China Just Put Another Nail in the World Trade Coffin

Preserving its track record of major defeats before the WTO, China recently lost its appeal of the WTO panel decision in the minerals export case. The appeal decision was issued on January 30 and can be found here. Briefly stated, the original panel report held that Chinese export duties and export quotas for certain industrial minerals violate WTO requirements. China was ordered to reduce its duties and dismantle its export quota system. China appealed and lost on all important issues.

This decision has important implications. As most observers have noted, the real issue is export quotas and the real target is China’s export quota system for rare earths. Under the terms of this decision, China’s rare earths quota system is in clear violation of the WTO. The U.S. and others expect China to now act on its own and terminate the rare earths quota system. If this is not done voluntarily, the U.S. and the European Union have threatened to bring a follow-up action in the WTO, targeting rare earths. After this victory in the metals case, such an action against China would almost certainly succeed.

More important, China has an extensive export quota system covering over 600 products. These are all basic materials considered by China to be vital to its internal security: energy, raw materials and food. Under the terms of the panel decision and appeal, it is now clear that China’s entire export quota system is in violation of the WTO. This recent decision on minerals therefore goes far beyond rare earths. It is a challenge to a vast and complicated system that the Chinese see as essential to national survival.

Ron Kirk, the U.S. Trade Representative, described the success of the appeal as as a tremendous victory for the United States.  In reality, the decision is bad for both the United States and China and for the members of the WTO as a whole.

This case is a very hot issue in China. After the decision, assessments have appeared from the Chinese government, the Xinhua News Service [link no longer exists] (the Chinese government’s propaganda arm) and from general business commentators. The universal conclusion of the Chinese is that China has no intent whatsoever to comply with the terms of this decision or any other decision relating to its export quota program or to any other regulatory regime China deems in its national interest (such as China’s restrictions on importing print and audio-visual materials).

The basic position set forth in the Chinese press has been as follows:

  • Control of domestically produced raw materials, energy and food are vital to China’s national interest. China will not allow a trade law like the WTO to impact its pursuit of policies such as export quotas that are vital to its national interests. The attempt by the developed countries to use the WTO as a way to attack China’s national interest is unfair and shows bad intent. Such attempts will be rejected.
  • China still intends to remain within the WTO so as to be able to obtain certain trade benefits. Rather than openly disregard the minerals decision, China will resort to “procedural games” (游戏规则) to render any response against China ineffective as a practical matter. China is proud of how it has  used “procedural games” to avoid its responsibilities to respond to adverse WTO decisions and it openly states that it will continue to use this approach in these “national interest” cases. In fact, the term “procedural games” has become a standard feature of China’s trade policy vocabulary.

This result is bad for supporters of the WTO trade system and it is bad for China. It is bad for the supporters because it exposes the weakness of the WTO dispute resolution process for resolving serious trade conflicts. China’s recent series of losses in the WTO justifies the US and other countries imposing major tariff and related trade sanctions against China, but no such sanctions have been imposed and China has concluded that no such sanctions will ever be imposed. China correctly believes that it can afford to ignore adverse WTO decisions because the complaining countries have no interest in actually imposing sanctions. We can thus expect China to continue ignoring most (all?) adverse WTO decisions against it. This will serve to progressively weaken the WTO trade system.

The odd thing about the export quota case, however, is that China itself is likely to be the biggest loser. China is the major importer in the world of raw materials, energy and food products. China therefore absolutely requires an open and fair export system for such products. By acting to support mercantilist export quotas and other restrictions on the export of critical raw materials, China is acting directly against its own economic and national security interest. China’s control of the rare earths export market has convinced it that it can become a rare earths version of OPEC, giving them power to finally dictate terms to the developed world. This dream has blinded China to the real risks of its plan.

Both China and the U.S. are acting recklessly in a way that serves to undermine the WTO trade system. The damage has been done. The WTO minerals ruling is just another nail in the coffin. The WTO has been murdered. China pulled the trigger and the U.S. and Europe supplied the gun.

What do you think?

For more on China and the WTO, check out WTO China Piracy Ruling: It Ain’t Worth A Thing. . . . For more on China’s rare earths, check out Rare Earths And Polysilicon. Does China Control Our Green Future?