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China’s WTO defeat over metals is really victory

China has lost a key trade dispute over its restrictions on exports of rare-earth metals, after a World Trade Organization panel rejected dubious arguments that the stiff quotas and duties it imposed in 2010 were needed to conserve the precious resources and safeguard the environment. Yet China's love for the WTO, with its interminable bureaucratic delays, likely remains undimmed.

The minerals are critical to the manufacture of such advanced tech products as hybrid car batteries, small electric motors, wind turbine generators, catalytic converters, missile guidance systems, helicopter blades and LCD screens. The curbs imposed by China, which accounts for the vast majority of global supply, sparked shortages and drove costs through the roof for companies in Japan, the U.S., Europe and elsewhere.

Conveniently, China's manufacturers suddenly gained yet another competitive advantage to go along with their low wage costs and deliberately undervalued currency. Foreign companies had to fork out about three times as much for some of the metals as their Chinese counterparts.

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But any joy over this important victory for freer trade must be tempered by the knowledge that this will not result in a dramatic increase in shipments or a decline in prices any time soon.

When China came into the WTO fold back in 2001, major trading partners had doubts about whether a government that had flouted international rules for years, distrusted free markets and showed no desire to create a level playing field for foreign competition would be willing to comply with rulings it didn't like.

In practice, Beijing has had a decent record of compliance. But as a couple of cases illustrate, that record doesn't mean much when the political stakes are high. In January, Washington filed its first official WTO complaint accusing China of ignoring a 2012 ruling that sided with the U.S. in a dispute over Chinese duties on certain heavy steel imports. U.S. producers say the unfair tariffs cost them about $250-million (U.S.).

The Chinese also dragged their feet when it came to implementing another unfavourable decision over audiovisual media products, citing the complexity of changing domestic regulations. The real reason was that China's Communist bosses had no desire to loosen their control over the distribution of content.

In the rare-metals case, China's curbs on exports were also widely believed to have a political underpinning. The move sent shock waves through the Japanese manufacturing sector just as a long-simmering dispute with Japan over control of several small islands in the East China Sea was reaching the boiling point.

The case against China, which was launched by the U.S., the EU and Japan in 2012, is far from over. Beijing has 60 days to appeal the finding. And if, after further delays, the decision is upheld, which seems likely, there is no guarantee the government will move all that fast to remove the restrictions.

In all cases, Beijing has come to appreciate the lengthy WTO dispute process, where it has proved adept at buying time and delaying changes in its practices – not to mention punitive countermeasures. China has had plenty of practice developing its expertise, as it is typically involved in about half the disputes, on one side or the other. The rule of international law has actually proved rather beneficial for one of the world's endemic rule-benders.

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

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