Indium Blues

The NYT has published an article about China's nationalization of its rare earth mining industry. In the typical tradition of he-said, she-said science and policy journalism, it quotes Chinese officials as attempting to improve environmental compliance. However, it is also precipitating consolidation of the industry into state control.

The article explains that invocation of environmental rules might be part of a wider strategy to restrict rare earths sales without falling foul of trade regulations. I think this picture is right. In order to figure out why this is true, we have to look at the two international trade regulations that I think China is breaking most flagrantly, and the legal dodges they are trying to employ.



The two agreements in question are part of the founding treaty of the WTO. Since everything in the WTO treaty is binding and enforceable by compulsory jurisidiction, fuzzy concepts of typical international law (i.e. opinio juris sive necessitatis) don't apply. The agreements in question are the subsidies agreement and technical barriers to trade agreement. If you read the text of both agreements, it is obvious at least that both the US and China and many other countries are in violation of the subsidies agreement. Loan guarantees, for example, are specifically banned, though both the US and China are very guilty of both. More telling is the text of the TBT agreement, which in many ways covers the more insidious and flagrant protectionism. The TBT agreement states:

For this purpose, technical regulations shall not be more trade-restrictive than necessary to fulfil a legitimate objective, taking account of the risks non-fulfilment would create. Such legitimate objectives are, inter alia: national security requirements; the prevention of deceptive practices; protection of human health or safety, animal or plant life or health, or the environment. In assessing such risks, relevant elements of consideration are, inter alia: available scientific and technical information, related processing technology or intended end-uses of products.

 Technical regulations include quotas, export bans, and forced substitution in bilateral treaty environments.

It's obvious that countries do this all the time for different reasons. Arms restrictions are good examples of perfectly legal TBTs.

What China is doing is clearly attempting to put up a veneer of compliance with the exceptions on the TBT agreement in its consolidation of the critical rare earths industry. It already justified export restrictions based on national security concerns, which quickly evaporated as a plausible multinational WTO challenge became evident, and now it's doing so based on environmental concerns. To be fair, putting environmental controls on its mines is a fine goal and should be done, but beyond shutting down unlicensed mines the consolidation of the industry into state-owned enterprises only is unsettling - but unlike the export ban, is not governed by the TBT agreement.

Undoubtedly, all the actions taken thus far have had a very significant impact. Companies have moved manufacturing to China to ensure critical raw materials supply. Not just American companies, by the way - many Japanese and Taiwanese makers of electronics as well.

The reflexive answer typically is for US companies and private citizens to cry foul, but for the government to do nothing formal. I don't pretend to understand the niceties of diplomacy, which presumably goes on behind the scenes before such things happen, but I can offer an educated guess as to why the US and other countries have not started formal proceedings.

The obvious reason is that both the US and China are guilty of unlawful restraint of trade. That China is doing it more egregiously doesn't matter in the eyes of the WTO. Match this with the fact that a typical trade complaint to the WTO is met with a counterclaim by the accused country, and you have a perfect storm of tariff and retaliatory tariff going up. This is the story we saw, for example, almost erupting between France and the US over EADS and Boeing. France was more guilty of unlawful subsidy of course (having given guaranteed loans) and the case against the US was a stretch (since government contracts are usually not considered subsidies per se), but both ended up being able to slap ridiculous punitive tariffs before backing down.

The other aspect of why the WTO has not been involved is the way enforcement mechanisms are designed. Although the WTO's dispute court can censure a country for violating international law, it cannot impose upon its sovereignty to force it to drop the practice. Instead, the enforcement mechanism is a punitive tariff by the aggrieved country. But there are situations in which a tariff effectively does nothing.

Rare earth technical barriers are one example. If China wants to restrict critical supplies and force manufacturing to relocate in order to secure raw materials, a tariff won't do a damned thing because it acts only on price, not on the quantity released. As I've posted before, another good example is solar PV - if the US slaps a bilateral tariff it effectively only protects the US from Chinese competition while the unlawfully subsidized industries still get to romp around in a global market.

On the other hand, tariffs from China on American goods would be devastating. China already imposes a lot of them anyway - so-called unilateral "antidumping" tariffs are frequently employed as naked protectionism by Beijing (mostly on food products), even though claiming the US is dumping on the Chinese is more than a little bit rich.

So if you take a cost-benefit analysis in the minds of US politicians, you have on the one hand very little effect on the Chinese policy in question, Chinese politicians beating their breasts about American meddling and "hurting the feelings of the Chinese people", and a tariff war, and on the other hand nothing much being done for American producers. It's a fundamental failure of WTO enforcement mechanisms. In a globalized market, tariffs are only effective if they hamper access to crucial markets. And against TBTs, they do a whole lot of nothing.

Ugh.