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China’s Export Conundrum

 

In 2009, the European Union, United States and Mexico filed a complaint with the World Trade Organisation (WTO) against China’s export restrictions on certain raw materials, including bauxite, coke, fluorspar, silicon carbide and zinc.  They said that, firstly, these constraints — in the form of export taxes, quotas, licences and so on — caused domestic and global prices to diverge, giving Chinese firms an unfair advantage over those in nations that had to import the materials.  And secondly, they stated such restrictions violated WTO rules, as well as the terms of China’s accession to the body.  China retorted that the central reason for adopting the measures was to boost environmental and resource protection.

Despite China’s remonstrations, a WTO panel was established to investigate the issue at the request of the three complainants on December 21, 2009.  Pending its conclusions, it is worth understanding the true motives behind China’s export restrictions, while highlighting existing discrepancies and incoherence in the stance against them of the European Union and United States.

The latest WTO two-yearly review of Beijing’s trade policy, published on May 31, 2010, stated that China’s export restrictions may favour China with regard to materials for which China is price maker (that is to say for which China has the capacity to influence world prices through its traded volume) and, more generally, that export restrictions are not the most efficient measure to curb energy and resource consumption and protect the environment.  The report, which was qualitative in nature and lacking hard figures, concluded that the export restrictions, therefore, do more economic harm at a global level — by distorting fair competition — than they do environmental good.

Balancing the economic losses (for trade partners) and environmental gains (for China and the world) is hugely complex, however.  In fact, the sustainable management of natural resources is one of the keys to social stability in China.  According to China’s National Development and Reform Commission (NDRC), there are around 118 cities that used to be rich in natural resources, and where over-mining has caused major development problems, including environmental degradation, health deterioration and unemployment.

According to China’s Ministry of Land and Resources, of the 45 raw materials which compose the essential mix for meeting China’s development needs, only six will be able to maintain their normal carrying capacity by 2020.  In this dramatic context, it is particularly important for China, for its own sake, to limit over-exploitation of its resources and mitigate the associated environmental damages both at domestic and export levels.

China also has political motivations for its export restrictions.  Such restrictions inflict costs to domestic exporting industries, while helping China shift its export pattern toward energy-efficient products.  This is a major difference with other Asian countries such as Japan and South Korea, which incurred the costs engendered by export restrictions in exchange for membership to the international community (the so-called “Membership-Fee Theory of Export Control”).

China has already set clear domestic development goals — such as energy and resource saving — against which export restrictions can be deemed part of a coherent development policy package.  In addition, they are not implemented for financial reasons: the revenues generated by export-restrictive measures account for a very small share of total customs income.

Moving back to the specific dispute in hand, the knotty challenge for China is to justify its non-compliance with its WTO accession protocol (AP) — more specifically, article 11.3, which says 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.”

In fact, China started to impose massive export restrictions, particularly export tax and export VAT refund rebate on energy-intensive and resource products, as early as 2007.  If we follow the logic that the European Union and United States have adopted, then more of the products listed in Annex 6 of China’s AP — not only the raw materials — should be covered by the complaint.  They are not.  It is interesting to note that European Union countries and the United States compete directly with China in the markets of other products listed, such as iron and steel.  The fact that the complainants have focused on a limited number of raw materials would seem to suggest that these countries only want “fair competition” for products that they need to import — while having a looser definition of fairness for products in whose markets they are competing with China.

In the iron and steel sector, following the logic of the dispute over raw materials, some 50 steel products should also, by rights, be subject to WTO disputes.  However, the use of export tax on final steel products as well as on certain similar products in China has not yet been raised alongside the December 21 complaint.

One of the materials that are listed in the WTO dispute, coke (which carries a 40% export tax and does not benefit from a VAT refund in China), provides another example of EU and US policy inconsistency.  As we know, coke production is very carbon intensive and environmentally damaging.  The export-restrictive measures that China has adopted and explicitly designated for climate change mitigation goals within its National Program on Climate Change could be an efficient way to prevent carbon leakage — the situation where there is an increase in carbon emissions in one country as a result of emissions reduction elsewhere — and thus contribute to global greenhouse-gas emissions reduction in the coke sector.

Not long before September 19, 2007, the European Union decided to impose an anti-dumping duty on Chinese coke for six months.  Now, it is complaining about export restrictions.  In such circumstances, the EU policy coherence over time can be questioned.  The swinging policy on coke may leave the impression with some that China is never right on its price: a low price liberated at the border reflects a dumping motive while a high price as a result of export restriction for environmental purposes generates trade distortions.  How, then, should China set the export price?

Whether China wins or loses the case, the European Union and United States must work to clarify their trade policies and bring them into line with climate policies.  This is crucial to building sound and fair international trade and climate governance.


Xin Wang is a PhD student on the economics of climate change at University of Lille 1, France, and works as researcher at French think-tank the Institute for Sustainable Development and International Relations (IDDRI).  Tancrède Voituriez is the director of IDDRI’s global governance programmeand research officer at CIRAD.  This article was first published in chinadialogue on 12 November 2010 under a Creative Commons license.




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