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Rare Earth Elements in National Defense

quota levels were more restrictive.39 A U.S. Trade Representative (USTR) official was quoted as saying that the USTR continues to be “deeply troubled” by China’s use of market distorting export restrictions on raw materials, including rare earths.40 China’s government responded by saying that it would apply the same policies to both domestic and overseas companies in rare earth production, processing, and export.41 In addition to export quotas, China imposes export tariffs of 15% to 25% on rare earth as well.

In September 2010, China reportedly delayed shipments of rare earth to Japan (the world’s largest rare earth importer) for about two months because of a territorial dispute. This has given rise to concerns that China may attempt use its control of rare earth as leverage to obtain its political and economic goals. 42

The Chinese government has announced a number of initiatives over the past few years to further regulate the mining, processing, and exporting of rare earth elements, such as consolidating production among a few large state-owned enterprises and cracking down on illegal rare earth mining and exporting. The Chinese government contends that its goals are to better rationalize and manage its rare earth resources in order to slow their depletion, ensure adequate supplies and stable prices for domestic producers, obtain a more favorable return for exports, and reduce pollution. Critics of China’s rare earth policies contend that they are largely aimed at inducing foreign high-technology and green technology firms to move their production facilities to China in order to ensure their access to rare earth elements, and to provide preferential treatment to Chinese high-tech and green energy companies in order to boost their global competitiveness. Such critics contend that China’s restrictions of rare earth elements violate its obligations under the World Trade Organization (WTO).

Some have urged the USTR to bring a dispute resolution case against China in the WTO, similar to a case the United States brought against China in 2009 over its export restrictions (such as export quotas and taxes) on certain raw materials (including bauxite, coke, fluorspar, magnesium, manganese, silicon metal, silicon carbide, yellow phosphorus, and zinc). In that case, the United States charged that such policies are intended to lower prices for Chinese firms (especially the steel, aluminum, and chemical sectors) in order to help them obtain an unfair competitive advantage. China claims that these restraints are intended to conserve the environment and exhaustible natural resources.

In July 2011, a WTO panel issued a report that ruled that many of China’s export restraints on raw materials violated WTO rules. In particular, the panel rejected China’s argument that some of its export duties and quotas were justified because they related to the conservation of exhaustible natural resources for some of the raw materials. The panel stated that China was not able to demonstrate that it imposed these restrictions in conjunction with restrictions on domestic production or consumption of the raw materials so as to conserve the raw materials, protect the health of its citizens, or to reduce pollution.43 China is appealing the WTO panel’s ruling.

39 Inside U.S. Trade’s World Trade Online, U.S.,” EU Denounce New China Rare Earths Export Quota As Too Restrictive”, July 15, 2011.

40 Ibid. Chinese Ministry of Commerce press release, July 15, 2011. 42 New York Times, “China Said to Widen Its Embargo of Minerals,” October 19, 2010. 41

43 A s u m m a r y o f t h e W T O p a n e l r e p o r t c a n b e f o u n d a t h t t p : / / w w w . w t o . o r g / e n g l i s h / t r a t o p _ e / d i s p u _ e / c a s e s _ e ds394_e.htm#bkmk394r. /

Congressional Research Service


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