WTO Tackles China Trade Dispute

June 22, 2010

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China's recent move to restrict exports of certain raw materials is raising questions about the fairness and effectiveness of its new policies from economic organizations and trading partners.

A recent decision by the Chinese government to curb exports of some precious metals and raw materials is intended to be a conservation measure, whose stated purpose is to reduce the effects of industry on the environment. But the World Trade Organization (WTO) and several of China's major trading partners, including the United States, the European Union and Mexico, have raised objections to the new policy, claiming it manipulates trade flows to benefit Chinese companies at the expense of international competitors.

Following complaints from the U.S., E.U. and Mexico, judges from the WTO have been investigating "Chinese restrictions on exports of raw materials to determine whether duties on overseas shipments of nine commodities including coke and zinc are discriminatory," Bloomberg News reports. "China says the taxes are aimed at easing overproduction and emissions of carbon and sulfur gases from furnaces."

The primary complaints involve China's implementation of new tariffs that curtail the exports of raw materials considered crucial for foreign manufacturers, while keeping them less expensive and more readily available for Chinese manufacturing firms. The disputants claim these measures establish unfair barriers to global competition and, in fact, may not be as environmentally friendly as the Chinese have stated.

The commodities at the center of the conflict include bauxite, magnesium, manganese, silicon carbide, yellow phosphorus and zinc, which are key production materials in a wide range of American industries.

"China's export restraints on raw material inputs can create enormous competitive advantages for downstream Chinese manufacturers and exporters in markets around the world," according to a report on the trade dispute last year from the Office of the U.S. Trade Representative. "At the same time, the restraints seriously disadvantage U.S. and other foreign manufacturers, exporters and workers in many downstream industries that make or use processed steel, aluminum and chemical products."

Although the WTO's investigation of the matter asserted that China has made serious efforts to avoid protectionist pressures and boost global demand, it also raised questions about the long-term effects of the country's attempts to control exports.

"[E]xport restraints for whatever reason tend to reduce export volumes of the targeted products and divert supplies to the domestic market, leading to a downward pressure on the domestic prices of these products. The resulting gap between domestic prices and world prices constitutes implicit assistance to domestic downstream processors of the targeted products and thus provides them a competitive advantage," the WTO explained in its latest Trade Policy Review of China, released this month.

"Insofar as China is a major supplier of such a product, export restraints may also shift the terms of trade in China's favour," the report continued. "Also, some export restrictions might be imposed to pre-empt imposition of import restrictions by governments in export markets."

Although there is a history of U.S.-China trade disputes, delineating between policies that violate regulations versus those that are merely unpopular is a challenging process. According to E.U. trade commissioner Karel De Gucht, using targeted tariffs to offset specific shortfalls or protect against dumping is an acceptable practice, but implementing protectionism within a centrally planned economy is not, the Wall Street Journal explains.

Chinese authorities disagree with the current round of complaints. "China's practices are consistent with GATT [General Agreement on Tariffs and Trade] obligations and Article XX as the restrictions achieve health and environmental goals, an unnamed expert at the Beijing WTO Affairs Center said," according to the state-run newspaper Xinhua.

"It is absurd for the U.S. and the EU to press China on environmental protection standards while criticizing China for restricting exports of energy-intensive and highly polluting resources and products," a separate official at the Chinese Academy of International Trade and Economic Cooperation told Xinhua.

The WTO review asserts that China's export barriers have not fallen as fast as its import barriers, but for the U.S. and E.U., the conflict is likely part of a larger strategy to pressure Chinese authorities into allowing the yuan to strengthen against foreign currencies and to pursue more flexible free-trade opportunities.

Earlier

Manufacturers Claim China Dodges Anti-Dumping Duties

U.S. and E.U. File Trade Complaints Against China Over Exports

China Accused of Steel Dumping

Resources

WTO Questions Chinese Export Limits on Raw Materials by Jennifer M. Freedman Bloomberg News, June 1, 2010

WTO Case Challenging China's Export Restraints on Raw Material Inputs Office of the U.S. Trade Representative, June 2009

Trade Policy Review: China World Trade Organization, May 31 and June 2, 2010

E.U. Commissioner Wants U.S. Action on Trade by John W. Miller The Wall Street Journal, June 2, 2010

China's Restrictions on Resource Exports Consistent with WTO Rules: Experts Xinhua, June 2, 2010

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