Saturday, March 17, 2012

China - Irrepsonsible Superpower?

Export restrictions that have pushed prices for the 17 rare earths in markets outside China up to several times the level of prices inside China, giving companies an incentive to move factories to China. These rare earth export restrictions are... about favoring Chinese industry over global industry...

Rare earths are vital to various sophisticated technologies, including smartphones, smart bombs, large wind turbines and electric cars. Tungsten and molybdenum are used to strengthen steel and other industrial materials. China is the world’s dominant producer of rare earths, tungsten and molybdenum, and it has imposed increasingly stringent export taxes and quotas on them for the past two years despite having promised the WTO when it joined in 2001 that it would remove export taxes and quotas on all goods except for a handful of other products.


Such policies are also another reason why China cannot be considered a responsible power. The sanctity of a contract with China is dependent on the whims and fancies of those who rule Beijing. For example, China halted shipments of rare earths to Japan for two months in the fall of 2010 during a dispute over contested islands in the East China Sea. This propensity to employ its trade policy blatantly to arm-twist its trade partners as part of strategic diplomacy is a sign of an insecure superpower.

Such flippant actions are all the more likely with autocratic regimes like China, where domestic pressure is unlikely to play a countervailing role against such whimsical policies. Contrast this with India's U-turn on cotton exports ban due to domestic political opposition.

For a more detailed discussion on China's rare earth's policy, see this.

2 comments:

Srikar said...

Gulzar,
I have raised these issues in the context of U.S.'s call on "letting the markets work" here (http://treadthemiddlepath.blogspot.in/2012/03/chinas-rare-earth-minerals-let-markets.html).

Primarily they are as follows:

1. "Now, if China would simply let the market work on its own, we’d have no objections." - Let the market work? Do all countries let the market work in the context of international trade? With rising "protectionism" all around and "subsidies" being provided, is China the only country that does not let the market work? Are providing subsidies to Airbus and Boeing "letting" the market work?


2. Would the restriction on exports of rare earth minerals be consistent with WTO obligations? What seems to be an essentially domestic policy choice of protecting and deciding on one's national, mineral resources by restricting exports has international trade ramifications. Article XI of GATT provides :
"1. No prohibitions or restrictions other than duties, taxes or other charges, whether made effective through quotas, import or export licences or other measures, shall be instituted or maintained by any contracting party on the importation of any product of the territory of any other contracting party or on the exportation or sale for export of any product destined for the territory of any other contracting party."
However, Article XX of the GATT provides for this exception that China will most probably use:

"(g) relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption;"
Hence, if China's measure of export restrictions on rare earth minerals are in conjunction with restrictions on domestic production or consumption it looks like a defensible measure under WTO rules. Non-discrimination between domestic and international use is the determinant factor here. This commentary in a Chinese daily seemed to suggest that this was the case.

3. The present case raises issues of domestic policy space int he context of an increasingly interconnected world. One would have perceived control over one's national resources to be exclusively within a country's domain. Export restrictions was the manifestation of this control. However, this control is not unbridled. While there is still domestic policy space to restrict exports, it cannot be done in a discriminatory manner favouring local industry over foreign competition. In other words, export restrictions that as a policy tool favour local industry will be violative of WTO rules.

As to your points, if China is discriminating and allowing exploitation of rare earths for domestic industry, this could be viewed as a violation of the national treatment principle. However, if it is policy to protect it's exhaustible natural resources sans discrimination, then i doubt it would fall foul of WTO rules. the issue of using it as a weapon of foreign policy is all together another debate!

Market and Research said...

Rare earths are also known as technology metal, because without the use of rare earths it would not be possible to make the latest digital technology products. Although rare earths are used in small quantities, their role is pivotal. Unlike other elements, the rare earths industry is dominated by China, which accounted for 95.3% of the total global production. Rare Earths Market