Round 3 of Environment vs. Trade: Rare Earths, China, and the World Trade Organization

Last week, the United States, European Union, and Japan requested a consultation (essentially accusing another country of unfair trade practices) in the Dispute Settlement Body of the World Trade Organization regarding China’s various barriers to the trade of rare earth metals.  Although, currently it does not have much, you can follow updates from the WTO on the case here.  The case may seem to be a repetition of earlier cases regarding natural resources and international trade; however, there are unique dynamics about rare earths that may make this a highly relevant case for global environmental politics.

China’s Dominance of the Rare Earth Market

Rare Earth minerals are 17 different elements that are, despite their name, quite abundant around the world but are dispersed and not available in large ores like are other minerals.  They are absolutely essential components of modern technology, including many forms of green technology.  Although the United States may have the third largest reserves of rare earth minerals (behind China and the former Soviet Union), there are no operating mines in the United States.  China dominates a large portion of the market, accounting for 95% of the overall global market.

Rare earth mining and processing is some of the most environmentally destructive activities undertaken.  The former world leader in rare earth mining, Mountain Pass in California, closed down when its operating permit was delayed by state authorities following the release of tons of radioactive waste into a dry lake.   Rare earth mining has all the problems associated with other mining activities, some aspects which though are more problematic.  However, processing is particularly polluting as separating the different elements from one another causes severe environmental damage to surrounding areasEvidence from China finds that for every ton of rare earth elements produced, 8.5 kilograms of fluorine enters the air, 13 kilograms of fine dust (with possible radioactivity) enters the air, between 9,000 and 12,000 cubic meters of air contaminated with hydrofluoric acid, sulfur dioxide, and sulfuric acid, and 75 cubic meters of acidic waste water, and one ton of radioactive waste residue.  Let me repeat the last part: for each ton of rare earth produced an equal ton of radioactive waste residue is produced. 

China in the 1990s began flooding the world markets with cheap rare earths while largely ignoring environmental consequences.  Areas where there were even minimal environmental requirements, were largely pushed out of the market by the flood of high quality, low price rare earths from China.  American mining operations are largely rusted over now, processing outside of China is being greatly contested, China has significant reserves to continue dominance for the next decade.

Starting in 2005, China introduced export quotas on rare earths onto the world market and began stockpiling reserves.  The largest cuts came in 2010, when China cut exports of significant amounts, essentially cutting rare earth availability on the world market by 40%.  Important in this is that manufacturing using rare earth metals can then export the finished products without the same requirements, encouraging increased manufacturing movement into China. The result of these cuts was that prices skyrocketed and the price for a ton of rare earths on the world market was 15 times higher as the price within China.

The World Trade Organization

With a mission to promote the removal of trade barriers, this dispute was destined to end up in the World Trade Organization’s dispute system eventually.  However, after a January ruling where the WTO found in regards to a 2009 case that Chinese trade limitations on zinc, yellow phosphorous, and bauxite was in violation of the WTO’s provisions.  This decision was on the heels of earlier WTO rulings against China for the same type of behavior.   In that case, the focus did not include rare earth metals and the limitations by China did not include significant restrictions on domestic mining so as to conserve resources.  As the WTO found in that case: ” China was not able to demonstrate that it imposed these restrictions in conjunction with restrictions on domestic production or consumption of the raw materials so as to conserve the raw materials. ”

In regards to rare earth metals, the environmental actions to conserve nonrenewable resources taken in China are significantly more targeted.  China has used taxation on rare earth mining to encourage less environmental waste and imposed air and water regulations on rare earth mining.  Don’t be fooled, these actions aren’t the only ones impact supply and are not necessarily the most significant ones impacting supply of rare earths to the world market: China is almost certainly distorting the market primarily for advantage in manufacturing and not for environmental protection.

The United States, Japan, and the E.U. have decided to challenge the actions taken by China as an unallowable trade distortion according to WTO rules.  Here is President Obama discussing filing the request for consultation:

China will respond, similar to earlier cases, that the decisions are in agreement with WTO regulations which allow countries to protect the health of their population or to conserve nonrenewable natural resources.  Air quality standards would be justified if they caused the cost of rare earths to be impacted evenly whether it was for domestic use or import.

But here’s why this may be the next key decision of the Trade and Environment debate within the WTO: Export restrictions may be a policy of shaping the use of a resource.  When a country dominates the world market to the extent that China does, export quotas may be the most efficient environmental standard in that they raise prices, encourage use of alternatives, and can encourage domestic environmental controls over manufactured products. World market share then may be very, very relevant in ascertaining what policies are appropriate to conserving nonrenewable natural resources and which are trade distortions. China may argue that they are simply trying to use trade policy to help conserve domestic resources.  For example, right after the WTO complaint was filed by the U.S., E.U., and Japan, China announced it would halt large scale mining of rare earths in order to support general sustainable use of the resource.

This may then be Round 3 of the WTO continuing debate between Trade and the Environment.  So far they’ve drawn clear lines about the issue: environmental policies can be enacted to the extent that they do not add discrimination between domestic and foreign producers.  Questions remain about how this plays out and what the exact limitations are.   If China was undertaking efforts to conserve rare earth minerals and as part of this overall policy they had trade restrictions, would that be a violation of WTO provisions?  We don’t quite know and in the evolving debates regarding genetically modified organisms, informed consent and even climate change, these issues will become more important.

The impact on global environmental politics from this decisions may well be: Can a WTO member use trade policy to conserve domestic resources?  Who knows what clarity this case will add.

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