EU requests WTO consultations on Chinese export restrictions on raw materials - briefing

23 June 2009
by eub2 -- last modified 23 June 2009

China applies export restrictions - quotas and export duties - on key raw materials. The European Commission says these restrictions distort competition and increase global prices, as some of these resources cannot be found elsewhere. Downstream industries in China therefore have access to cheaper materials than their competitors outside China. That is not a level playing field, and the EU and U.S. have asked for consultations with China at the World Trade Organisation (WTO).

For several years China has applied export restrictions – quotas and export duties – to key raw materials of which China is the leading extractor and exporter. The European Commission says these export restrictions distort competition and increase global prices, as some of these resources cannot be found elsewhere. The latter also means that EU companies that are dependent on such resources as inputs for further processing risk having to close down business, with implications for downstream industries.

Export quotas are made more restrictive every year, increasing the supply issue industry is facing. Moreover, for many of the raw materials under export quotas, China also imposes export duties. Currently China applies export duties on 373 tariff lines at 8-digit level. The imports of these products to the EU were worth an estimated EUR 4.5 billion in 2008.

While China applies export restrictions to a broad range of products, the EU is at the moment asking for consultations on the following policies:

• China imposes quantitative restrictions on the export of bauxite, coke, fluorspar, silicon carbide and zinc.

• China imposes export duties of 70 percent on yellow phosphorous, 15 percent on bauxite, 40 percent on coke, 15 percent on fluorspar, 10 percent on magnesium, 15 or 20 percent on manganese (depending on product), 15 percent on silicon metal and 25 to 35 percent on zinc (depending on product).

• China imposes additional requirements and procedures in connection with the export of the materials, including, but not limited to:

• Restricting the right to export based on, for example, prior export experience.

• Establishing criteria that foreign-invested enterprises must satisfy in order to export that are different from those that domestic entities must satisfy.

• Requiring exporters to pay fees.

• China maintains a minimum export price system for the materials and requires the examination and approval of export contracts and export prices. China administers this system and these requirements through its ministries as well as chambers of commerce.

The products concerned are used by the steel, aluminium and chemical industries. The industries in the EU that is potentially affected represents about 4 % of EU industrial activity and around 500,000 jobs. They serve a multitude of sectors such as automotive, construction and fire retardants. Work on other restrictions continues.

In its accession to the WTO, China agreed to restrict the number of products subject to export tariffs, as set out in Annex 6 of its Accession Protocol. Annex 6 lists a total of 84 products at 8-digit level with a maximum duty rate that can be applied. Bauxite, coke, fluorspar, magnesium, manganese and silicon metal are products that do not appear on the Annex 6 list, but on which China maintains export duties Section 11.3, Part I of the Protocol prohibits the application of export duties on those products not appearing on this list. For yellow phosphorous and zinc China applies export duty rates above those allowed.

EU industries are dependent on imports of raw materials, and are therefore vulnerable to distortions in world commodities markets. Export taxes accentuate our vulnerability and directly reduce European industry’s competitiveness and in some cases can even cut off European industry from essential inputs. Currently there is no level playing field for European industry with their Chinese competitors. Once these resources are placed on the market, we believe they should be available without discrimination to domestic or foreign buyers. This is not the case today.

These restrictions appear to be in violation not only of general WTO rules, but also of specific commitments that China signed up to as part of the WTO Accession Protocol, which sets out either prohibitions against the use of export duties or strict caps on a limited number of products. Export quotas without justification are prohibited under Article XI of the General Agreement on Tariffs and Trade (GATT) from 1994. In particular, China maintains no comparable restrictions on domestic sales of these raw materials. China has also not notified to the WTO many of the export quotas, despite its commitment to do so.

The launch of consultations is only the first step in the litigation process at the WTO – and intended to explore whether an amicable solution is possible between the parties. This remains the prime objective of the EC. But if this does not prove possible, the EC reserves its right to continue the process towards the establishment of a WTO Panel.

The Council of the European Union endorsed on 28 May 2009 the Commission's Communication on a Raw Materials Initiative which puts access to raw materials at the top of the EU agenda. The trade strategy developed to implement this initiative urges for action to enforce international rules, if necessary through dispute settlement.

Source: European Commission