CHINA MEASURES RELATED TO THE EXPORTATION OF RARE EARTHS...

In the World Trade Organization

CHINA – MEASURES RELATED TO THE EXPORTATION OF RARE

EARTHS,

TUNGSTEN AND MOLYBDENUM

(WT/DS431, WT/DS432, WT/DS433)

European Union's Comments on China`s Responses to the

Questions from the Panel following Second Meeting

Geneva, 17 July 2013

China-Rare Earths EU`s Comments on China`s Responses to Questions

(DS432) from the Panel following second meeting

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TABLE OF CONTENTS

EU'S COMMENTS ON CHINA'S RESPONSE TO QUESTION 66 .................................................................... 1 EU'S COMMENTS ON CHINA'S RESPONSES TO QUESTIONS 71 AND 72 .................................................... 3 EU'S COMMENTS ON CHINA'S RESPONSE TO QUESTION 73 .................................................................... 7 EU'S COMMENTS ON CHINA'S RESPONSE TO QUESTION 75 .................................................................... 9 EU'S COMMENTS ON CHINA'S RESPONSE TO QUESTION 76 .................................................................... 9 EU'S COMMENTS ON CHINA'S RESPONSES TO QUESTION 78 AND 79 .................................................... 11 EU'S COMMENTS ON CHINA'S RESPONSE TO QUESTION 85 .................................................................. 17 EU'S COMMENTS ON CHINA'S RESPONSE TO QUESTION 86 .................................................................. 17 EU'S COMMENTS ON CHINA'S RESPONSE TO QUESTION 87 .................................................................. 18 EU'S COMMENTS ON CHINA'S RESPONSE TO QUESTION 88 .................................................................. 20 EU'S COMMENTS ON CHINA'S RESPONSE TO QUESTION 89 .................................................................. 20 EU'S COMMENTS ON CHINA'S RESPONSE TO QUESTION 90 .................................................................. 21 EU'S COMMENTS ON CHINA'S RESPONSE TO QUESTION 91 .................................................................. 21 EU'S COMMENTS ON CHINA'S RESPONSE TO QUESTION 92 .................................................................. 22 EU'S COMMENTS ON CHINA'S RESPONSES TO QUESTION 93 AND QUESTION 96 .................................. 23 EU'S COMMENTS ON CHINA'S RESPONSES TO QUESTION 94 AND QUESTION 126 ................................ 25 EU'S COMMENTS ON CHINA'S RESPONSE TO QUESTION 95 .................................................................. 27 EU'S COMMENTS ON CHINA'S RESPONSE TO QUESTION 97 .................................................................. 28 EU'S COMMENTS ON CHINA'S RESPONSE TO QUESTION 100 ................................................................ 28 EU'S COMMENTS ON CHINA'S RESPONSE TO QUESTION 103 ................................................................ 31 EU'S COMMENTS ON CHINA'S RESPONSE TO QUESTION 104 ................................................................ 31 EU'S COMMENTS ON CHINA'S RESPONSE TO QUESTION 105 ................................................................ 31 EU'S COMMENTS ON CHINA'S RESPONSE TO QUESTION 106 ................................................................ 32 EU'S COMMENTS ON CHINA'S RESPONSE TO QUESTION 107 ................................................................ 33 EU'S COMMENTS ON CHINA'S RESPONSES TO QUESTION 108 AND QUESTION 109 .............................. 33 EU'S COMMENTS ON CHINA'S RESPONSE TO QUESTION 112 ................................................................ 34 EU'S COMMENTS ON CHINA'S RESPONSE TO QUESTION 114 ................................................................ 35 EU'S COMMENTS ON CHINA'S RESPONSE TO QUESTION 115 ................................................................ 35 EU'S COMMENTS ON CHINA'S RESPONSES TO QUESTION 116 AND QUESTION 117 .............................. 35 EU'S COMMENTS ON CHINA'S RESPONSE TO QUESTION 118 ................................................................ 37 EU'S COMMENTS ON CHINA'S RESPONSE TO QUESTION 123 ................................................................ 38 EU'S COMMENTS ON CHINA'S RESPONSE TO QUESTION 124 ................................................................ 39 EU'S COMMENTS ON CHINA'S RESPONSE TO QUESTION 126 ................................................................ 40 EU'S COMMENTS ON CHINA'S RESPONSE TO QUESTION 127 ................................................................ 40 EU'S COMMENTS ON CHINA'S RESPONSE TO QUESTION 133 ................................................................ 41 EU'S COMMENTS ON CHINA'S RESPONSE TO QUESTION 139 ................................................................ 41 EU'S COMMENTS ON CHINA'S RESPONSE TO QUESTION 141 ................................................................ 41 EU'S COMMENTS ON CHINA'S RESPONSE TO QUESTION 143 ................................................................ 42 EU'S COMMENTS ON CHINA'S RESPONSE TO QUESTION 144 ................................................................ 42 EU'S COMMENTS ON CHINA'S RESPONSE TO QUESTION 146 ................................................................ 43



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TABLE OF CASES

Short Title Full Case Title and Citation

China – Raw Materials Panel Reports, China – Measures Related to the Exportation of

Various Raw Materials, WT/DS394/R / WT/DS395/R /

WT/DS398/R / and Corr.1, adopted 22 February 2012, as modified

by Appellate Body Reports WT/DS394/AB/R / WT/DS395/AB/R

/ WT/DS398/AB/R

US – Gasoline Appellate Body Report, United States – Standards for

Reformulated and Conventional Gasoline, WT/DS2/AB/R,

adopted 20 May 1996, DSR 1996:I, p. 3



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TABLE OF EXHIBITS

DESCRIPTION

JE-188

Web-Published Notice on the 2013 Initial Approval List of Enterprises

Qualified to Export Rare Earths in the Annual Review (Ministry of

Commerce, Department of Foreign Trade, December 17, 2012)

JE-189 Sina.com.cn, Rare Earth Mining Controls said to “might as well not exist”,

real production remains over-quota every year (April 1, 2011)

JE-190 Xinhuanet.com, Rare Earth Industry Reorganizing, Guandong Staking an

Early Claim (Yancheng Evening News, February 28, 2012)

JE-191 Xinhuanet.com, China Minmetals Proposes Production Freeze, Revealing

Unspoken Rules inside RE Industry

JE-192 Quotes from China’s Export Quotas and Measures Promoting Downstream

Industries

JE-193 Professor L Alan Winters: Comments on China's replies to Questions 76

and 87

JE-194 Professor L Alan Winters: Comments on China's replies to Questions 78

and 86

JE-195 Professor L Alan Winters: Response to Professor De Melo, Exhibit CHN-

206 and certain points in China's Answers of 8th

July 2013

JE-196

Dudley Kingsnorth, “Rare Earths: An Industry Undergoing

Rejuvenation,” June 2013, published jointly by Curtin University and

IMCOA

JE-197 Professor Gene Grossman: Response to Professor Jaime de Melo



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This submission sets out the European Union's comments on a number of the points raised

in China’s Answers to the Panel’s written questions after the second substantive meeting

of the Panel with the Parties. The absence of a comment by the European Union on any

particular answer or argument made by China should not be regarded as agreement by the

European Union with China’s views.

EU's comments on China's response to Question 66

1. The European Union disagrees with the arguments put forward by China for the

reasons set out in its own response to Question 66. While the European Union will

not repeat all the arguments set forth in its own response,1 it would like to draw the

Panel's attention to certain incoherencies in China's argumentation about the

interpretation of the term "conservation" under Article XX(g) of the GATT 1994.

2. Firstly, in response to Question 66 China submits that its export quota, which

China describes as an act of "supply management", is not intended to protect or

promote domestic industry. At the same time, however, China states that the

export quota is needed to safeguard/protect against any risk that the market may

pose to its own economic development and its own economy.2

3. In the view of the European Union these two positions cannot be reconciled. Either

the quota protects the domestic industry and economy, in which case that function

of the quota is not conservation, or it does not. If it does serve the purpose of

protecting, as is the case here, the Panel should not stretch the meaning of

conservation in the manner suggested by China to fit within the concept a policy

objective which is separate and distinct from the objective of conservation. As

explained in our response to Question 66, neither the text nor the context of the

provision supports such a reading. Indeed, interpreting conservation in this manner

would go contrary to customary rules of treaty interpretation by reducing the

safeguard that chapeau represents against protectionism into a nullity.

4. China alleges that the EU relies on the chapeau in a manner as to read into Article

XX(g) a per se prohibition against export quotas as part of a conservation policy.

This allegation is wrong and clearly attempts to mislead the Panel. By asking to

1 See European Union's replies to the Panel's questions following the second meeting of the Panel with

the Parties, paras 1-8. 2 See e.g. China's response to Question 97 and 120. The objective of safeguarding its economy is also

the motivation behind export quotas on tungsten and molybdenum, as China explains in para. 203 of

its replies to the Panel's questions following the second meeting of the Panel with the Parties.



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consider the text of the chapeau as context in interpreting the scope of

"conservation" under Article XX(g) the European Union asks the Panel for no

more than to apply the customary rules of treaty interpretation, which is something

that the Panel is in any event required to do.

5. Taking the chapeau into account does not, as China argues, result in a per se

prohibition of export quotas as instruments of conservation. The chapeau prohibits

"protectionism" it will therefore only result in a prohibition of measures which are

protectionist. The European Union did not submit that all export quotas are per se

protectionist. The European Union has, however, explained why the export quotas

at issue in this dispute, the purpose of which is to allocate limited supply and

thereby determine the location of consumption in a manner which inherently

protects and favours domestic consumption are protectionist.

6. China's proposed interpretation of "conservation" rests on a misreading of the

panel report in China – Raw Materials which concerns the Preamble of the WTO

Agreement and selective quotes from the first recital of the Preamble of the WTO

Agreement. It is notable that China never as much as attempted to reconcile its

proposed interpretation with the text of the third recital of the Preamble, which

confirms the WTO Members' agreement to pursue the objectives set out in the

Preamble (including the objective of sustainable development) through free trade

and non-discrimination. China's proposed reading of "conservation" therefore goes

contrary to the text of the chapeau of Article XX, as well as the very keystone

principle of the WTO, as reflected in the Preamble of the WTO Agreement.

7. The European Union also disputes China's interpretation of the principle of

sovereignty over natural resources. In its response China once again invokes the

principle of sovereignty and argues that "it is simply not credible that resource-

endowed countries would, by acceding to the WTO, have relinquished this

fundamental norm and not be permitted to balance the needs of their own citizens

with the rights of foreign users of such resources".3

8. As already clarified by the panel in China – Raw Materials4 the ability to enter

into international agreements − such as the WTO Agreement − is a quintessential

3 See China's response to the Panel's questions following the second meeting of the Panel with the

Parties, para. 3. 4 Panel report, China – Raw Materials, para. 7.382.



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example of the exercise of sovereignty. "In joining the WTO, China obtained

significant commercial and institutional benefits, including with respect to its

natural resources. It also committed to abide by WTO rights and obligations."5

9. In sum, China's WTO commitments are clear and do not allow for the possibility

of justifying under Article XX(g) of the GATT 1994 export restrictions adopted in

aid of economic development if they operate to increase protection of the domestic

industry.6 This is not, as China argues a limitation on its right to economic

development, it is no more and no less than a ban on protectionism.

EU's comments on China's responses to Questions 71 and 72

10. The European Union notes that in giving its conditional agreement to the panel's

analysis in China – Raw Materials, China in fact tries to reformulate the test that

"the impact of the export duty or export quota on foreign users is somehow

counter-balanced with some measure imposing restrictions on domestic users and

consumers".7 What China does in its response is turn the test on its head; China

contends that the test would be limited to verifying that "the achievement of the

conservation objective – by means of export quotas – […] not be undermined by

unlimited domestic production or consumption"8.

11. It is obvious that, while the panel in China – Raw Materials spoke of a

requirement of balance between two sets of restrictions9 pursuing the same goal

and affecting in a balanced manner domestic users on the one hand and foreign

users on the other; China speaks of restrictions on foreign users, which would not

be undermined by unlimited domestic production or consumption. China's

approach fails to check for the existence of a structural balance of burdens and

even implies that foreign users should carry most of the burden of the conservation

policy. China's approach therefore significantly differs from the clarification that

the panel in China – Raw Materials provided about the test under Article XX(g).

12. It is worthwhile to recall that the Parties to this dispute agree that an effective

restriction on extraction serves the purpose of conservation by simultaneously

restricting access to the materials for both domestic and foreign users. China,

5 Ibid. 6 Ibid. para. 7.386. 7 Panel report, China – Raw Materials, para. 7.465. 8 China's response to the Panel's questions following the second meeting of the Panel with the Parties,

para. 8. 9 I.e. restrictions on foreign users (export duties and export quotas) and restriction on domestic users.



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however, contends that this is not sufficient and that it is entitled - in the name of

conservation - to put an additional barrier affecting only international trade by

additionally restricting exports.10

China alleges that doing so is balanced and

contends that market forces will ensure that quantities earmarked for export will

not be diverted to the Chinese market. China, however, fails to provide any

explanation as to why – in its view – these same market forces could not function

to the benefit of both domestic and foreign consumers (i.e. making export-

safeguard measures unnecessary) and how this trade restrictive, distortive and

divertive measure serves the purpose of conservation at all. Even at this late stage

of proceedings, China still has not shown the Panel that it has any measure in place

that impacts its domestic consumers of rare earths, in order to act as a "counter-

balance" to the export quotas it imposes, which only impact foreign users. This is

what is required by the "even-handedness" test of GATT Article XX(g).

13. China contends that domestic production and consumption restrictions produce the

same effect,11

and as a result consumption caps would be entirely superfluous. The

European Union disagrees with China's argument. The existence of a production

restriction is not sufficient to demonstrate a structural balance or even-handedness

of restrictions imposed on foreign consumers and domestic consumers.

14. Firstly, a production restriction measure cannot be considered as balancing out the

restrictive effects of export restrictions, when it is clear that foreign consumption is

restricted both by restrictions on extraction and production and further restricted

by restrictions on export, whereas domestic consumption at most12

faces

restrictions on extraction and production.

15. Secondly, a production restriction (coupled with an export restriction) will not

necessarily produce restrictive effects on domestic users. This will depend

primarily on the level at which it is set, as well as on the availability of materials

"earmarked" for export to domestic consumers. If the production cap is set

10 The European Union notes that China in reality first introduced export quotas, which were

supplemented by an extraction plan only in 2006 and a production plan in 2007. As it is apparent from

Exhibit CHN-137 export quotas were gradually tightened and significantly reduced in July 2010,

whereas extraction and production targets saw an opposite trend. 11 China's response to the Panel's questions following the second meeting of the Panel with the Parties,

para. 9. 12 That is assuming the extraction and production quotas are enforced, and assuming that these quotas

are set at such levels where, once the amount reserved for exports is deduced, the outstanding quantity

available for domestic consumption actually restricts domestic consumption.



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sufficiently high, it will not have any restrictive effects on domestic users – not

even under a scenario where the entirety of the export quota has been utilised.

However, even under a scenario where the production cap is set at a level at which

it could restrict domestic consumption, if the export quota is fully utilised, this

restriction will not materialise if domestic users can buy the materials "earmarked"

for exports. In the case of Chinese restrictions on rare earths, we can observe both

(i) extraction and production limits which are set very high and (ii) no instrument

(comparable to the export quota) that would prevent Chinese users from buying all

the rare earths produced in China.

16. China's response to Question 71 also repeats its flawed logic that due to the fact

that in 2012 the export quotas on rare earths remained unfilled, then somehow this

fulfils the even-handedness requirement of Article XX(g). They also try to support

their arguments by reference to the theory put forward by Professor De Melo who

expounds that "when export quotas are not filled, there cannot be any difference

between domestic and foreign prices as a result of the export quotas. Hence, there

cannot be any un-evenhanded impact on foreign users."13

As Professor Winters

notes in Exhibit JE-18314

, while Professor de Melo's assertion may hold in the

context of a simple model with full certainty and perfect competition, this assertion

is not true in the absence of these conditions as Professor Grossman (Exhibit JE-

164) and Professor Winters (Exhibit JE-141) have shown.

17. While the European Union recalls, that the Appellate Body clarified that Article

XX(g) does not require an effects test15

, it notes for the sake of completeness that –

contrary to what China implies in paragraphs 12 – 13 and 16 - 17 of its responses -

a comparison of the data on the actual extraction and production, as well as

domestic consumption and actual exports demonstrates the existence and the

effects of this systemic imbalance.

18. China does not dispute that what matters in terms of conservation is reducing the

level of extraction. Facts on the record show that actual extraction declined from

13 China's Replies to Panel Questions, 8 July 2013, para. 13. 14 See p.1. 15 See Appellate Body report, US – Gasoline, p. 18.



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its peak in 200616

to 2011 by 36%. However, one needs to put this in perspective

with the decline by 71% of actual exports and the increase by 32% of actual

domestic consumption during the same period.

19. Firstly, looking at the overall decrease since 2006 blurs the year to year evolution

of rare earth extraction and production and a possible link between the extraction

and production quotas. By observing the data for each year it becomes clear that

until 2010, the extraction quota does not seem to influence the actual extraction at

all. 2010 is the first year when the actual level of extraction starts decreasing and

getting – coincidentally – close to the quota. At the same time, in 2010, the actual

level of production (118,889 REO tons) significantly exceeds the actual level of

extraction (89,259 REO tons).

20. In addition, there is another argument which seems to support the premise that the

actual level of extraction as well as production is driven by demand rather than by

the government's conservation policies. For 2011 and 2012, the actual level of

extraction dropped below the extraction quota. This begs the question why would

producers have mined even less than they are allowed to, if the extraction quota

has, as China claims, a limiting effect. According to China's own logic, a quota

that is unfilled does not have any restricting effect.

21. The same is true with respect to domestic consumption in 2012 – the figures

provided by China on domestic consumption (64,797) stay below the actual

production (82,000 REO tons) minus the actual exports (14,000 REO tons). This is

in line with evidence provided as Exhibit JE-167 and Exhibit JE-168 about the

falling prices and Chinese producers actually halting production for several

months in order to reduce supply and thereby trigger an increase in prices.

22. As is evident from Figure 1 below, domestic restrictions have not produced any

restrictive effects on domestic users. Chinese domestic consumption only dropped

slightly in the most recent years as a result of the global slowdown. The European

Union explained in the context of its opening oral statement at the second meeting

of the Panel with the parties, why the global slowdown is the real cause behind the

recent reduction in Chinese domestic production and consumption, and that there

16 This is without prejudice to the European Union's position about the correct reference period for

observing the effects of Chinese WTO-incompatible export restrictions, as set out in the European

Union's response to Question 78.



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is no causal link between this reduction and the Chinese caps on extraction and

production. 17

23. The European Union further notes that China through its recently submitted

Exhibit CHN-200 acknowledges the effects of the global financial crisis on rare

earths consumption and thus corroborates the European Union's line of argument.

Figure 1 (Source: Exhibits CHN-137 and CHN-191)


24. By means of comments on the first part of China's response, where China presents

its opinion about the interpretation of the term "restriction" under Article XX(g),

the European Union refers to its own reply to Question 73. As noted in that

context, the European Union agrees that a restriction does not necessarily have to

take the form of a measure that reduces the amount of material extracted in

absolute terms for it to fall within the scope of Article XX(g).

25. Having said that, however, once a WTO Member determines its desired level of

protection, it should pursue it through measures that produce a balanced restrictive

effect on domestic and foreign users and shall not – as China does in the context of

rare earths, tungsten and molybdenum – pursue it through a set of measures that

shift the burden of its conservation policy on foreign users of the protected

material.

17 See para. 54.

0

20000

40000

60000

80000

100000

120000

140000

160000

180000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

actualextraction

actualproduction

domesticconsumption

actual export



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26. In the second part of its response (paras 21-22) China attempts to justify the

increases in its extraction and production quotas in 2010 and 2011. In this respect,

the European Union once again contests China's allegation that there is a causal

link between the extraction and production caps and the drop in extraction and

production in 2011 and 2012. As explained in the context of our opening oral

statement and in response to Question 72, as well as in comment to China's reply

to said Question above, China did not establish the existence of a causal link

between its restrictions on extraction and/or production and the drop in the actual

extraction and production. All evidence on the record, including Exhibit CHN-200,

shows that Chinese actual extraction and actual consumption were reduced as a

result of the global slowdown and as a result of efforts by Chinese producers of

rare-earths to stabilise prices.18

Contrary to what China alleged in its response, the

evidence that China put on record does not show that the actual level of rare earths

extracted in China would have been greater but for the existence of the extraction

and production quotas and their enforcement.19

27. Another manipulation is that China does not include the evolution of the export

quota in this comparison. The forced decrease in exports clearly has an impact on

extraction and consumption, and can allow domestic consumption to remain

unrestricted.

28. What China also fails to address in its response, but is clear from the figures it

submitted for actual production and actual extraction (Exhibit CHN-137 and CHN-

191), is that actual production has been since 2006 consistently and often by a

considerable margin exceeding actual extraction (as well as the extraction and

production quotas). This undermines China's argument that the production quota

serves an enforcement function with regard to the extraction quota. Furthermore, it

demonstrates that the actual production is independent of the extraction quota and

its evolution, which disproves China's allegation that the decline in production is

linked to the extraction quota (see Figure 1 above).

18 See Exhibit JE-167 and Exhibit JE-168. 19 Indeed, assuming the figure China provided for actual extraction in 2012 is correct, a fact which is

disputed, its enforcement efforts would have had to be quite formidably improved to have pressed the

actual extraction more than 16.000 REO tons below the allowed level. The European Union therefore

contests the credibility of China's data and line of argument.



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29. By means of comments the European Union refers to its own response to Question

75, as well as its comments to China's response to Question 73.

30. The European Union further reiterates that China has not – and indeed cannot –

establish any causal link between its extraction and production caps and the

decrease in the actual production and domestic consumption in most recent years.

Indeed, as noted in comment on China's response to Question 72, it is curious that

China claims that its extraction and productions targets (which have never actually

bound domestic consumption since their introduction) suddenly have the power to

reduce extraction and production far below the legally permitted level (in 2012),

while at the same time alleging that such an effect is impossible in the context of

export restrictions (which contrary to extraction and production plans for domestic

users have bound foreign consumption; severely after the July 2010 tightening).


31. The European Union disagrees with China's arguments in response to Question 76.

The fact that the export quotas and export duties at issue in this dispute have been

challenged by the Complainants under different legal claims is a reflection of the

fact that they are infringing different WTO obligations, and are also imposed by

different legal instruments under Chinese domestic law. However, this does not

detract from the fact – which China has not disputed – (i) that both export quotas

and export duties are in place and (ii) that both only affect market players outside

China. Both also produce similar effects and ultimately distort the market

conditions in favour of China.

32. The European Union also notes the artificiality of China's argument, which puts

into question the genuineness of the link between the measures at issue20

and the

legitimate objective they allegedly pursue. China submits in paragraph 27 of its

response that its decision to invoke separate defences with respect to export quotas

and export duties was guided by the decision of the complainants to invoke

different WTO-obligations in their claims. Surely China's decision on defences

should not be guided by the complainants' claims or even by the WTO-obligations

concerning quantitative restrictions and export charges. Its decision should be

guided by the actual objective of its measures.

20 I.e. export quotas and export duties.



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33. As already noted, China had no problem in alleging that export duties and export

quotas (because of their effects) together formed part of its conservation policy for

exhaustible natural resources. This was despite the fact that the claims with respect

to quotas and duties were made under different legal provisions and despite the

fact that quotas and duties were enacted through different domestic legal acts.

China contends that the fact that it invoked a different provision to defend its

export duties requires the Panel to isolate the effects of export quotas and export

duties. The European Union disagrees; the Panel's analysis of the effects of China's

export restriction on foreign users is not limited by China's litigation strategy.

Accepting China's argument would prevent the Panel from making an objective

assessment of the facts before it.

34. Furthermore, if one were to accept China's premise that the various elements that

form part of its conservation policy cannot be analysed in isolation, because they

reinforce each other and produce similar and/or complementary effects.21

The

same should hold when analysing effects on foreign users, which are manifestly

affected by export quotas and export duties, which produce similar and

complementary effects22

. China's incoherent approach speaks for itself about the

credibility of China's arguments.

35. As China concedes in paragraph 30 of its responses, export duties can affect the

operation of export quotas. However, China then continues that its export duties

are not capable of having such an effect because of the low demand elasticity for

rare earth products. In so doing China contradicts its own premise that export

duties are necessary to reduce extraction and processing and as result reduce the

negative impacts of extraction and processing on the environment. If demand

elasticity is as low as China alleges, than its export duties are incapable of having

the effect China tried to convince this Panel they had. China's line of argument is

incoherent and as such simply not credible.

36. While we may not have all the data to determine beyond any doubt that the

removal of the duties could result in quotas becoming binding again, the effect that

export duties certainly do have is that of increasing the price gap23

between

21 In para. 58 of its response to Question 78 China argues that "[…] it is not possible to now "unpack"

these various conserving measures to isolate the effects of the export quota system". 22 See panel report, China – Raw Materials, para. 7.231; see also Exhibit CHN-157, p. 7. 23 Which exists already on account of export quotas.



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domestic and foreign prices, which in turn creates a competitive advantage for

Chinese downstream producers over foreign producers; this advantage would not

have existed in the absence of export duties. It is also because of this

discriminatory effect on foreign users - which they share with export quotas - that

the effects of both export duties and export quotas have to be analysed together -

and not because of their relation to conservation or environmental protection the

existence of a genuine link with which is in any event highly questionable.

37. The European Union also refers the Panel to Exhibit JE-193,24

in which Professor

Winters responds to the critique contained in Exhibit CHN-195, on which China

relies in its response to inter alia Question 76.

EU's comments on China's responses to Question 78 and 79

38. For the reasons set out in its own response to Question 78 the European Union

disagrees with China.

39. The European Union submits that it would be unconceivable to accept that after

nearly a decade and a half since China has been restricting, distorting and diverting

international trade by imposing export restrictions on trade in rare earths, one

could accept that today can be regarded as a normal year and the relevant period

for observing the effects of these restrictions on prices and/or more generally. If

one wanted to look at "today", this could only be done by resorting to a

counterfactual analysis by means of which we could establish what today would

look like in the absence of over a decade of China's export restrictions. Pretending,

however, that those restrictions had no effects on the demand patterns and prices

today would be tantamount to rewarding almost 15 years of China's WTO-

incompatible behaviour.

40. 2013 is not a normal year. The demand for rare earths is still below the levels that

we might expect it to be once the western economies fully recover from the

financial crisis and is certainly below the levels where it would have been in the

absence of China's export restrictions. Hence, as Professor Winters explains in

Exhibit JE-182, one cannot conclude from any equality or smaller gaps between

24 The European Union has in part rebutted Exhibit CHN-195 in the context of its response to Question

145 and provides Exhibit JE-193 in rebuttal to arguments that China presents in its replies to Question

76 and 87, which largely rely on the analysis contained in Exhibit CHN-195.



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domestic and export prices that the export quota is having no effect and that it will

continue to have no effect as the world economy continues to recover.

41. Still, against this evidence, China continues to assert in its reply to Question 78

that the rare earths market is now back to normal.25

The European Union submits

that there is no basis for such a conclusion. China claims in its reply to Question

78 that normality has arrived because “The market now has eliminated

speculative-driven extremely high prices and distortions from the intense

speculation during the period from mid-2010 to mid-2012”.26

As Professor

Winters explains in Exhibit JE-194, even in its own terms this is not an argument

that May and June are actually ‘normal’. Even ignoring the absence of independent

evidence of the absence of speculation and the use of the term ‘more normal’

instead of "normal", this statement just sets up a circular argument. It identifies

normality by claiming that prices are lower and undistorted, but then goes on to

say that because the current situation is normal, we can take the low and

undistorted prices as an indicator that the export quota has no effect under

‘normal’ conditions. To prove the latter assertion, one would need to examine

prices for a period whose identification as normal was based on other criteria than

prices; in these other dimensions China offers only two weak claims only one of

which is supported by evidence.

42. There is no doubt that prices are currently low, but as Professor Winters notes,27

this is abnormal rather than normal. The demand for rare earths is still depressed.

We might assume, as do Dr Humphreys and China, that de-stocking has slowed

down because stocks are finite, although even this statement is barely supported by

any evidence. However, for ‘normality’ we need also to be sure that stocks do not

need to be replenished (due to uncertainty about future supply) , and that as use-

demand in western economies slowly recovers, firms will be able to procure the

quantities of rare earths that they need from an “undistorted” marketplace. No

evidence is offered for either of the latter elements and the European Union

submits that no such evidence can be provided. With the slow recoveries of the

25 It quotes from Exhibit CHN-186,a paper by Dr David Humphreys, where China's expert concludes

that “there is a strong case to be made that the conditions in rare earths markets now (May-June 2013)

are closer to ‘normality’ than they have been at any time during the preceding three years” (emphasis

added). 26 See China's replies to Panel's Questions following the second meeting of the Panel with the Parties,

para. 46. 27 See Exhibit JE-194, p. 3.



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-13-

western economies, use-demand is still depressed. Moreover, as discussed in

Exhibits JE-141 and JE-193, the uncertainty created by the mere existence of a

unilateral export quota by the world’s predominant supplier discourages the use of

rare earths outside China (at a loss for the companies that are producing

downstream products outside China), even if demand is currently not constrained

by the export quota because it is below the levels of exports permitted by that

quota.28

43. With regard to paragraph 49 of China's response and the assertions made on the

use of certain metals in downstream products, the European Union notes that the

arguments put forward by China do not sustain any viable thesis, and are

fundamentally misleading. China alleges that price differences are not visible in

the case of metals used for the production of NdFeB magnets as well as NiMH

batteries, which account for more than 50% of rare earths use by value.

44. First, the European Union notes that what China does not say is that these two

applications also account for 39% (therefore less than 50%) of rare earths use in

terms of REO weight29

, which is more indicative of the scale of industrial use; this

means that in the case of remaining 61% of rare earths applications, the situation

might be completely different, as - according to China's own calculation in Exhibit

CHN-196, seven out of 15 rare earths presented in Table 2 feature price

differences between FOB and domestic prices.

45. Second, it should be noted that while permanent magnets and NiMH batteries are

manufactured mainly from alloys of Neodymium, Lanthanum and Cerium metals,

the latter are primarily processed from oxides. When looking at figures in Table 2

of Exhibit CHN-196, FOB prices of oxides of Neodymium, Lanthanum and

Cerium feature price differences of more than 10% over domestic prices, and this

even according to China's methodology of adjustments.30

46. Unlike China, the European Union has not attempted to limit the Panel's

assessment to a moment in time which best suits its line of argument. The evidence

that we have put before this Panel analyses the information going as far back in the

28 “Under-filled export quotas do not indicate that the quotas impose no costs on non-Chinese users”

(Exhibit JE–141). 29 See Rare Earths Report, Table 4.2 (JE-129). 30 It should be noted that this argument is made without prejudice to the European Union's position that

China's analysis and the methodology are inadequate and that the price analysis provided in Exhibit

JE-169 represents a more accurate overview of the price effects of China's export quotas.



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past as possible.31

The evidence put forward by the Complainants demonstrates

convincingly that Chinese export restrictions created a price gap between domestic

and foreign prices for rare earths and that this price gap continues to exist. We

have also demonstrated that the export restrictions and the manner in which China

sets and administers them generate business uncertainty, which has carried

significant costs for non-Chinese market operators. The price gap and the business

uncertainty have translated into an advantage for Chinese downstream producers

of rare earths products over their foreign competitors. All these effects have

nothing to do with conservation within the meaning of Article XX(g) of the

GATT. On the contrary, they resulted32

in an ever increasing domestic production,

extraction and consumption thereby undermining and not supporting China's

conservation objectives.

47. China also relies on the opinion of its expert Dr David Humphreys (Exhibits CHN-

153 and CHN-186) in support of its argument that the price increase to foreign

prices in July 201033

reflect the effect of outside speculators and cannot be

attributable to Chinese export restrictions. The European Union contests China's

allegation and Dr Humphreys opinion on the matter. The European Union notes

again that speculation is actually encouraged by the existence of the quotas. So if

speculation is what China is worried about, keeping the export quotas is only

making things worse. Furthermore, as discussed in Exhibit JE-19434

, Exhibits JE-

129 and JE-169, demonstrate beyond reasonable doubt that there is a causal link

between the severe tightening in China's export restrictions on rare earths and the

increase of foreign prices.

48. In paragraph 60 of its response to Question 78, China refers to the export quota

tightening from 2008 to argue that since it did not produce the same effects as the

July 2010 tightening, this disproves the claim that what triggered the increase in

the gap between foreign and domestic prices in July 2010 cannot be attributed to

the Chinese export quotas. In rebuttal the European Union refers to Exhibit JE-

169, in which Professor Winters explains:

31 I.e. November 2007, prior to which there is no publicly available data on pricing. 32 But for the slight decrease in 2011 and 2012 due to the global slowdown. 33 The European Union notes in this respect that China's reply in para 54 et seq alleges that the price

increase only occurred in 2011. As Exhibit JE-169 demonstrates, this statement is factually incorrect. 34 L. Alan Winters: Comments on China's replies to Panel's Questions 78 and 86 (Exhibit JE-194).



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-15-

China refers to three export quota ‘events’ that had no effect on

prices and argues from this that export quotas have no effect. The

‘events’ are (i) the first cut in export quotas in 2008, (ii) the cut in

export quota from 2009 to 2010, which China implies (by looking

at annual average prices in Annex 1) should have had observable

effects throughout the whole of 2010 and (iii) the announcement

of quotas for the first half of 2011 which were fully 30% below

those for the first half of 2010. But the lack of effect of these

‘events’ is easily explicable and perfectly consistent with the big

shock to rare earth markets being the 5th July 2010 announcement

of 2010 second half quotas: (i) the 2008 announcement was not

particularly credible and it is also possible that it was not very

tightly binding vis-à-vis the previous level; hence there is no

surprise that it had little effect;13 (ii) the cut in 2010’s annual

quota was revealed only in July 2010 and hence could affect

prices only in the second half of that year, and (iii) given that the

new annual rate had been revealed in July 2010, the January 2011

announcement did not imply any further tightening. The recent

history of rare earth prices is really that of one event: after a

period of relative stability from at least November 2007, the

market received a massive shock in July 2010; huge buying

occurs and a stock-cycle is initiated; after a year or so of high

prices and given low aggregate demand the stock-building

unwinds and prices fall over the next couple of years. The prices

of July 2010 to July 2011 are almost certainly higher than those

justified by simple commodity balances of new supply and

demand for immediate use, but those of 2012 and 2013 are almost

certainly lower.35

49. Finally, in rebuttal to China's arguments in paragraphs 62 to 67 and Exhibit CHN-

260, which provide a critique to Professor Winters paper submitted as Exhibit JE-

169, the European Union submits Professor Winter's response to said paper as

Exhibit JE-195. China criticizes Exhibit JE-169 based on four alleged flaws:

50. First, it alleges that it was incorrect to use the years 2000-2006 as benchmark to

estimate what foreign demand would be in 2012, given that China significantly

reduced extraction and production of rare earths since 2006. This criticism is

entirely unfounded, as that section of Exhibit JE-169 deals only with the

relationship between export demand and the export price, so that conservation

policy is not relevant. In any event, and importantly, it is not correct that China’s

production of rare earths is ‘much lower’ today than it was over 2000-2006. In

reality it is less than 6 percent lower: the average over 2000-06 is 87.1 MT REO,

the figure for 2012 is 82 MT REO. Professor De Melo quotes figures for large

declines in extraction and in the production of smelted and separated products

35 See Exhibit JE-169, p. 13 (footnotes omitted).



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since 2006 and 2007 respectively (2006 is the peak year for both), but even for his

chosen years the decline in planned exports (the export quota level in 2012 relative

to actual exports in the chosen base year) is larger. Note, again, that while China

has asserted that the declines in rare earth outputs will have raised prices for

domestic as well as foreign users, they have not offered any estimate of by how

much. Thus they are not able or not willing to estimate how much of Professor

Winters estimate that export prices would have had to rise by 95%-160% in a

‘normal’ 2012 would have been due to non-discriminatory production policies and

how much to discriminatory export policies.

51. Second, China argues that it is not plausible that the rest of the world (RoW) could

increase its use of rare earths from current levels back to pre-2006 levels.

However, as Professor Winters explains,36

it is perfectly credible that, had the

world economy not crashed and had the Chinese not slashed available exports in

such an unexpected fashion in 2010, the RoW’s demand for rare earths would have

continued to grow after 2006 let alone remain static at 2006 levels. As world

demand recovers from the crisis, it is entirely realistic to expect the demand for

downstream goods and hence for rare earths themselves to pick up strongly.

52. Thirdly, China alleges that Professor Winters did not take into account the rate of

China's economic growth. However, as Professor Winters notes,37

the difference in

the rates of growth of China’s and RoW’s demand for downstream products could

not possibly explain why Chinese consumption would increase from approximate

equality with the RoW’s in 2006 to three times the RoW’s level by 2010 and 2011.

Professor De Melo offers no analysis as to why the RoW’s demand for rare earths

could have shrunk significantly since 2006.

53. Fourth, China alleges that Professor Winters ignored in Exhibit JE-169 that foreign

supply of rare earths is also not static and that the RoW may increase its supplies

of rare earths. The European Union notes that at this point of time the RoW’s

output of rare earths had not increased significantly so the criticism is moot. In

future, RoW output of rare earths may increase and this may start to relax the

pressure on world prices. However, in the foreseeable future China will remain the

dominant supplier of rare earths and so it is not possible to absolve China of

36 See JE-195, p. 5. 37 Ibid.



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-17-

responsibility for the adverse effects of its export restrictions on the grounds that

the RoW will eventually increase its output.


54. The European Union notes that China's explanations are (yet again) incoherent. In

paragraphs 71 and 72 of its response, China puts forward causes for paradoxically

low FOB prices based on Metal Pages reported prices. Further on in its response

(paragraph 73), however, China puts into question the reliability of the Metal

Pages data, by calling them 'estimates' rather than actual reported prices,

undermining its own argumentation.

55. Having said that, the European Union contests China's argument in paragraph 72,

according to which FOB prices would be generally low across the board, as

Chinese exporters would demand lower prices than in the domestic market. If such

situation would indeed occur generally, a similar business approach and trend

would have been visible through longer time frames than just in a few isolated

periods, and might have been only true for a few exporters/traders at best. The

mere fact of selling the rare earths material at any cost in one year (to keep a quota

share for the next year) would not make sense economically, precisely because

keeping the quota share for the "privilege" of "selling cheaper" in the future would

not make sense. Under such circumstances it would clearly make more sense to

stock the unsold material for use in more lucrative transactions - in the near future

or in the next years.

56. Based on the above, the European Union submits that the only reasonable

explanation for the abnormal situation of FOB domestic prices exceeding FOB

prices in certain (rare) periods is the flawed methodology of calculating excessive

and unrealistic adjustments of FOB prices by China, which lead to abnormal

results.


57. To avoid repetition the European Union refers the Panel to its comments to China's

response to Question 78 and Exhibit JE-194.

58. In addition the European Union wishes to note certain factual errors in China's

response to Question 86.



_______________________________________________________________________

-18-

59. First, in paragraph 78 China alleges that "there was no consistent widening of the

price gap as a result of the reduction of the export quota in 2010". The European

Union has refuted this allegation which China made already in the context of its

second written submission, by means of the price analysis submitted as Exhibit JE-

169.

60. Second, in paragraph 79 China states that "both domestic and foreign prices

increased in 2010 […]" and alleges that this was a result not only of the tightening

of the export quota and but also of an unprecedented and significant reduction of

its production quota, as well as other measures. China's statement misses the point.

The Complainants are not challenging China's extraction or production

restrictions, and do not even contests (or complain about) the fact that those too

may have resulted in price increases. However, the price increases affected all

users of rare earths in a non-discriminatory manner. Conversely, the severe

tightening of export quotas and its effect on export prices, created a price gap

between domestic and foreign prices.

61. Third, China implies that Table 2 in Exhibit JE-169 demonstrates very limited

price differences for what China describes as key rare earths (metals, not oxides).

While it is correct that for 2013 the price differences for those materials are small,

this is not at all the case for preceding years, as China implies.


62. China makes three arguments in rebuttal to Exhibit JE-141. First, that its export

duties cannot be the reason for the lack of export quota fill in recent years. Second,

that the costs of substitution away from rare earths apply to Chinese and non-

Chinese firms alike, and third that the costs associated with the uncertainty in rare

earth supply should be seen as part of the risk businesses face, and it affects all

market operators.

63. To avoid repetition, the European Union refers the Panel to its comment to China's

response to Question 76, its response to Question 145, as well as Exhibit JE-193 in

rebuttal to China's first argument.

64. Second, China claims in paragraph 88 that conservation policy is intended to

incentivise the costly substitution of other materials for rare earths and that the

incentives affect Chinese and non-Chinese users alike. While this may be a fair



_______________________________________________________________________

-19-

account of the consequences of a genuine conservation policy, the actual policy in

2010 affected only exports38

and may even have reduced Chinese users’ incentives

to substitute away from rare earths.39

Thus the burden of that policy fell wholly on

overseas users, while the legitimate objective of conserving these natural resources

should be shared by all those who make use of them (i.e. firms in China and firms

abroad). Other instruments (and their enforcement)40

may have additionally

affected both domestic and foreign users, but the incidence of an export quota was

felt wholly and exclusively abroad.

65. Lastly, China's expert Professor De Melo argued in Exhibit CHN-195 that costs

associated with uncertainty are normal costs and affect all consumers on any

commodity market.41

Accordingly, China submits in paragraph 90 (i) that

accepting the argument that uncertainty suppresses demand where adjustment is

costly would prevent a government from implementing any conservation policy

and (ii) that Professor Winters through his argument seeks a world in which

business is free from any uncertainty. Neither is true and China advances no

textual evidence that it is. Paragraph 90 states, inter alia, that:

China […] do[es] not have any particular obligation to shield

foreign and domestic consumers of products such as rare earths

from the normal risks of running a business that relies on an

exhaustible natural resource subject to the vagaries of market

fluctuations and changes.

66. While there is no obligation on WTO Members to remove the normal risks of

running a business that relies on an exhaustible natural resource, there is an

obligation on WTO Members that adopt conservation measures to do so without

introducing arbitrary or unjustified discrimination and hidden obstacles to

international trade. China therefore does have an obligation not to impose

additional and entirely unnecessary uncertainty only on foreign users through the

implementation of discriminatory export polices. That is the heart of this dispute.

38 Export quotas by diverting part of the production (that would go abroad) into the domestic market in

fact undermine the incentive for domestic downstream firms to become more efficient in the use of

rare earths. The effect of the quota is to push down the domestic price of rare earths in China relative

to a situation with export quotas. 39 The European Union restates its position that based on the data on the record it seem clear that the

domestic consumption in China has not been restricted and certainly not in the manner Chinese

restrictions affected current foreign consumption. It is simply not tenable to argue that the two

scenarios can produce identical or even comparable incentives toward substitution. 40 As those listen in para. 57 of China's response to Question 78. 41 See Exhibit CHN-195, Question 3.



_______________________________________________________________________

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67. As Professor Winters explains in Exhibit JE-193,42

the uncertainty that affected

non-Chinese users of rare earths following the July 2010 export quota tightening

was anything but "business as usual". This uncertainty is a direct consequence of

the serious lack of transparency and due process that characterises the Chinese

export quota system.43


68. The European Union contests China's allegation that what occurred in 2010 was a

significant reduction of the production quota. As China explained in the course of

the second meeting of the Panel with the Parties, a discrepancy existed until 2010

between its extraction plan and its production plan. This discrepancy was

addressed in 2010 and the two figures have since been fixed at the same level.

Assuming China's argument that the production quota serves the function of

enforcing the extraction quota is credible, and assuming the discrepancy in the

plans prior to 2010 was indeed no more than an unintentional discrepancy that was

removed, then China did not reduce the production quota in 2010, but indeed

increased it from 83,320 REO tons to 86,000 REO tons.44

69. Second, the European Union does not contest that certain of the measures

introduced by China resulted in an increase in prices of production45

. What is

important with respect to those price increases, however, is that they affected all –

Chinese and non-Chinese – users of rare earths indistinctively. Conversely, the

price increases resulting from export restrictions (quotas and duties) affected only

foreign users of rare earths and created a price gap between domestic and foreign

prices.


70. The European Union notes that what China explains is not a weighted average, but

a simple average which; given the high fluctuation even within one year can

actually lead to diluting the visibility of price effects.

42 See Exhibit JE-193, pp 3-5. 43 See European Union's second written submission, paras 210 et seq. 44 See Exhibit CHN-137. 45 See China's replies to the Panel's questions following the second meeting of the Panel with the Parties,

para. 94.



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71. The European Union notes that China did not provide any evidence that limiting

mining licenses has resulted in less mining. The only argument that China makes

is that less mining licenses, results in less mines to supervise and hence allegedly

less illegal production.

72. China seems to contradict itself (or is attempting to willingly mislead the Panel) in

arguing in paragraph 101 that the results of better enforcement are observable in a

drop in actual legal extraction and production, information on which was

submitted by China in the context of Exhibits CHN-137 and CHN-191. There is no

evidence before this Panel showing that illegal extraction and production dropped

as shown in the figures for legal extraction and production. Furthermore, it is not

clear why strengthened enforcement actions would reduce legal production below

the legally permissible limits (as they did in 2012). In line with China's own logic

on the effects of unfilled quotas46

, any reductions of actual extraction below the

permissible extraction limits could not be the result of an unfilled extraction limit

or its enforcement, but would be attributable to other factors. What China's

argument seems to imply is that both legal and illegal extraction and production

trends behave similarly, which would suggest that they are not affected by China's

restrictions on production and extraction or their enforcement, but have indeed

dropped – as the European Union argued – mainly as a result of the global

slowdown and voluntary restrictions on production by Chinese companies who

reduced supply in an effort to increase prices.


73. The European Union notes that China’s reply seems to support the European

Union's statement47

that recycled rare earth can definitely not account for any

significant part in Chinese rare earth production.

74. In its response China has not provided any actual figures of the real effects of

recycling, suggesting that this phenomenon is insignificant and that only very

small quantities are possibly re-used for consumption. China even concedes in

46 This is without prejudice to the European Union's position that China's theory about the effects of

unfilled quotas is over-simplistic and fails to take into account all the effects that quantitative

restrictions produce and how those effects present through time. China's theory would, however, seem

to have some merit in the context of "restrictions" that never actually limited domestic production and

extraction, due to the high levels at which they were set. 47 European Union's second written submission, para. 157.



_______________________________________________________________________

-22-

paragraph 109 that “recycling of rare earth elements remained at limited

commercial scale before 2012”. It is furthermore not clear from China's response

whether recycling has actually been taken into account in the 2012 production

plan, it rather sounds like “it should be” in the future. In the view of the European

Union, this clarifies that recycling is not done at levels, which could provide a

credible explanation for overproduction in previous years.

75. Finally, the European Union notes that all Chinese laws inciting recycling of rare

earths are incommensurately less stringent than the export quotas that China

imposes on international trade in rare earths, which forces foreign users to look for

alternatives and recycle and bear the costs that these adjustments entail.

Conversely, and in stark contrast to what China alleged in the context of its

arguments under the chapeau of Article XX,48

Chinese domestic users of rare

earths have not been suddenly cut off supplies of rare earths and have only been

subject to initiatives that would gradually incentivize increased recycling

activities.


76. As the European Union discussed in its second written submission,49

the

disciplines of chapeau of Article XX of the GATT, require abidance with basic

rules on transparency and due process. Demanding that these rules are respected is

not, as China remarkably lightly insinuates, a matter of putting procedure over

substance, but rather a matter of ensuring that substantive rules are respected. For

indeed, as China criticizes, without transparency, all we are often left with is

guessing based on piecemeal information that comes in the public.

77. However, and contrary to what China seems to believe, the fact that it leaves WTO

Members and their business operators guessing about what is actually going on

when its measure50

is implemented, can and, as we have shown in our second

written submission with respect to Chinese export quotas on rare earths,

molybdenum and tungsten51

, does amounts to a breach of the chapeau.

48 China's opening oral statement at the second meeting of the panel with the Parties, para. 62. 49 European Union's second written submission, paras 90, 210-219. 50 The European Union recalls that the export quota measures at issue are measures with respect to

which China and not the complainants invoked Article XX and hence carries the burden of proof. 51 European Union's second written submission, paras 210-219, 276, 309; European Union's opening

oral statement the second meeting of the Panel with the Parties, para. 79.



_______________________________________________________________________

-23-

78. This lack of transparency (which has been adversely affecting international trade

in rare earths, but also tungsten and molybdenum) cannot be considered as

remedied by a post hoc affidavit by a government official, which provides some

limited insight in the criteria that were allegedly taken into account in the setting

of the rare earths quota for 2012.

79. Nor is the lack of due process vis-à-vis foreign consumers remedied by the fact

that China allegedly consults with its exporters. While its exporters certainly have

a very good insight into their own business plans, these do not necessarily

correspond with plans of foreign consumers (indeed there may even be a risk of a

conflict of interest when one considers the trend of increasing vertical integration

in China).52

China does not contest that foreign consumers, unlike Chinese

consumers, are not directly consulted during the quota setting process despite the

fact that their rights are no less affected than those of Chinese consumers by the

decision on quota setting.

EU's comments on China's responses to Question 93 and Question 96

80. In its response to Question 93 China explains two ways in which its production

quota on smelted and processed rare earth is supposed to enhance or enforce the

extraction quota.

81. China alleges that the extraction quota alone would be insufficient to tackle with

illegal mining, because in the absence of a production quota illegal miners could

sell their products to producers for further processing. However, this objective

would seem to be ensured rather through a tracking system (proof of source) than a

quantitative limit.

82. China further alleges that its production quota enhances the conservation aim as it

ensures that stocks from previous years will also count against the production

quota and therefore limit the use of newly extracted material.

83. The European Union notes that this allegation by China is contradicted by its

position concerning the reason for consumption being higher than production,

which China gave in the context of its response to the Panel's Questions of 14

52 This is only the more relevant when one takes into account that the Chinese quota setting system may

have locked in foreign consumption into a vicious circle. If the export quota is determined according

to demand and demand is taken from past exports, it is unclear how the export quota should ever rise

again.



_______________________________________________________________________

-24-

March53

. It is clear, based on China's response, that consumption cannot be higher

than the production quota because of stocks being used. China's response to

Question 93 therefore supports the complainants position (based on the figures

provided by China in CHN-137 and CHN-191) that China imposes no effective

restriction on domestic consumption contrary to its obligations under Article

XX(g) and the chapeau.

84. China's response to Question 93 also contradicts its position expressed in the

context of its response to Question 96,54

where China alleges that actual

production can be higher than actual extraction because of the use of stocks. This

allegation seems to be contradicted by the data on record (see Figure 2 below),

which show that the actual level of production consistently exceeds the production

limit as well as the extraction limit (until 2011 included55

). China's response to

Question 93 therefore confirms the complainants position that China imposes no

effective restriction on domestic production contrary to its obligations under

Article XX(g) and the chapeau.

Figure 2 (Source Exhibits CHN-137 and CHN-191)

53 See para 70. 54 See para. 132. 55 The European Union refers to its comments in paras 22-23, which explain the cause of the drop in

actual production in 2012.

0

20000

40000

60000

80000

100000

120000

140000

160000

180000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012actual production extraction plan production plan



_______________________________________________________________________

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85. Finally, with respect to China's arguments in paragraph 123, the European Union

notes that China considers quantitative restrictions on downstream products as

distortive and disruptive to trade, as well as administratively burdensome. This

justification concerning the scope of the production quotas, however, does not

reconcile with China's position concerning the larger scope of export quotas.


86. In response to Question 94 as to whether an export quota at a higher level could

fulfil the function of facilitating the efficacy of China's conservation policy, and in

response to Question 126, whether the fact that quotas have not been filled does

not demonstrate that the quotas are unnecessary, China argues on similar

arguments that export quotas, as set presently, are necessary for its conservation

policy.

87. The European Union will not restate all its arguments demonstrating why China's

premise that its export quotas can be considered as related to conservation policy

on rare earth, tungsten and molybdenum, is logically misguided and unsupported

by facts. It will, however, take this opportunity to address some of the main

weakness in China's response which demonstrates why export quotas serve in

furthering China's industrial policy and are thus unrelated to conservation.

88. First, the European Union has already explained why China's attempt to justify its

export quotas by resorting to an analogy to Article XIII of the GATT 1994 should

be rejected. Without prejudice to said position, the European Union notes that

China does not even contend that it would be prepared to fully respect the

disciplines of Article XIII. Rather, China casually selects out of Article XIII what

fits its line of argument and disregards the rest. China suggests that its quota

setting is somehow compatible with Article XIII, because China is:

[…] trying to approach as closely as possible what the foreign

and domestic consumers “might be expected to obtain”148 under

normal market circumstances […]

148 Article XIII:2 of the GATT 1994.56

89. Yet, "normal market circumstances" as understood by China are certainly not what

Article XIII requires. Article XIII:2 provides as follows:

56 China's responses to the Panel's questions following the second meeting of the Panel with the Parties,

para. 124 (Emphasis added, footnote original); almost identical language can be found in para. 270 in

response to Question 126.



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-26-

2. In applying import restrictions to any product, contracting

parties shall aim at a distribution of trade in such product

approaching as closely as possible the shares which the various

contracting parties might be expected to obtain in the absence of

such restrictions […] (emphasis added)

90. What Article XIII:2 requires is to allocate quotas based on distribution which

existed prior to their introduction; i.e. before trade was restricted and distorted.57

What China does in actual fact is allocate quotas in a non-transparent process

which only takes into account the current and projected needs of its domestic

industry and arbitrarily determines the "needs" of non-Chinese consumers. China

does not even envisage setting the export quota at over 70% of its extraction and

production plan, yet that is the approximate level that foreign consumption

represented in the absence of Chinese export restrictions.

91. Clearly, it is China's industrial policy and not conservation policy objectives that

would not reconcile with the allocation that existed in 1999 when China

introduced its export quotas. For, as China itself acknowledges in response to

Question 127,58

the location of consumption is irrelevant from a conservation

perspective. This further demonstrates that there is no genuine link between the

conservation objective and the Chinese export quotas; thus they cannot be

considered as justifiable and have not been justified under Article XX(g) of the

GATT 1994.

92. Third, China's argument in paragraphs 126 and 274 highlights the weakness of

China's argument on signalling.

93. First, China alleges in para 126 that a higher export quota would signal to foreign

producers that that their potential new customers would have significant sources of

supply from China and thereby diminish incentives for investment. This argument

ignores the fact that it was China's own intervention in July 2010 that created

extreme uncertainty, speculation and price volatility. None of these are conducive

57 Based on Exhibit CHN-137, domestic consumption was at 16,010 REO tons in 1999, which represents

less than 27 % of the 60,000 REO tons produced in China in that year. In 2000 domestic consumption

was at 19,200 REO tons and actual exports were at 46,7000 REO tons, representing 29 % and 71 %

respectively of the total actual consumption of 65,900 REO tons for that year. 58 See para. 277.



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to the long-term investments such as those required in developing alternative

sources of rare earths and relieving pressure on China.59

94. Interestingly, in its response to Question 126 in paragraph 274, China takes a

somewhat different approach and contends that even quotas that are set above

demand can effectively signal to foreign customers that supply is limited. The

European Union understands this statement as an acknowledgment by China that

the extraction and production quotas or any of the alternative measures put

forward by the European Union could have fulfilled the role of signalling, just as

well as the export quota. Indeed, as the European Union explained in prior

submissions and noted above,60

Chinese export quotas have a counterproductive

effect when it comes to stimulating investment in rare earth extraction and

processing, as well as in the developing of substitutes, by distorting the market,

increasing price volatility and generating business uncertainty. All these factors

have dissuasive effects on the long term investments that are necessary to reduce

reliance of other countries on rare earths from China.

95. Finally, the European Union notes for the record that China conceded in paragraph

275 that the function of its export quotas is to protect the supply of its domestic

industry and give it assurance at all times that sufficient quantities of material will

be available for its needs. The European Union reiterates its position that this

function of export quotas has nothing to do with conservation within the meaning

of Article XX(g). It is naked protectionism and should be condemned as such by

the Panel.


96. The European Union notes that, according to China's own explanation, the

extraction quota and production quota are supposed to address the same issue and

only the issuing ministry is different (i.e. MLR for extraction and MIIT for

production). China points to the production quota for mining (not for smelted and

separated products), but conveniently ignores the extraction quota set by MLR.

The European Union notes that the extraction quota by MLR actually increased

from 82,320 to 89,200, to match the production quota set by MIIT to 89,200 to

59 See European Union's opening oral statement at the first meeting of the Panel with the Parties, paras

11 et seq. 60 Ibid., para. 19.



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have a consistent policy, as China explained in the course of the second meeting of

the Panel with the Parties.

97. China has therefore not lowered the extraction quota, as it argues in response to

Question 95, but has rather increased it.


98. First, the European Union notes with respect to paragraph 13361

of China's

response, that as it became clear in the course of the second meeting of the Panel

with the Parties, the detailed explanation that China refers to in this response was

not entirely correct. China clarified in the course of the meeting that, in contrast to

what was presented in Figure 1 of its opening oral statement,62

the production

quota only covers rare earth oxides and salts, but not metals.

99. Second, it should also be noted that China's response clearly avoids the core of the

Panel's question as to why there is a difference in the scope between the two

measures. China merely restates its usual arguments on the need to address illegal

production and the signalling and the safeguard functions of export quotas, but

does not even attempt to reconcile its line with the fact that the export quotas cover

a wider scope of products than the domestic production plan.


100. The European Union notes that, while China explains in its response that it has an

extraction and production plan for tungsten concentrates only63

, export quotas in

2012 covered concentrates and further downstream products (APT, tungstic acids

and its salts, tungsten trioxide, blue tungsten trioxide and tungsten powder).64

101. Similarly, while Molybdenum ores of 45-57% molybdenum content are the only

molybdenum products subject to a production plan,65

export quotas cover a

number of semi-processed products in addition.66

102. The comments made by Japan and the United States referred to by the Panel in

Question 100(e) essentially questioned whether China had the same environmental

efforts in place for tungsten and molybdenum as it described in great detail for rare

61 C.f also para. 136 of China's response. 62 See p. 4. 63 See para. 157. 64 See European Union's first written submission, Table 4, p. 21. 65 See para. 155. 66 See European Union's first written submission, Table 4, p. 22.



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earth. Japan and the United States particularly noted a number of environmental

laws and enforcement actions applicable to rare earth which seem not to be

applicable to the other two products. In reply to this question from the Panel,

China does not achieve to disperse these doubts. With great effort, China cites two

measures, one for each product, which deal with environmental requirements for

those two industries.

103. The European Union notes that the measures referred to by China clearly do not

have the same scope of environmental concern expressed in laws as for rare earths.

The references to environmental requirements contained therein are more general.

All the emissions standards referred to are for the industry in general, not for

tungsten and molybdenum industries specifically.

104. China claims that the Circular on Conditions for Admission to the Tungsten

industry (Exhibit CHN 93) “details certain standards to address particular emission

problem in each industry”. The European Union notes, that while this is the only

area where the national standards on waste water in general seem to be further

detailed, it is not clear how this relates specifically to environmental problems

arising from the tungsten industry. This is not at all comparable to the specific

emission standards for rare earths.

105. Furthermore, with respect to molybdenum, no specific standards are set at all and

only references to the general national emission standards are made. The European

Union further notes that the document on Access Conditions for molybdenum

(Exhibit CHN-108) is very recent, as it was only adopted in July 2012, when

China knew that its export restrictions on molybdenum would undergo scrutiny in

WTO dispute settlement. In addition, while it seems to be applicable

“immediately”, i.e. as of July 201267

, it does not really give specific dates etc., it

often mentions “new established, expanding or modified” enterprises. No

transitional periods are mentioned for those enterprises already operating (while at

the end it says “applicable to all enterprises “engaging” in molybdenum

production). However, no consequences are mentioned if and by what date an

already operational enterprise is not complying with the environmental standards.

67 The European Union notes that there is a mistake in the English translation of Exhibit CHN-108,

which provides "2010" the year of entry into force, whereas the original Chinese refers to "2012".



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106. The European Union is also surprised that China only presented at this late stage in

the proceedings a new piece of evidence, Exhibit CHN-217 on “Environmental

Protection Inspection of Tungsten and Molybdenum”, a circular issued in April

2013 particularly for the two materials under dispute. This seems somewhat

artificial, as China applies export restrictions to a number of other raw materials,

which are probably similarly polluting, but not addressed in this Circular (but of

course not challenged by the complainants). For example, tungsten is normally

regulated together with tin and antimony (see e.g. the Circular China submits as

Exhibit CHN-93 includes the admission conditions for all three products, albeit in

three different annexes).

107. Furthermore, China's Circular on the inspections (Exhibit CHN-217) does not

include any specific deadlines as to when this has to happen or be completed (“it is

an on-going exercise”, inspections will cover the year in which the application for

inspection (by the company) has been made and the preceding one) and it does not

state any consequences if a company either does not apply for inspections or

delays its application or even fails the inspections.

108. Different from what China tries to suggest, the allocation of a quota under the

production plan does not seem to be linked to the successful passing of

environmental inspection or the inclusion on a list to be published. It seems that

China tried to quickly copy the system as applied for rare earths, but with very

little precision and consequence. The reference in the 2012 Directive production

plan for rare metals, as cited by China, are vague: the enterprises need to meet

“requirements of provisions and criteria relating to environmental protection” (no

link is provided to the inspections and list).

109. The only link that China specifies later in reply to Q 109 is Article 4 of the

Guidelines (CHN 217), which stipulate: "The list of enterprises will be copied and

sent to all relevant departments, in order to provide support for their works of

industry access, backward production capacity elimination, financial support, tax

preference, credit financing, production and operation licensing and foreign

export." However, it is clear that China did not intend to give these obligations any

real teeth, since it foresaw for the lists to only "provide support" for the work of

relevant administration departments, but did not provide for any obligatory

consequences to the non-passing of the environmental obligations.



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110. The European Union notes that while VAT rebates for exports are not a measure

challenged by the complainants, the change in China's policy concerning VAT

rebates68

is a relevant fact for this Panel. This change in policy is evidence in

support of the Complainants argument that China has in place an industrial policy,

composed of a number of measures (including the measures at issue in this

dispute, as well as other instruments such as VAT rebates for exports of

downstream products), the common objective of which is to promote and protect

the development of Chinese downstream industry for the materials at issue in this

dispute. These measures should not be looked at in isolation, but should be seen as

an integrated system of measures which support and reinforce each other's effects.


111. The European Union notes that in its response China only explains why it is not

allocating the quotas on rare earth on the basis of individual elements, but fails to

explain why it does so for the duties. If, as China explains for the quotas, a further

division does not make sense as these are mined together, all the polluting effects

of the individual materials should also be rather similar and it would be

superfluous to have a differentiation here between the different kind of rare earths.


112. The European Union would like to note the discrepancy that exists between the

intensity of controlling the production of heavy/light rare earths through the

production quota and controlling of the exported amounts of light /heavy rare

earths. Indeed, the system China put in place for the control of production will

never be as tight and precise. This is due to the fact that, as China submits, rock-

type ores are mainly located in the North of China and are rich in light rare earths,

and ion-type ores are mainly located in the southern part and are rich in heavy rare

earths. However, as the Table 2.3 of the Rare Earths Report (Exhibit JE-129)

shows, each of these ores is not only constituted of either light or heavy rare earths

but is a mix, with some rare earths being only predominant. It is therefore not true

68 As Japan explained in its second written submission, China provides tax incentives through refunds of

value-added tax (“VAT”), for the exportation of value-added products such as rare earth permanent

magnets, but has stopped providing value-added tax (VAT) refunds for the exportation of raw and

intermediate materials in 2005-2006 and replaced such refunds with export duties.



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that Chinese provinces will have their rare earths extraction amounts precisely

capped by types.

113. It remains unclear to the European Union why China assigns its extraction quota

geographically based on amounts of ores, which are in fact mixes of various rare

earths, and not by specific REO-content of either light or heavy rare earths, as is it

does in the context of export quotas. This discrepancy shows the lack of relation

between the production quota's conservation aims and the quota restricting

exports.


114. Firstly, the European Union notes that China did not actually respond to the

Panel's question, since it did not provide any actual evidence on how the specific

duty level that imposes might have resulted in a decrease in demand, production

and consumption or how this helped furthering China's objective of protecting

health. All alleged “evidence” we have seen from China and its economic expert

De Melo, rather suggests that even an export duty of 25% is considered to be fairly

low and has no impact on the level of exports due to the low price elasticity of

these products.

115. Additionally, the European Union notes the incoherence between the applied

export duties and China's explanations in paragraphs 178 and 179. If, as China

alleges, heavy rare earths are dutiable higher that light ones and those which

undergo "more processing" (metals) are dutiable higher than less-processed ones

(oxides or salts)

i. why is the duty on heavy yttrium chloride salt lower (15%) than on some

chlorides of other heavy rare earths (e.g. terbium or dysprosium chloride,

both subject to 25%),

ii. why is the duty on the light Lanthanum chloride as high as on some

chlorides of heavy elements (eg. again terbium or dysprosium chloride);

iii. why is the duty on the said chloride salts of heavy terbium and dysprosium

specifically higher than on "other chlorides"(15%), which include also

chlorides of some heavy elements by default (code HS28469029), or than

on all fluorides (which are also salts);



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iv. at the same time, regarding the latter, why do "other compounds (i.e. salts)"

of all rare earth - be it heavy or light (from code HS 28469091 to code HS

28469099) - attract a high duty of 25%;

v. finally, why is there a duty of 20% on "other NdFeB alloys" (a magnetic

material which is a processed rare earth product (code HS72029919) and

why is it lower than the duty of 25% on rare earths metals alloys (code

HS28053019/21) of heavy or light rare earths without distinction.


116. With reference to China's explanation on the conversion contained in paragraphs

184 and 185 of its response, the European Union wonders what is the rationale

behind setting up a gross quota amount for an upcoming year based on conversion

factors for the previous year, while knowing that the structure of exported goods in

the future might be completely different. The European Union refers to its

response to Question 84, where it explained why this approach is flawed and how

this is problematic from Article XX(g) perspective.


117. The European Union notes that even if China tries to construe that what they have

on paper is a conservation policy for tungsten and molybdenum, this policy (or

policies) does not seem to be enforced.

118. The European Union notes, that China’s extraction plan for tungsten has never

been respected; the actual extraction at times exceeding the extraction plan by as

much as 124% (2004), by 24% in 2010, 38% in 2011 and in 2012 by 40%. For

Molybdenum, the same is true: in 2010 the plan was exceeded by 16%, in 2011 by

15% and 2012 by as much as 38%.

119. The very late exhibit on enforcement efforts CHN-219 does not change this picture

as the few actions, had little impact69

and do not seem to be able to rectify these

significant amounts of overproduction.

69 Exhibit CHN-219 makes it clear that the enforcement actions seem to target small illegal mines (in

April 2013, 97 illegal mines were closed). See also pt. 3 on p. 1: “Since the beginning of 2012, the

three suspects have illegally extracted 2,000 tons of tungsten crude ores and earned illegal profits

more than RMB 120,000 yuan.” This is the largest volume of illegally mined tungsten that is reported

by China in its various examples but it is still very low compared to an overproduction of more than

30.000 tons.



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120. The European Union notes that Exhibit CHN-219 only includes one recent case of

enforcement action on molybdenum (dating from February 2012), while the other

cases are on tungsten and post-date the start of dispute settlement proceedings in

this case.


121. China argues that domestic measures on extraction and consumption do not aim at

reducing the quantity but at controlling the increasing speed. It further alleges that

the measures were effective in reducing the growth of extraction. The European

Union notes that data on the record gives reason to doubt the seriousness of

China's commitment to its alleged conservation objective when it comes to

domestic limits on extraction and consumption.

122. First, if one looks at China’s extraction plan (see 1st line of Table 1 below), which

is a measure that is managed and under the control of the Chinese authorities, the

increasing speed of growth is far from stable from one year to another. Indeed the

volume reported in the extraction plan varies from 0% to 19% depending on the

year since 2002. China submits that the average was 6% since 2002 but this

average looks meaningless compared to the yearly fluctuation. The significant

variation of volumes of extracted tungsten as foreseen by the extraction plan casts

doubts on China alleged objective of controlling the growth of its extraction.

123. Second, this observation is reinforced when it comes to actual extraction. In fact, it

is difficult to find a link between the actual extracted volumes and the plan, since

extracted volumes are constantly far above the extraction plan, with a difference

comprised between 24% and 124%.

124. Third, the increase of extracted volumes of tungsten, planned or actual, has to be

compared with the evolution of the volume of the export quotas of tungsten, which

has decreased from 2002 to 2012 by almost 6%.

Table 1 (Source Exhibit CHN-223)

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

43,740 43,660 52,000 52,000 59,060 59,270 66,850 68,555 80,000 87,000 89,000

0% 19% 0% 14% 0% 13% 3% 17% 9% 2%

39,160 45,477 53,903 69,952 70,216 116,302 99,444 87,277 79,958 97,316 95,850 99,514 119,875 124,706

16% 19% 30% 0% 66% -14% -12% -8% 22% -2% 4% 20% 4%

26,212 26,556 64,302 47,444 28,217 20,688 30,466 27,295 19,514 32,875 35,706

60% 61% 124% 91% 48% 35% 46% 40% 24% 38% 40%

12,000 20,000 22,300 23,500 25,000 26,000 27,500 30,000 33,000 n.a.

67% 12% 5% 6% 4% 6% 9% 10%

export quota 16,300 16,000 16,300 15,800 15,400 14,900 14,600 16,000 15,700 15,400

-2% 2% -3% -3% -3% -2% 10% -2% -2%

actual

extraction

consumption

extraction

plan

extraction:

actual/plan



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125. China confirms that there is no extraction quota on molybdenum, as molybdenum

had not yet been identified in 199170

as a scarce resource. However, China submits

that in effect the extraction of molybdenum is controlled through the production

plan.

126. The European Union notes that there was no production plan on molybdenum

before 2010. Thus the data to look at is rather limited. However, with respect to

the three years for which data is available (i.e. 2010, 2011, 2012), the production

plan does not seem to be particularly effective as demonstrated by the fact that the

production caps have always been exceeded.


127. As in the context of our comments on China's response to Question 112

concerning tungsten, the European Union submits that data on record gives reason

to doubt the seriousness of China's commitment to its alleged conservation

objective when it comes to domestic limits on extraction and consumption.

128. For molybdenum China introduced the production plan only in 2010 and the

reporting period to look at the effect is rather limited (2 years). Moreover, China

submits that the average growth of extraction was set around 6%. This is not

correct according to the calculations presented in Table 2 below, which show a

growth of 7% in 2010 and 2011 and 17% in 2012.

Table 2 (Source Exhibit CHN-224)


129. First, the European Union notes that China attempts to misguide the Panel and

misconstrue the European Union's argument by making conclusions based on data

for two years 2011 and 2012, which even China recognises as abnormal, on the

even-handedness or balance that its restrictions have in their design and structure.

As the European Union noted already in the context of its comments on China's

responses to Questions 71 and 72, the test that Article XX(g) requires is not an

70 I.e. year of the enactment of the circular on extraction quota applied to tungsten and rare earth.

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

66,132 63,933 63,153 67,319 71,646 85,427 88,432 95,988 150,554 191,323 200,614 214,664 229,600 267,947

-3% -1% 7% 6% 19% 4% 9% 57% 27% 5% 7% 7% 17%

15,773 18,655 26,405 40,373 47,460 54,000 60,000 70,000 72,000

18% 42% 53% 18% 14% 11% 17% 3%

extraction

production



_______________________________________________________________________

-36-

effects test and even to the extent which evidence on the operation of a measure

may be relevant in supporting (or rebutting) arguments about its design and

structure, it is clear that China's approach of looking only at certain moments in

time "in isolation" fails to paint an objective picture.

130. When one considers the structure and design of the Chinese measures at issue, it is

clear that they cause a prejudice in favour of domestic consumers. China

acknowledges explicitly71

that in all circumstances where demand for export will

not be high enough to fill the quota; domestic consumers will be free to legally buy

all the materials produced under the production plan.72

The same will never be true

for foreign customers, who cannot – even if Chinese demand dropped considerably

at a given moment in time – legally have access to rare earth materials above the

limit set by the export quota. In line with China's own argument allowing for such

sales within the extraction and production quota, would in no way undermine

China's conservation objective. Yet, it is clear from China's response to Question

116 that this type of flexibility only exists for its own domestic consumers and can

never be extended to foreign consumers.

131. China also forcefully alleges that unused quotas are fully taken into account when

setting the next year's quotas.73

With all due respect to what may perhaps be good

intentions of a step in the right direction, a post hoc affidavit of a government

official clearly does not live up to the transparency standards the chapeau of

Article XX and WTO-law more generally require.

132. Furthermore, China's allegation in paragraphs 212 and 214 that it has taken into

account stocks resulting from unfilled quotas when setting the next years`

extraction quota finds little support in the facts on record, which show that the

extraction and production quota(s) remained the same during 2011 and 2012. The

comparison with the level of quotas set to actual consumption is not really

convincing against that background.

71 See e.g. China's response to the Panel's questions following the second meeting of the Panel with the

Parties, para. 222. 72 Indeed, as the European Union has explained, there is no legal obstacle for Chinese consumers to buy

all the material even when there is sufficient demand by foreign customers, as long as they are

prepared to pay the price demanded by the Chinese producer. Notably, this price will not even

necessarily be a market price in view of the fact that Chinese industry is more and more vertically

integrated. 73 See paras 211, 214.



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133. First, the European Union notes that it is important to put into context the

comment it had made in paragraph 116 of its second written submission. This

comment – i.e. that China put subsidies in place which had the aim of

compensating companies which complied with its environmental requirements –

was made in rebuttal to China's claims that the environmental requirements that

China imposes on the producers on rare earths are actually "additional restrictions

on domestic production of rare earths that work in conjunction with other domestic

restrictions."74

134. The European Union notes that Exhibit CHN-212 provided by China and referred

to in its reply to this question seems to be the same document that the

Complainants had already submitted as Exhibit JE-114. It is Notice 375/2012

issued by the Chinese Ministry of Finance and the Chinese Ministry of Industry

and Information Technology on the 9 November 2012, entitled "Measures on

Management of Special Funds for Rare Earth Industry Adjustment and

Improvement". This Measure in its Article 1 states that it has the purpose of

"bringing into full play the role of the special fund for rare earth industry

adjustment and improvement; facilitating the healthy and orderly development of

the rare earth industry; standardizing the management of the fund; and improving

the efficiency of using the fund."

135. Even if Article 6 provides that the special fund shall give "rewards instead of

subsidies", the next article, Article 7, clearly states that Chinese local governments

which had completed the "overall construction of rare earth mining monitoring and

management system may receive one-shot rewards, the amount of which shall not

exceed 20% of actual investments." Article 8 provides further that rare earth

mining and smelting enterprises "that have passed the national environmental

protection inspection may receive one-shot rewards, based on the enterprises'

production capacities." Article 9 of the same measure additionally provides for

free financial assistance of up 50% of the cost of "projects of R & D of rare earth

common key technologies and standards and high-end technologies."

74 China's first written submission, 20 December 2012, para. 196. See also paras. 196-203.



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136. In the view of the European Union, it is clear that this Chinese measure had the

purpose of rewarding and encouraging even further investment, as well as research

and development into the rare earth industry.

137. It is also very obvious that even if this Notice is specifically aimed at, and deals

exclusively with the Chinese rare earth mining and processing industry, the

concept or aim of the "conservation" of rare earths in China - which is supposed to

be at the heart of China's "comprehensive conservation policy" - does not feature

in the text of this Notice75

. The main objective of the Notice is that of offering

financial incentives to the rare earth mining industry in China, especially in the

areas of research and development.

138. As explained in the context of our comments to China's response to Question 103,

this measure should be regarded as evidence of the existence of China's industrial

policy for rare earths part of which – and not the conservation policy, as China

alleges – are inter alia also export restrictions.


139. The European Union contests China's allegation made in paragraph 245 that China

has effective restrictions on the extraction and production of rare earths, tungsten

and molybdenum. The European Union submits that in light of the level at which

they are set, the limits China imposes on extraction and production are not

restrictive on domestic production or consumption and certainly not restrictive in

the same manner export restrictions affect consumption abroad. Furthermore and

in any event, it is clear that these restrictions are not effective.76

They only exist on

paper and are not properly enforced in reality (a fact which is patently clear in the

context of tungsten and molybdenum).

140. By means of comments to China's argument in paragraph 118 (sic) the European

Union notes that specific emission standards for rare earth, have only been

introduced very recently and are not fully operational yet (as there are transitional

periods for established companies), in contrast to the longstanding export

restrictions.

75 The European Union found one indirect reference to conservation in Article 5 (1) of the Notice which

states "Supporting relevant local government construction projects of monitoring and management

systems which aim at protecting rare earth resources and rectifying the mining order." 76 C.f. European Union's response to Questions 71 and 72.



_______________________________________________________________________

-39-

141. China submits in paragraph 258 that since domestic consumption in China can

never legally exceed the production quota minus actual exports77

, "there is a

maximum limit on domestic consumption of rare earth”. The European Union

notes in that regard that since this limit seems to be set above actual domestic

demand/consumption, it cannot be considered as a real limit.

142. In 2011 domestic consumption (83,110) exceeded the production plan (90,400)

minus actual exports (15,700). So even this “maximum limit”, as China describes

it, is not in fact enforced. All explanations that China has given previously, i.e. that

this would be due to the consumption of stocks and recycled material, do not seem

to hold anymore, since China clearly explained that the use of stocks also counts

against the production quota78

and that the commercial scale of recycled material

was rather limited until 2012.79


143. The European Union notes again80

that China's justification for the need to resort

to export quotas has changed during the process of this dispute. While China

initially argued that export quotas are needed to reduce the incentive for illegal

mining by removing an outlet for selling such illegal products81

, it eventually

became clear to China that the theory it put forward did not reconcile with the

facts.82

144. While arguments put forward by Parties can change during the course of a dispute,

such a categorical change without any explanation speaks for itself about the

credibility of the argument. It clearly shows the difficulties China is having in

77 The European Union notes that China clearly conceded that the domestic consumption is not limited

by the production quota minus export quota, but by production quota minus actual exports. Any

limitation to the right to trade for export therefore clearly has the potential of further increasing the

quantities of rare earths available for domestic consumption. 78 See China's response to Question 93, para. 122. 79 See China's response to Question 91, para. 109. 80 See European Union's closing statement at the second meeting of the Panel with the Parties, para. 9. 81 China's first written submission, paras 135 et seq.; China's replies to Panel's Questions following the

first meeting of the Panel with the Parties, para. 128. 82 China's opening oral statement at the second meeting of the Panel with the Parties, para. 21 ("Without

an export quota in place, entities in China will consider the potential that a significant part of all

legally produced rare earth products could be exported, leaving the domestic Chinese market in a

supply squeeze.").



_______________________________________________________________________

-40-

justifying the genuineness of the link between its export quotas and its

conservation policy objectives.83

145. The alternative measures put forward by the European Union in the context of its

arguments under Article XX(g) and the chapeau of Article XX, clearly

demonstrate that if China wanted to have a mechanism to control that exported

products are legally produced, this can be done without resorting to trade

restrictive, distortive and divertive export quotas. The European Union reiterates

its position that export quotas – as instruments against illegal production - do not

genuinely relate to conservation. Even if, arguendo, one were to consider that they

can relate to conservation in that respect they would still be disproportionate84

in

their effects on international trade and would as such violate the obligations under

the chapeau.85


146. First, for the reasons set out in in prior submissions86

the European Union

disagrees with China's allegation that the inclusion of rare earth alloys to the

export quota in 2012 did not result in the tightening of the export quota. Following

China's own logic, expanding the scope of application of quotas creates distortive

effects.87

The European Union also notes that rare earth alloys are not subject to

the Chinese production plans.

147. The European Union additionally refers to comments made jointly on responses to

Questions 94 and 126 above.


148. The European Union refers the Panel to its comment on China's response to

Question 66, where the European Union notes the inconsistency in China's line of

argument about the role of export quotas within its conservation policy.

83 Where link to a policy objective is genuine there is no need for changing one's line of argument in the

midst of the process and there is also no risk of contradicting oneself as China has done on multiple

occasions during these proceedings. 84 See para. 268, where China concedes that their role is to safeguard against the "potential that a

significant part of all legally produced rare earth products could be exported". 85 C.f. European Union's opening oral statement at the second meeting of the Panel with the Parties,

para. 93. 86 See European Union's second written submission, para. 218; European Union's response to Question

84. 87 See China's opening oral statement at the second meeting of the Panel with the Parties, para. 10.



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149. The European Union further notes that China concedes by means of this response

that what is relevant from a conservation standpoint is not the place of

consumption, but merely the extraction and production of rare earths. This is an

important acknowledgement by China, which describes the role of export quotas

as essentially one of signalling and as an instrument in the fight against illegal

trade. The European Union has taken great pains to explain why export quotas

cannot be considered an adequate tool in the fight against illegal trade and refers

the Panel to its earlier submissions in that regard.88

Similarly, we have shown why

the signalling argument advanced by China does not stand and should be rejected

by the Panel.89


150. For the reasons set out in its own response to this Question, as well as Questions

135 and 136 by the Panel, the European Union disagrees with China's response.


151. The European Union notes that China`s explanation actually shows that over-

extraction is allowed by law. Even if the mineral extracted in excess has to be

stockpiled, it has effectively been extracted from the earth. China does not provide

any assurance in its reply, as to whether future extraction quotas will take into

account these stockpiled ores, which have been extracted in excess.

152. Despite having been prompted to do so by the Panel, China also does not provide

any information in response to the last question under Question 139(a), concerning

the quantities of rare earths, tungsten and molybdenum that have been and/or are

currently stockpiled by China.


153. First, the European Union notes that China makes it very clear in paragraphs 297

and 298 that the broader scope of the export quota, as compared to the production

quota, corresponds to a difference in the objective of both measures. Whereas the

production quota is enforcing the extraction quota, the export quota is enforcing an

88 See e.g. European Union's second written submission, paras 121-125; European Union's response to

Question 26.

The European Union further notes that China explained in para 319 of its responses that "since 2012

every shipment of rare earths is subject to inspection including the information of producers". Such

inspections and not a preventive – but nonetheless trade restrictive and distortive – quantitative

restriction on international trade are the adequate tool to deal with illegal trade. 89 See e.g. European Union's second written submission, paras 126-132; European Union's opening oral

statement at the second meeting of the Panel with the Parties, para. 94.



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allocation quota for the use of products domestically and abroad. China explicitly

acknowledges this fact in paragraph 298. The European Union refers to its

response to Question 66 and its comments on China's response to the same

question and recalls that this type of allocation is unrelated to conservation

measures, which are allowed under Article XX(g). Article XX(g) only exempts

from other GATT 1994 disciplines those conservation measures that are not

designed to or have the effect of protecting or promoting domestic industry.

154. Second, the European Union notes with respect to paragraphs 300 and 301 of

China's response that the resource tax, levied on ores, impacts the price of both,

consumption in China and abroad in the same manner.

155. Finally, the European Union notes that China did not respond to the Panel's

Question 140(i), as to why it levies export duties on products such as NdFeB

magnet film, other NeFeB alloys and other ferroalloy (Chinese HS No. 7202.9911,

7202.9919, 7202.9999), other tungstates, ferro-tungsten, ferro-silico-tungsten

(Chinese HS No. 2841.8090, 7202.8010, 7202.8020).


156. The European Union notes that China has not replied to the Panel's question and

has not provided any reassurance that a company actually exporting rare earths has

to bear the same stringent requirements in terms of documentation as the

candidates applying for an export quota.


157. The European Union notes that China's response to this question, by means of

which China concedes that it is aware of the deficiencies of its quota

administration system, confirms the arguments the Complainants advanced in the

context of their claims against China's quota administration, as well as in rebuttal

to China's defence under the chapeau of Article XX. Namely, that China's quota

administration system unduly limits trade and thereby exacerbates the already

damaging trade restrictive and distortive effects of the export quotas (and duties).

It also undermines China's argument that its system of allocation of export quotas

should be regarded as an "advantage"/"priority" that China gives to non-Chinese



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users of rare earths over Chinese users.90

Clearly, all that China's flawed system

translates to is additional costs and additional delays for foreign users.


158. In its response to Question 146 China refers to Exhibit CHN-206 and Exhibit

CHN-195, where its expert Professor De Melo alleges that Chinese export duties

cannot affect the quota fill rate for Chinese export quotas. The European Union

refers the Panel to its own response to Question 145, as well as Exhibits JE-193

and JE-197, which rebut the arguments advanced by China and its expert.

90 See e.g. China's second written submission, para. 79 ([…] By imposing an export quota, and thus

providing the priority access of a certain share of the amount of newly produced rare earth products to

foreign users, China also limits the amount available to domestic users […]."

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