This Memorandum was prepared on a pro bono basis by students of the Trade & Investment Law Clinic at the Graduate Institute for International and Development Studies in Geneva, Switzerland. It responds to a request by the International Centre for Trade and Sustainable Development (ICTSD) to investigate China’s rare earths export quota regime, as it stands in 2012, and to examine whether the regime could be justified in line with certain obligations of the World Trade Organization. ICTSD is a non-governmental organization created “to influence the international trade system such that it advances the goal of sustainable development.” As such, this Memorandum also aims to identify what “policy space” could be available to WTO Members wishing to apply export restrictions for sustainable development purposes.
China authorizes the Ministry of Commerce and Customs to establish export quotas under the Foreign Trade Law and Regulation on Import and Export Administration. Export quotas on rare earths are allocated in batches, twice per year, amounting to around 30,000 tons annually since 2010.
Export quotas are prohibited under GATT Article XI, the “General Elimination of Quantitative Restrictions.” However, China’s measures will not violate the provision if they meet the requirements of Article XI:2 (a), which carves out quantitative restrictions temporarily applied to essential products in order to resolve critical shortages. China may not meet these requirements because its supplies of rare earths may not be in critical shortage, nor do China’s measures appear to be temporarily applied.
If China faces a GATT Article XI violation, it may seek to justify its measures under GATT Articles XX (b) and XX (g), which provide exceptions for sustainable development-related purposes. Under Article XX (b), China must show that its export quotas materially contribute to health and environmental protection and that they are the best option given other available, less trade-restrictive alternatives. Under Article XX (g), the export quotas must relate to the conservation of an exhaustible resource. Moreover, they must be made effective with corollary restrictions on domestic production or consumption to balance the burden that export quotas impose on trade partners.
China has instituted a number of new measures in recent years designed to increase environmental protection and resource conservation in the rare earths industry. These could help it meet the requirements of Articles XX (b) and (g). These include export licensing measures allocating export quotas to environmentally-certified enterprises, as well as production quotas and efforts to consolidate, police, and monitor the domestic rare earths sector.
China could assert at least five broad arguments to link its export quotas to its sustainable development efforts. These include “signaling,” that is, relying on export quotas to induce trade partners to develop new rare earths supplies; incentivizing rare earths producers to pass environmental inspection to gain access to export quota licenses; narrowing the export sector to enforce limits on illegal production and consolidate the rare earths industry; exchanging access to Chinese rare earths for foreign investment in greener technologies and expertise; and subduing spikes in foreign demand.
Despite China’s substantial progress in strengthening the sustainable development of rare earths, the current regime is unlikely to meet the requirements of Articles XX (b) and (g). The export quotas do not appear designed primarily to achieve sustainable development of the rare earths industry. Moreover, China’s domestic restrictions on environmental pollution and resource conservation in rare earths do not yet appear to effectively reduce domestic production or consumption, and remain viable alternatives to export quotas. Under the further requirements of the Article XX “chapeau,” China’s measures may be deemed discriminatory or disguised restrictions on trade, and thus face a second formidable hurdle.
In general, the GATT should offer some policy space to Members seeking to apply export quotas, but the space is very narrow. WTO adjudicators should be careful to interpret GATT disciplines to prevent this space from becoming so narrow that Members may not have any real recourse to impose export quotas, even under reasonable circumstances.