China announced in July that it would extend and further tighten its export quotas on rare earth materials for the second half of 2011. U.S. manufacturers of downstream products will continue to experience high prices for rare earth materials as a result. China's decision to continue its export quotas for rare earth materials, however, has drawn criticism from its trading partners, indicating a possible action at the World Trade Organization.
Rare earth materials are a group of 17 minerals, which are widely used in high-technology products such as hybrid cars, tablet computers, high-performance magnets, and light-emitting-diode phosphors. Rare earth materials also have defense applications. China controls 97 percent of the global rare earth materials' market. In July 2010, China significantly reduced its export quotas on rare earth materials, causing world prices for rare earth materials to greatly increase compared to domestic Chinese prices. This new announcement extends the 2010 quotas and added a new product - ferro-alloys - to the list.
China's export quota on rare earth materials presents a significant trade issue. Export restraints, such as quotas, create competitive disadvantages to foreign producers by artificially increasing the world market price of the restrained materials, while concurrently providing a competitive advantage to domestic producers by lowering the domestic price. This disequilibrium becomes particularly pronounced when the country imposing the export restraints controls a significant portion of the restrained materials and when those materials comprise a significant portion of the downstream product's cost of production.
The announcement comes only weeks after the release of a WTO panel report ruling against China on similar export restrictions for certain other raw materials. When acceding to the WTO, China agreed to eliminate all quantitative export restrictions, including quotas. Although the parallel fact patterns between these two export restraints indicate that China would lose a WTO challenge to these recent export quotas, observers caution against dismissing China's rare earth export quotas outright. In the raw materials case, China's defense on environmental grounds was rejected because, inter alia, China failed to prove that it had limited domestic production and consumption in addition to the export disciplines. China, however, has introduced stronger environmental considerations into its legislation because the extraction of rare earth materials is highly polluting, and China has limited domestic production of rare earth materials. Although China may have strengthened its defense, the threshold for an environmental exception from a member's WTO obligations is high.