

The WTO examined China's activities in relation to the production and trading of rare earths as well as the metals tungsten and molybdenum following a joint complaint by the European Union, the US and Japan. China imposed rare earth export quotas in 2010, stating that it was attempting to limit pollution and preserve resources by preventing over-mining, according to Reuters. Following the restrictions prices of the elements rose by hundreds of percent, said Reuters, and the EU, US and Japan claimed that this gave Chinese companies an unfair competitive edge in the manufacture of goods which use these products.

According to the WTO findings, China argued that export duties it imposes on the elements are necessary to protect "human, animal and plant life and health from the pollution caused by mining the products at issue", and that this was allowed under the "general exceptions" of the WTO General Agreement on Tariffs and Trade (GATT 1994), a multilateral trade agreement designed to reduce trade barriers.

However the WTO found that the materials in question do not fall within the scope of the general exceptions and even if they had, export duties were "not necessary" to protect against pollution. Therefore the export duties were inconsistent with China’s WTO obligations.

China argued that its export quotas on rare earths, tungsten, and molybdenum were designed to conserve an exhaustible natural resource. However the WTO found that these were designed to "achieve industrial policy goals rather than conservation", said the WTO.

The WTO also found that trading rights which China imposes on enterprises regarding the export of rare earths and molybdenum breach its WTO obligations, despite China's argument that these too are designed to conserve exhaustible natural resources.

China appealed the ruling in April. Among other issues, China claimed that the WTO had erred in its interpretation of aspects China's accession protocol to the WTO.