China's export restrictions on key raw materials such as bauxite, coke, fluorspar, magnesium, manganese, silicon carbide, silicon metal, yellow phosphorus and zinc have been a point of contention. The failure of consultation to resolve the issue led the EU, the US and Mexico to request for the establishment of a WTO panel on November 4, 2009.
Finally, a panel was established on December 21, 2009. Subsequently, Argentina, Brazil, Canada, Chile, Columbia, Ecuador, India, Japan, Republic of Korea, Norway, Saudi Arabia and Turkey joined the dispute as third parties.
The principal measures to restrict export include export quotas, export duties, export licensing and minimum export price requirements. Since, China is the leading supplier of these items, imposition of export quotas limits their global supplies, while export duties increase their international prices. This adversely affects the cost competitiveness of foreign manufacturers dependent on these inputs.
The complainants contend that such measures act as an indirect subsidy to the disadvantage of the import-dependent foreign manufacturers of steel, aluminium, chemicals and downstream industries.
Export restrictions ensure cheap industrial inputs to its domestic industry. Artificially-low exchange rate discourages imports into China. Resorting to non-tariff barriers such as non-notification of Sanitary and Phytosanitary (SPS) regulations, application of unique national standards instead of well-established international standards, or discrimination between imported and domestic products further restrict access to the Chinese market.
WTO COMPATIBILITY ISSUES
The complaints have claimed that Chinese export restraints violate WTO rules and certain provisions of Chinese Accession Protocol. The major WTO compatibility issues are:
Do Chinese export restraints violate Article XI of General Agreement on Tariffs and Trade (GATT) 1994, which bans the implementation of “prohibitions or restrictions other than duties, taxes or other charges” on exports, except when such export prohibitions or restrictions are temporarily applied to prevent or relieve critical shortages of foodstuffs or other products as under Article XI: 2(a) of GATT 1994?
Are Chinese export restraints compatible with Article XX (g) of GATT 1994, which allows exception to trade rules on grounds of preservation of natural resources?
Do such export restraints violate Article 11.3 of Chinese Accession (to WTO) Protocol, 2001 requiring China to do away with all taxes and charges applied to exports, on all but 84 items mentioned in Annexure 6 of the Protocol?
China has countered that such export curbs do not violate any WTO provisions or its obligations. Further, they are allowed under exceptions to trade rules on environmental grounds.
NOT JUST CHINA
To be fair to China, imposition of export controls is not done by China alone. Many WTO members impose some kind of export restrictions. The most recent example of such action is Indonesia's draft decree, which seeks to ban export of coal below 5100 Kcal/kg from 2014, that will put immense cost pressure on power companies relying on imported coal. India too, imposes export restrictions from time to time, for example, export duties on iron ores.
Article XI requires WTO members to remove all quantitative restrictions on export or imports, the exception being, among others, BOP problems, development needs of Least Developed Countries, or when they're applied temporarily to relieve critical shortage of food items. Chinese export restrictions cannot be justified on any of the above grounds. Article 11.3 of Accession Protocol provides that “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.”
Annexe 6 lists 84 such items. Most of the disputed items either do not fall under this list, or duties imposed on them are at rates that exceed the exemption limits. Chinese export measures cannot be justified on environmental grounds under Article XX (g), GATT 1994.
IMPLICATIONS FOR INDIA
Chinese export restraints, in particular those on coking coal, fluorspars, silicon, magnesium, manganese, silicon carbide and yellow phosphorus, affect the cost competitiveness of Indian manufacturers using them.
Take, for example, export duty on coke, a key steel input processed from coking coal. It takes about one tonne of coking coal to produce one tonne of steel. China accounts for nearly 60 per cent of the global production of coking coal.
Fluorspar is used for production of fluorine chemicals, which are used in aluminium smelting, petroleum refining, steel re-rolling and production of refrigerant gases. India, being deficient in good quality fluorspar, imports it from China, which supplies two-third of its requirement.
A 15 per cent Chinese export duty on fluorspar adversely affects the cost of producing hydrofluoric acid, the ‘primary feedstock' for manufacturing virtually all organic and inorganic fluorine-containing compounds.
Manganese, magnesium and silicon are important alloying elements. Silicon carbide finds applications in semi-conductors. Yellow phosphorus is used in the production of safety matches and phosphorus chloride. They too are subject to some kind of Chinese export controls.
DECISION OF WTO
The WTO panel has held that Chinese export quotas, the way they are implemented, violate Article XI of GATT 1994, that prohibits any kind of quantitative restrictions on export.
It has rejected the Chinese contention that its export measures, supposedly to protect the environment, are covered by the exceptions under Article XX (g) of the GATT. The panel held that Chinese export measures which increase the price of these inputs for foreign consumers while decreasing them for domestic consumers cannot be justified on environmental grounds.
On August 31, China appealed against the WTO panel report. The decision of the appellate body is eagerly awaited.
(The author is Subject Matter Expert, International Trade, Aditya Birla Group.)