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Thursday, January 20, 2011

Rare earth export quotas in China

Over at the China Law Blog, Steve Dickinson has a very informative post on China's export quota regime for rare earths. I would add one supplementary point and note one wee disagreement.

The wee disagreement: Steve says, "Many foreign commentators have suggested that the rare earths quota system arose by surprise or that the system is a random restriction by the Chinese government as part of some sort of natural resources power play." That wasn't my impression of the commentary surrounding the controversy over the alleged blocking of rare earth exports to Japan last fall. I went back and checked press reports, and really can't find this kind of commentary. The press reports I saw note the existence of the export quota system in a straightforward and non-judgmental way.

Of course, Steve may be referring to commentary I didn't see in my quick search. But in any case, it seems to me that the real controversy has not been over whether China suddenly imposed a quota system in general as over whether the government had, last September, imposed an extra restriction on exports to Japan, and if so, whether this was a way of pressuring Japan over Chinese ship captain it was holding. Press reports quoted various industry executives as saying that a restriction not explainable by the existing quota system seemed to have been imposed; the Chinese government denied it. The Chinese government did not say, "It's the quota system that has caused the sudden cutoff in exports." They denied that there had been any cutoff in exports at all. I don't know if the truth of this matter has been conclusively established one way or the other.

The supplementation: I agree with Steve that the quota system is very problematic under WTO rules. The odd thing to me is that WTO rules make evading this prohibition very easy, because they don't prohibit export taxes, even those set at a prohibitively high level. Thus, by replacing the export quota with an export tax, China could restrict exports to exactly the same degree it does today and make a bit of money for the treasury in the process. I can only assume that there is some obscure reason related to politicking among domestic interest groups that explains China's not doing so.

For more than you ever want to know about export restrictions under the WTO, check out this article from the Herbert Smith LLP web site.

JANUARY 27th UPDATE: An anonymous commenter writes: "You are right - in almost all situations, the GATT permits a government to use a sky-high export tax to block exports, and export taxes are in principle GATT-consistent. However China's accession protocol includes legally binding commitments not to impose export taxes, except for a list of specific products, which do not include rare earths."

This comment is on target and I appreciate it. The relevant text of the Protocol of Accession reads:"China shall eliminate all taxes and charges applied to exports unless specifically provided for in Annex 6 of this Protocol or applied in conformity with the provisions of Article VIII of the GATT 1994." (Article VIII allows modest cost-based fees for services in connection with import and export formalities.)

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You are right - in almost all situations, the GATT permits a government to use a sky-high export tax to block exports, and export taxes are in principle GATT-consistent. However China's accession protocol includes legally binding commitments not to impose export taxes, except for a list of specific products, which do not include rare earths.

Posted by: Anon | Jan 26, 2011 12:50:21 AM

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