Hit with an unfavorable WTO ruling, China must dig deep in order to rescue its beleaguered rare earth industry
By Zhou Xiaoyan
LOCAL ADVANTAGES: A worker checks tri-phosphor energy-saving bulbs made from rare earths at a factory in an industrial park in Jing'an County, east China's Jiangxi Province (XU ZHONGTING)
According to a World Trade Organization (WTO) Appellate Body ruling published on August 7, China has lost its appeal against a case brought by the United States, the European Union and Japan challenging its restrictions on exports of rare earths.
"China has not demonstrated that the export quotas that China applies to various forms of rare earths, tungsten and molybdenum by virtue of the series of measures at issue are justified," the document's conclusion stated.
China's Ministry of Commerce (MOFCOM) said that it regretted the WTO's decision to uphold a previous ruling against China's management of rare earth exports.
In a statement, the MOFCOM announced that China will evaluate the ruling and adopt measures in accordance with WTO rules to protect fair competition and ensure sustainable development.
"We aren't surprised by the ruling, as the panel held that China's export restrictions on these materials were inconsistent with WTO rules, but we insist that the purpose is to protect the environment and exhaustible natural resources," said Li Chenggang, Director of the Department of Treaty and Law at the MOFCOM.
Things aren't any better inside the country. Although China has annual exploration and smelting quotas in place, illegal mining, black market dealing and smuggling of rare earth products that effectively bypass the export quota system remain problems endemic to the sector. They have disrupted the rare earth market and have led to a nosedive in the prices of the valuable minerals in China.
So then, what exactly should the country do to improve the fortunes of this rampantly expanding yet highly pollutant industry?
Beset by difficulties
Rare earths, a class of 17 metals, are valuable and non-renewable resources essential in green technologies such as wind turbines and electric car batteries as well as in military sectors. Therefore, they have been dubbed "vitamins to industries."
China is the world's largest producer and exporter of rare earth, accounting for 95 percent of the global output but possessing only 36 percent of global reserves, according to China's Ministry of Industry and Information Technology (MIIT).
Although rare earths are of vital significance to the development of clean technologies, exploration projects to locate for rare earths paradoxically cause severe environmental pollution.
To curtail pollution and preserve resources, the Chinese Government applied restrictive measures to the sector in 2010, including export quotas and export tariffs.
The move immediately triggered opposition from the European Union, the United States and Japan. In March 2012, the trio lodged a joint complaint to the WTO, accusing China of breaking WTO rules on rare earth exports. A panel was formed in September 2012 to look into the dispute, and a report on March 26 this year found that China's measures had violated WTO rules. The United States appealed on technical grounds on April 8 and China appealed on April 17.
In addition to global trade disputes, China's domestic rare earth industry is highly fragmented. Small-scale mining and cutthroat price competition over the years have led the sector into trouble.
According to China Customs statistics, in 2013 China's rare earth exports volume rose by 38.3 percent year on year, but its exports value fell by 37 percent compared with that in 2012. Currently, the average price of rare earths has fallen back to the level of 2010, said Chen Zhanheng, Deputy Secretary General of the Association of China Rare Earth Industry.
"Illegal mining, production and selling of rare earth materials have already taken the shape of a black interest chain," said Jia Yinsong, who is in charge of the MIIT's Rare Earth Office, noting that high profits from illegal mining have also led to collusion between local government officials and illegal miners.
Extracting solutions
After the export quotas and export tariffs are scrapped, environmental tax should be levied during the exploitation process to promote sound and sustainable development of the industry, said Bai Ming, a research fellow with the Chinese Academy of International Trade and Economic Cooperation.
Chen Weidong, a professor in law at the Beijing-based University of International Business and Economics, said once the export tariffs are removed by the Chinese Government, a resource tax is likely to be levied on the valuable resource, which is in line with WTO regulations and has been adopted by other countries that are rich in rare earth reserves.
Ye Bo, an assistant professor with Shanghai University of International Business and Economics, said regulation on the rare earth industry should be expanded to the production link of the supply chain. "The Government should increase regulation on rights pertaining to the mining of natural resources, and the production and sales of those resources," Ye said. "In addition, the mineral resource tax should be levied to protect the environment."
Meanwhile, smuggling, illegal mining and black market dealing should be strictly prohibited, Bai said.
The Chinese Government has carried out major crackdowns on illegal mining, black market dealing and smuggling activities in the rare earth industry in a move to further the industry's healthy development.
In Ganzhou, east China's Jiangxi province—an area rich in light rare earth resources, more than 40 officials were probed for their involvement in illegal rare earth mining and processing last year.
In a three-month campaign held from August last year, 126 rare earth production firms were ordered to suspend operations and another 161 had their production licenses revoked. Inspectors also seized 19,000 tons of illegally mined rare earth materials during the campaign.
The MIIT, together with other government departments, plans to carry out another round of crackdowns on illegal mining, black market dealing and smuggling starting from August 15.
Industrial integration is the key to the healthy development of the sector. Amid a government-led push to consolidate the industry, authorities also approved six rare earth blocs in early August.
After the currently fragmented industry has been integrated, industrial behemoths will have the requisite common sense and expertise to control productivity and prices, even without government restriction and supervision, analysts say.
In all, six rare earth companies including Baogang Group, China Minmetals, Chinalco, Guangdong Rare Earth Corp., Ganzhou Rare Earth Group and Xiamen Tungsten have been encouraged to take the lead in integrating regional resources to improve industrial concentration.
The government has accelerated consolidation in the rare earth industry through giving its approval for three major producers to become conglomerates by year-end to fortify available resources, combat smuggling and alleviate overcapacity. Three more such companies will be given approval during the second half of the year.
Bai said the establishment of rare earth conglomerates can improve the allocation of China's rare earth resources. "For example, it should be established which resources should be tapped first and which later. In this way, price decline following overexploitation and oversupply can be avoided. Also, an orderly exploitation of rare earths can be achieved to avoid over competition."
"The proposed conglomerates should focus on research and development so as to achieve higher-end rare earth production," suggested Bai.
