According to a World Trade Organisation (WTO) expert panel ruling issued on July 5 2011, China's export restrictions on nine raw materials used in the manufacture of high-technology products are inconsistent with its WTO obligations.

The raw materials covered by the export restrictions are bauxite, coke, fluorspar, magnesium, manganese, silicon carbide, silicon metal, yellow phosphorous and zinc. The affected materials are used in medicines, CDs, electronics, cars and automotive components, ceramics, refrigerators, batteries and other products. The export restriction regime includes quotas, export duties and a minimum export price system, as well as additional requirements and procedures for exporters.

The complaints were jointly lodged by the United States, the European Union and Mexico in 2009. These jurisdictions claimed that China was driving up prices for certain raw materials by introducing export duties and quotas. China argued that the restrictions were motivated by a desire to protect the environment and prevent a critical shortage of the materials in question. The United States and the European Union challenged China's environmental protection argument, noting that China was not controlling its own raw material consumption.

Following an 18-month investigation, the WTO panel rejected China's argument, siding with the United States, the European Union and Mexico. It ruled that the export restrictions imposed by Beijing are inadequate protection for the environment as long as the extraction of raw materials remains unrestricted in China.

China must now either appeal the ruling or comply with it. According to WTO dispute settlement rules, an appeal can be made to the appellate body within 60 days of the report's distribution. The legal process can take several years. Although China has not yet officially announced whether it plans to appeal, it is likely to do so, as this would secure an extension of time to comply with the unfavourable ruling. If China refrains from appealing, it will have 12 months - at most - to comply with the WTO appellate body's report, which is expected to be issued at the end of 2011. If China fails to comply, the United States, the European Union and Mexico could eventually be allowed to respond with equivalent trade sanctions.

The ruling strengthens EU arguments against China's restrictions on another category of exports: rare earths. These 17 minerals are important for the high-technology industry, and China has implemented a quota system to limit their export. Although China has 30% of the world's rare earth reserves, it is responsible for over 90% of global production. It justifies its export restrictions on rare earths on a similar basis to its restriction on the nine raw materials in the ruling, citing environmental protection and the prevention of critical shortages. However, Deputy Commerce Minister Zhong Shan stated on July 6 2011 that China will continue to improve its regulations covering exports of rare earths according to both Chinese law and WTO regulations. There is much speculation that the United States, the European Union and other trading partners could use the ruling to take action against Chinese restrictions on rare earths.

For further information on this topic please contact Eugene Lim at Baker & McKenzie's Hong Kong office by telephone (+852 2846 2413), fax (+852 2845 0476) or email ([email protected]).