A World Trade Organization panel ruled last week that China’s export restraints on rare earth elements and other metals violate W.T.O. rules because they are discriminatory. Rare earth minerals are critical in a wide range of industries, from electronics and hybrid automobiles to petroleum and chemicals. Should the ruling stand, China will have to dismantle the discriminatory policies or face trade sanctions.
This ruling may appear, at first glance, to be a vindication of the strategy of turning to the W.T.O. to fight Chinese protectionism. But litigation victories do not always translate into economic victories, especially when the W.T.O. is concerned.
In 2010, China imposed quotas and other restraints to sharply limit exports of rare earths. Because more than nine-tenths of the world’s production of rare earths occurs in China, price shocks hit foreign producers who rely on the Chinese minerals. Complaining that the export restraints were discriminatory and illegal, the United States, the European Union and Japan all filed complaints before the W.T.O.
China defended its actions by arguing that the export limits were necessary because of the environmental hazards associated with rare earths production. That environmental harm can occur is undoubtedly true, but the W.T.O. panel found this was just an excuse. The export restraints, it ruled, were designed to achieve industrial policy goals rather than promote conservation. In other words, China sought to limit its export of rare earths to give a leg up to Chinese manufacturers. It also sought to use cheaper domestic prices to entice foreign companies dependent on rare earths to relocate production to China.
The strategy worked. Chinese manufacturers in several industries relying on rare earths, such as wind turbines and chemicals, made formidable inroads against their foreign competitors. Foreign companies making products relying on rare earths, such as camera lenses and touchscreen glass, shifted some production to China.
Although the W.T.O. panel ruled against China, it did not require China to pay compensation. By design, the W.T.O.’s remedies are not retrospective. Workers who lost their jobs because firms outsourced production to China would receive no damages. In fact, so long as China eliminates the discriminatory elements of its policies going forward, there are no remedies available for the United States or the other countries. The main goal of W.T.O. dispute settlement is to force compliance with the law rather than provide economic justice for past harm.
The W.T.O., in effect, provides countries with a free pass to breach its rules temporarily. So long as a violating country ends its illegal policy in a reasonable period of time following a final judgment, it need not worry about being punished.
W.T.O. rulings do little to dissuade China from continuing to take advantage of the free pass to advance other unfair and illegal policies when the gains are large enough. China has done this in industry after industry, from semiconductors to electronic payment services. The approach typically involves contravening trade rules just long enough to allow domestic players to build up their market position without incurring W.T.O. sanctions. China then undoes the policy and claims that it is respectful of W.T.O. judgments. But undoing China’s gains afterward often proves difficult.
It may seem as though the solution to China’s flouting of trade rules would be to push for more robust remedies at the W.T.O. But retrospective remedies are not necessarily in the interest of other big countries like the United States. That is because they also lose cases at the W.T.O.
Beyond the simple calculation of whether China’s competitors would gain or lose more with stricter punishments, there is also the political difficulty of implementing such a solution. Imagine that having lost a cotton subsidies case to Brazil, the United States was ordered to pay compensation. Would the government claw back these subsidies from cotton farmers? Or would it try to convince the American public to shoulder the burden on behalf of cotton farmers through higher taxes or greater deficit spending?
Relying on the W.T.O. alone to fight back against Chinese protectionism is a losing strategy. The United States should employ an array of tools to ensure that, even when our companies face discriminatory policies overseas, they are not tempted to relocate.
The United States should undertake a comprehensive evaluation of the minerals critical for strategic interests. The government then should play a major role in re-establishing a robust domestic supply chain for such minerals. Such a strategy will take time to execute. In the meantime, stockpiles should be built to guard against future attempts to use rare earths as economic leverage. The American Congress would do well to hasten its review of the bills introduced to reduce foreign mineral dependency.
Careful consideration should be given to whether government procurement policies can be altered to dissuade companies from succumbing to resource-based extortion by other countries. This may provide an opening to make it clear that companies that shift technology or jobs overseas in response to discriminatory export restrictions may hamper their chances of winning government contracts.
While court victories are satisfying, they are often not enough. This is doubly true when the legal system’s remedies are inadequate. When faced with unfair competition, companies develop comprehensive plans beyond litigation to push back against such threats. So too should governments. Otherwise, W.T.O. victories will prove hollow.
Mark Wu is an assistant professor of law at Harvard Law School, where he specializes in international trade.