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Chinese Curbs on Raw-Material Exports Break Rules, WTO Says

China Iron Ore
Workers walk past piles of iron ore at an iron ore transfer and storage center operated by the Shanghai International Port Group in Shanghai, China. Photographer: Qilai Shen/Bloomberg

Chinese restrictions on exports of nine raw materials violate global rules and give the country’s manufacturers an unfair edge, a World Trade Organization panel said, backing a complaint by the U.S., the European Union and Mexico.

Today’s ruling comes more than 18 months after WTO judges agreed to investigate whether Chinese quotas, export duties and license requirements on overseas shipments of industrial ingredients including coke, zinc and bauxite are discriminatory. The restrictions have stoked tensions between China and its trading partners, which often accuse the Chinese government of having unfair commerce and currency policies.

“The panel found that China’s export duties were inconsistent with the commitments that China had agreed to in its Protocol of Accession,” WTO judges said in a summary of the 315-page ruling on the Geneva-based trade arbiter’s website. “The panel also found that export quotas imposed by China on some of the raw materials were inconsistent with WTO rules.”

China, the world’s second-largest economy, is the top producer of cadmium, gold, indium, iron ore, lime, lead, manganese, mercury, molybdenum, phosphate, salt, tin, tungsten, vanadium and zinc. Its export restrictions have caused worldwide supplies of many raw materials to plummet, sending prices higher and providing an incentive for manufacturers to move to China to take advantage of the cheaper materials.

‘Significant Victory’

“Today’s panel report represents a significant victory for manufacturers and workers in the U.S. and the rest of the world,” U.S. Trade Representative Ron Kirk said in an e-mail. The duties “have caused massive distortions and harmful disruptions in supply chains throughout the global marketplace.”

The commodities at issue in the WTO case also included magnesium, manganese, silicon carbide, fluorspar, silicon carbide and yellow phosphorus, which are used by the steel, aluminum, automotive and chemicals industries.

China argued that the restrictions are necessary to conserve exhaustible natural resources and ease overproduction and emissions of carbon and sulfur gases from furnaces. The U.S., the EU and Mexico said the curbs discourage the export of materials that are “critical” for their manufacturers, while keeping them cheaper and readily available in China.

The WTO panel said that China was “unable to demonstrate” that the export duties curtailed pollution. China’s government has the right to appeal the decision.

Rare Earths

Today’s ruling may prompt the U.S. and the EU to make good on threats to complain at the WTO over Chinese restraints on exports of rare earths, a group of 17 elements used in wind turbines, hybrid cars and defense applications such as guided missiles.

China has limited domestic output and exports of the metals, sending some rare earths up sixfold and souring ties with major users including the U.S. and Japan. The government may further reduce its quotas, pushing prices higher, Goldman Sachs & Partners Australia Pty said in May.

“I expect that China will now bring its export regime in line with international rules,” EU Trade Commissioner Karel De Gucht said in a statement. “In light of this result, China should ensure free and fair access to rare earth supplies.”

China, supplier of 95 percent of global rare earths, has said the curbs protect the environment and are in line with its WTO commitments. The country’s Inner Mongolia Baotou region produces so-called light rare earths such as lanthanum, cerium and samarium. Heavy rare-earth production, concentrated in the south of China, includes the elements dysprosium, gadolinium and terbium.

Strong Case

James Bacchus, a lawyer at Greenberg Traurig in Washington and a former chairman of the WTO’s Appellate Body, said a “strong legal case” can be made against China’s policies on rare-earth exports.

“China may be especially vulnerable to WTO action in the case of rare earths because, while applying and increasing restrictions on rare-earth exports to the detriment of foreign producers, China has done little to impose rare-earth restrictions on its domestic producers,” he wrote in the Wall Street Journal on May 20. “An environmental defense is possible only for measures that are ‘made effective in conjunction with restrictions on domestic production or consumption.’”

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