INDUSTRY BULLETIN: Avalon Comments on World Trade Organization Ruling on China - Rare Earths Dispute
On March 26, 2014, a panel established by the World Trade Organization (“WTO”) ruled against China on the China — Measures Related to the Exportation of Rare Earths, Tungsten and Molybdenum dispute, referred to simply as “China – Rare Earths”. While the case also involved tungsten and molybdenum, this Industry Bulletin will focus specifically on the aspects of the ruling relevant to the rare earth industry.
Avalon’s Vice-President, Sales and Marketing, Pierre Neatby, also Chairman of the Management Committee for the Rare Earth Trade Association (“RETA”), commented that “it is unlikely that the WTO ruling will have any impact on the rare earth market in the short and medium term. Most observers believe that China will appeal the ruling within the 60 days permitted and, if so, that the WTO ruling will be upheld. However, it will take China quite some time to come into compliance”.
China has created a two-tiered pricing system with lower prices inside China and higher prices outside China to encourage downstream manufacturing in China and create and maintain Chinese jobs. China is unlikely to give up this competitive advantage easily.
Mr. Neatby continued, “We believe China in the long term will likely respect the ruling and eliminate export quotas. There would be no immediate impact on the market since Chinese producers have not reached the quota level in the last few years. In addition, in order to fully comply with the WTO, China should also eliminate export duties and other non-competitive measures. However, these could be replaced by other measures such as subsidies, taxes or production quotas ultimately having the same effect.”
“As light rare earth production outside China ramps up, it will be more difficult for China to maintain its two-tiered pricing mechanism for light rare earths. Regardless, China will still have a monopoly on heavy rare earths until new supply sources emerge outside China from companies like Avalon. The two-tiered pricing system and supply uncertainty for heavy rare earths will support strong prices for the scarce heavy rare earths until those new supplies begin to come into the marketplace from Canada in 2018.”
“We very much welcome the WTO decision”, said new Avalon Board member the Hon. Sergio Marchi, a former Canadian Ambassador to the WTO and Minister of International Trade. “It was a clear and unambiguous ruling, and it is important for China to respect both the letter and spirit of this important decision. Moreover, given the crucial role that rare earths play in the development of the global high tech sector, we call on China to practice only WTO-consistent alternative measures if its true goals are to preserve its depleting resources and protect the environment.”
Background on WTO Ruling
This process began in March 2012 when the United States, the European Union and Japan (the complainants), requested consultations with China with respect to China’s decision to restrict exports of various forms of rare earths. These restrictions included export duties, export quotas, minimum export price requirements, export licensing requirements and additional requirements and procedures in connection with the administration of the quantitative restrictions. The export duties covered 58 rare earth products and were in the 15 to 25% range (generally 15% for lights, 25% for heavies).
The complainants claimed that these practices were inconsistent with various articles of the General Agreement on Trade and Tariffs (“GATT”) 1994, as well as China’s WTO Accession protocol where China was to eliminate all taxes and charges applied to exports unless specifically provided otherwise. On March 26, 2012, Canada requested to join the consultations as a third party (15 other countries also did so) and in July 2012, a panel was formed by the WTO’s Dispute Settlement Body.
In the recent ruling, the panel declared that China had “failed to demonstrate that its export duties are necessary to protect human, animal or plant life or health”, which had formed the central tenet of China’s argument for the policies it had enacted. China claimed its practices were designed to reduce usage of rare earth elements, and thus reduce pollution.
The panel further ruled that, “when seeking to address environmental concerns and protect the life and health of its population, China must use instruments and means other than export duties to do so” as the duties did not suggest the “even-handedness” required by the WTO. Numerous other WTO-consistent alternative measures could be pursued as opposed to export duties and the panel concluded that China had not conclusively demonstrated that they were not available.
The panel also found that China’s claim that export quotas were used for the “conservation of an exhaustible natural resource”, which can be allowed under WTO rules, and to prevent smuggling, did not stand up to scrutiny. Many WTO-consistent alternatives that provide conservation effectiveness while avoiding the discriminatory and distorting effects of export duties or quotas were listed such as sales quotas covering both domestic sales and exports and other methods of controlling illegal extraction, production, consumption and exports of rare earths. Other examples included increasing volume restrictions on mining and production; establishing effective pollution controls on mining and production; imposing a resources tax on consumption; imposing a pollution tax; and developing and imposing an export licensing system.
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ABOUT AVALON RARE METALS INC.
Avalon Rare Metals Inc. (TSX & NYSE MKT: AVL) is a mineral development company focused on rare metal deposits in Canada. Its 100%-owned Nechalacho Deposit, Thor Lake, NWT is exceptional in its large size and enrichment in the scarce 'heavy' rare earth elements, key to enabling advances in clean technology and other growing high-tech applications. With a positive feasibility study and environmental assessment completed, the Nechalacho Project remains the most advanced potential large new source of heavy rare earths in the world outside of China, currently the source of most of the world's supply. Avalon is adequately funded, has no debt and its work programs are progressing. Social responsibility and environmental stewardship are company cornerstones.