The World Trade Organisation (WTO) has ruled that China’s restrictions on exports of rare earths break WTO trade rules.

The WTO’s dispute panel report has found that China’s restrictions on exports of rare earths break WTO trade rules. The report states that China’s export duty, export quota administration and allocation measures imposed on rare earths (as well as the metals tungsten and molybdenum) are inconsistent with WTO rules and commitments China made when it joined the WTO in 2001.

The case against China stated that Chinese restrictions limited other countries access to rare earths and gave China a distinct competitive advantage whilst damaging producers and consumers elsewhere. It was originally brought to the WTO jointly by the EU, US and Japan in March 2012.

Rare earths are essential parts of a range of hi-tech and green goods. Statistics show that China, with a rare earths reserve of approximately just 23 percent of the global total, supplies over 90 percent of the world’s market demand.

The panel rejected China’s argument that their export restrictions on rare earths were based on a need to protect the environment and to conserve rare earths, rather than a trade tactic. The report states that the overall effect of the restrictions is to encourage domestic extraction and secure preferential use of those materials by Chinese manufacturers.

In a statement China’s Ministry of Commerce (MOFCOM) expressed regret at the WTO’s decision, re-iterating their belief that the measures they have taken on rare earths is consistent with the objective of sustainable development promoted by the WTO.

The reports findings have received widespread media coverage in China, with a strong focus on MOFCOM’s statement of regret. The government’s  Xinhua news agency stated no matter the final outcome the industry should be strengthened to improve environmental protection. Other reactions were more vitriolic, citing China’s desire to protect the environment and stating that WTO ruling is unfair with the West showing double standards by complaining about export restrictions when it does not suit their own interests.

China has filed an appeal against the ruling, which has been hailed as a victory for the EU, US and Japan. The WTO appellate body now has 3 months to make a final decision on the case.

Although the result was not a surprise China now faces the challenge of deciding how they adjust their policy to implement the ruling. The industry is beset by problems related to pollution and waste of resources – this could be an opportunity for China to improve its production control and environmental protection.