china – measures related to the exportation of rare earths...

In the World Trade Organization

Geneva, 25 March 2013

China – Measures related to the exportation of rare earths, tungsten and molybdenum

(DS432)

The European Union's Comments on China`s Responses to Questions from the Panel to the Parties in Connection with

the First Substantive Meeting of the Panel

China – Measures related to the Exportation of Rare Earths, Tungsten and Molybdenum (DS432)

European Union – Comments on China`s Responses to Questions from the Panel

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TABLE OF CONTENTS

QUESTION 3.......................................................................................................................... 6

QUESTION 4.......................................................................................................................... 6

QUESTION 5.......................................................................................................................... 8

QUESTION 9.......................................................................................................................... 8

QUESTION 10........................................................................................................................ 9

QUESTION 11...................................................................................................................... 10

QUESTION 12...................................................................................................................... 12

QUESTION 13...................................................................................................................... 12

QUESTION 18...................................................................................................................... 14

QUESTION 19...................................................................................................................... 15

QUESTION 20...................................................................................................................... 16

QUESTION 24...................................................................................................................... 17

QUESTION 27...................................................................................................................... 18

QUESTION 28...................................................................................................................... 19

QUESTION 30...................................................................................................................... 19

QUESTION 32...................................................................................................................... 20

QUESTION 34...................................................................................................................... 22

QUESTION 35...................................................................................................................... 23

QUESTION 36...................................................................................................................... 25

QUESTION 37...................................................................................................................... 27

QUESTION 40...................................................................................................................... 27

QUESTION 41...................................................................................................................... 27

QUESTION 42...................................................................................................................... 27

QUESTION 46...................................................................................................................... 29

QUESTION 47...................................................................................................................... 29



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QUESTION 50...................................................................................................................... 30

QUESTION 53...................................................................................................................... 32

QUESTION 54...................................................................................................................... 32

QUESTION 56...................................................................................................................... 34

QUESTION 58...................................................................................................................... 35



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TABLE OF CASES CITED

Short Title Full Case Title and Citation

China – Raw Materials Appellate Body Reports, China – Measures Related to the Exportation of Various Raw Materials, WT/DS394/AB/R / WT/DS395/AB/R / WT/DS398/AB/R, adopted 22 February 2012

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

China – Publications and Audiovisual Products

Appellate Body Report, China – Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, WT/DS363/AB/R, adopted 19 January 2010, DSR 2010:I, 3

US – Gasoline Appellate Body Report, United States – Standards for Reformulated and Conventional Gasoline, WT/DS2/AB/R, adopted 20 May 1996, DSR 1996:I, 3

US – Shrimp Appellate Body Report, United States – Import Prohibition of Certain Shrimp and Shrimp Products, WT/DS58/AB/R, adopted 6 November 1998, DSR 1998:VII, 2755



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TABLE OF EXHIBITS

Exhibit No. Title

JE-110 Letter from Ed Crawford, CEO Philips Lighting North America, July 2011

JE-111 Philips Lighting North America, Phosphor – a critical component in fluorescent lamps

JE-112 Arnold Magnetic Technologies, Magnet FAQs (February 7, 2013)

JE-113 WantChinaTimes.com, Central and local authorities clash over Baotou’s rare earth (February 25, 2013)

JE-114 Communication on the management method applicable to Rare earth industry adjustment and improvement special fund

JE-115 China Daily, Baotou Steel Rare-Earth halts production to stabilize prices (October 24, 2012)

JE-116 China Daily, Appeal to boost rare earth imports, (August 22, 2012)

JE-117 SinoCast, Rare Earth Exporters Facing Shifting Risk (October 27, 2010)

JE-118 Xinhua Insight, China tightens regulation of rare earth industry (June 15, 2011)

JE-119 MetalBulletin, Tide turns on antimony amid rumours of customs crackdown (July 8, 2011)

JE-120 Dart Mining NL, Molybdenum

JE-121 China Tungsten Online (Xiaman) Manu. & Sales Corp., Cemented Carbides

JE-122 People’s Daily, Another large rare earth mine found in Hubei’s Shiyan (October 9, 2010)

JE-123 English.news.cn, China Minmetals takes steps to help rare earth industry consolidate (June 16, 2011)

JE-124 Peter Thomas in der Heiden, Chinese Sectoral Industrial Policy Shaping International Trade and Investment Patterns - Evidence from the Iron and Steel Industry, Duisburg Working Papers on East Asian Studies, No. 88 (2011)



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Exhibit No. Title

JE-125 MIIT, Hastening the Progress of Optimizing and Upgrading the Raw Materials Industry’s Structure (December 18, 2009)

JE-126 MIIT, Actively Push Forward the Deepening of Reform and Openness to the Outside Explore and Put Into Practice a New Era of Large Ministry System (December 28, 2012)

JE-127 MIIT, Optimizing the Industrial Structure is the Main Task of Hastening the Transformation of the Economic Development Method (November 26, 2012)

JE-128 People’s Economic and Trade Commission, Export Quotas, Allocations, and Application Procedures for Important Industrial Items for 2003 (November 1, 2002)



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The European Union takes this opportunity to provide preliminary comments on China's Responses to the Questions from the Panel to the Parties in connection with the First Substantive Meeting of the Panel. Silence on any issue should not be understood as agreement with China's views and arguments as the European Union intends to provide more detailed argumentation in its second written submission.

QUESTION 3

(China) Please explain why you think there was no need to include an explicit reference to “WTO Agreement”, “in conformity with the GATT 1994” or “Article XX of the GATT 1994” in the text of Paragraph 11.3 of China’s Accession Protocol in order for the general exceptions in GATT Article XX to be applicable to the obligation in Paragraph 11.3. More precisely:

(a) What implications if any result from the fact that in the immediate legal context of Paragraph 11.3 of China’s Accession Protocol, i.e. in Paragraphs 11.1 and 11.2, there are explicit references to “in conformity with the GATT 1994”, but there is no such reference in Paragraph 11.3?

(b) What implications if any result from the fact that in other provisions of China’s Accession Protocol, for instance in Paragraph 5.1, there is an explicit reference to “in a manner consistent with the WTO Agreement”, but there is no such reference in Paragraph 11.3?

(c) What implications if any result from the fact that in some provisions of China's Working Party Report, for instance in Paragraph 160, there is an explicit reference to “Article XX of the GATT 1994”, but there is no such reference in Paragraph 11.3?

(d) Why would there be a need to refer to GATT Article VIII in Paragraph 11.3, if, as you suggest, all GATT provisions were (presumed to be) applicable to situations covered by Paragraph 11.3?

QUESTION 4

(China) In its first written submission, China presents three arguments in support of its contention that the obligation in Paragraph 11.3 of its Accession Protocol is subject to the general exceptions in Article XX of the GATT 1994. China’s first argument is that Paragraph 11.3 of its Accession Protocol “has to be treated as an integral part of the GATT 1994”, because it has an “intrinsic relationship” to the GATT 1994, and the general exceptions in Article XX of the GATT 1994 are therefore applicable to Paragraph 11.3. China’s second argument is that “the terms ‘nothing in this Agreement’ in Article XX of the GATT 1994 have to be read broadly to incorporate provisions in post-1994 accession protocols for which an intrinsic relationship to the GATT 1994 can be



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shown” (emphasis added)1. With respect to this second argument, China reiterates that “the terms ‘this Agreement’ under Article XX of the GATT 1994 do not necessarily confine to the text of the GATT 1994 as it entered into force on 1 January 1995. Provisions beyond the GATT 1994 as it entered into force on 1 January 1995 may well be covered, too, if an intrinsic relationship between a given provision and the GATT 1994 can be established as explained in detail in the preceding section of the present comments and in China’s first written submission”2 (emphasis added). In its rebuttal comments, China clarifies, with respect to its second argument, that it “does not argue that the phrase ‘nothing in this Agreement’ makes the exceptions of Article XX of the GATT 1994 available to violations of provisions contained in (i) other multilateral agreements on trade in goods, (ii) China's Accession Protocol taken as a whole, or (iii) the WTO Agreement as a whole.”3

(a) In the light of the foregoing, we understand China’s second argument to be that the terms “this Agreement” in Article XX of the GATT 1994 should be interpreted to apply to the following, and nothing more than the following: (i) the provisions of the GATT 1994; and (ii) the provisions of post-1994 accession protocols that have become an integral part of the GATT 1994. Is our understanding correct?

(b) If this understanding is correct, please explain how, if at all, China’s second argument adds to its first argument? That is, if the Panel were to accept China’s first argument and conclude that Paragraph 11.3 has automatically become part an integral part of the GATT 1994, would it follow that the words “this Agreement” in the chapeau of Article XX of the GATT 1994 could not exclude, and would actually confirm, the availability of Article XX to defend a violation of Paragraph 11.3? Does China’s second new argument simply amount to the proposition that the terms “this Agreement” in Article XX of the GATT 1994 include all of those provisions in post-1994 accession protocols that have become an integral part of GATT 1994?

Joint comment to China's replies to questions 3 and 4:

1. As a general comment on China`s replies to questions 3 and 4, the European Union

would like to state that its views on the various arguments raised by China in its

request for a preliminary ruling (submitted with its first written submission of 20

December 2012), were already put forward in the submissions made by the European

Union made on the 21 January4 and 30 January 20135. It is not the intention of the

European Union to repeat its views again at this juncture.

1 China’s first written submission, para. 442.

2 China’s rebuttal comments, para. 41.

3 China’s rebuttal comments, para. 42.

4 European Union - Reply to China's Request for a Preliminary Ruling – 21 January 2013, paras. 17- 38.



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2. However, in summary, the European Union wants to reiterate its position that

paragraph 11.3 of China's Accession Protocol is not an "integral part" of the GATT

1994 as China alleges. The European Union also wants to again refer to the fact that

the issue of the applicability of Article XX of the GATT 1994 has already been

decided by the panel and Appellate Body in the China-Raw Materials dispute, and

urges this Panel to follow the adopted panel and Appellate Body reports on what is

essentially an identical legal issue.

QUESTION 5

(China) In China’s view, the result of the Appellate Body’s ruling on the non-applicability of Article XX as a defence to a violation of the obligation in Paragraph 11.3 is that “trade liberalization must be promoted at whatever cost – including forcing Members to endure environmental degradation and the exhaustion of their scarce natural resources”.6 Does this position assume that export duties are, at least in some circumstances, the only type of instrument that can be used to protect the environment and conserve exhaustible natural resources? What is the basis for this assumption? Can it be reconciled with China’s view that “the use of export duties and export quotas can produce identical results”?7

3. The European Union agrees with China's comment8 that "China would find it difficult

to conceive that export duties are the only instrument that can be used to protect the

environment or to conserve exhaustible natural resources […]". As long as it complies

with its WTO obligations, China is perfectly able to take any other measures which

have the objective of protecting its environment or of conserving its natural resources,

without resorting to the imposition of export duties.

QUESTION 9

(China) China submits that the 2012 export duties are justified pursuant to Article XX of the GATT 1994. Is the Panel correct in understanding that China does not dispute the either the complainants' description of how these measures operate, or their claim that these measures are export duties within the meaning of Paragraph 11.3 of China's Accession Protocol?

5 European Union - Comments on China's Comments to the European Union's Reply to China's Request

for a Preliminary Ruling - 30 January 2013, paras. 4-28.

6 China's first written submission, para. 455.


8 China's Answers to the Panel Questions after the First Hearing, para. 27.



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4. As China points out in its reply, the co-complainants, including the European Union,

have all stated the same thing in the first written submissions, namely that the 2012

Tariff Implementation Programme does not specify a time limit for the duration of the

"temporary" export duty rates. This statement is not inaccurate, as the temporary

nature of the duties is not defined in the measure.

5. China now explains that the "temporary" duties were applicable for the whole of the

year 2012 as indicated in the heading to Announcement No. 79, and in its first

paragraph.9 The European Union does not dispute China's explanation. However, this

explanation makes it obvious that the export duties were not meant to be in force for a

"temporary" period of time in 2012, but for the whole of 2012.

QUESTION 10

(China) China submits that the 2012 export quotas are justified pursuant to Article XX(g). Is the Panel correct in understanding that China does not dispute either the complainants' description of how the measures operate, or their claim that these measures are restrictions within the meaning of Article XI:1 of the GATT 1994?

6. In commenting on China's response to Question 10 and in particular paragraphs 32 and

33 of its submission, the European Union would like to refer the Panel to its response

to Question 38, in particular paragraphs 55 to 57.

7. China alleges in its response that the European Union inaccurately describes rare earth

quota allocation and refers to paragraph 60 of the European Union's first written

submission. The European Union notes that paragraph 60 is part of the section

providing a general overview of export quotas. Sections dealing with each of the

materials at issue in this dispute correctly and accurately reflect the measures that

regulate allocation for each product and the manner in which allocation is conducted.

9 Exhibit JE-47: 2012 Tariff Implementation Program (Customs).



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QUESTION 11

(All Parties) Please comment on Canada's third-party submission with respect to the complainants' trading rights claims.

8. As noted in our response to this question by the Panel, the European Union agrees with

the Canadian submission and disagrees with the interpretation of paragraph 5.1 of the

Accession Protocol and paragraphs 83 and 84 of the Working Party Report advanced

by China.

9. China contends that the obligation pursuant to paragraph 5.1 of the Accession Protocol

and paragraphs 83 and 84 of the Working Party Report is limited to removing certain

pre-conditions for "obtaining" the general "right to import and export goods"10, but

that any limitation to the right to trade can be applied thereafter. Contrary to China's

assertion the text of the provisions at issue does not support such a narrow reading of

China's trading right obligations, which would –according to China – make trading

rights commitments inapplicable to the measures at issue.

10. Paragraph 5.1 of the Accession Protocol defines the right to trade as "the right to

import and export" and contains an obligation on China to "progressively liberalize the

availability and scope of the right to trade"11. Paragraph 83(a) of the Working Party

Report is clear that export performance and prior experience requirements would be

eliminated as criteria for "obtaining or maintaining the right to import and export"12.

11. The applicability of China's trading rights commitments to a measure is triggered

when the measure concerns who may export (or import, as the case may be) a good.

As explained in our first written submission, the measures at issue have precisely that

function (i.e. determining who may export rare earths or molybdenum products).13 An

enterprise that does not comply with the export performance and minimum capital

10 See China's answers to Panel's questions after the first hearing, paras 46-47, China' first written

submission, para. 267.

11 Emphasis added.

12 Emphasis added.

13 See European Union's first written submission, paras 148 et seq.



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requirements imposed by the Chinese measures at issue does not have the right to

trade in contravention of commitments undertaken in China's Accession Protocol.

12. China further relies on its right to "regulate trade in WTO-consistent manner", as

recognized by paragraph 5.1 of the Accession Protocol, in submitting that if its quotas

are justified under Article XX, they can be administered in any way it sees fit

(including by relying on minimum capital and prior export performance requirements)

and still be considered WTO-compatible.

13. In so doing China ignores that the obligations under its Accession Protocol relating to

trading rights are distinct from and additional to those relating to Article XI and

possible justifications under Article XX GATT. Even in situations where a quota is

justified pursuant to Article XX, the allocation and administration of a quota must still

comply with other relevant WTO-commitments. The European Union has

demonstrated that China's trading rights commitments apply to the measures at issue,

since the measures at issue result in the denial of the right to export to certain

companies. 14

14. The fact that China's trading rights obligations exist "[w]ithout prejudice to China's

right to regulate trade in a manner consistent with the WTO Agreement", provides no

basis to argue that WTO-consistency of a measure that regulates the administration of

a quota is automatically established where the quota is shown to be WTO-compatible.

Even if, as China argues, the requirements it imposes on companies in order to

determine their eligibility for an export quota and allocation of export quotas fell under

China's "right to regulate trade", China would still be under an obligation to

demonstrate that this right is exercised in a WTO-compatible manner.

15. In replying to Panels' Question 11 China questions what the complainants "seek to

achieve with a challenge of [the] eligibility criteria"15. The European Union considers

that the response to China's query is clear from the claims and the argumentation

developed therein. The European Union is asking the Panel to confirm that the prior

14 As a result of the measures at issue, an enterprise that does not comply with the export performance

and minimum capital requirements imposed by China is denied the right to trade.

15 See China's answers to Panel's questions after the first hearing, para. 53.



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export performance and minimum capital requirements, which China imposes on

companies that want to export rare earth and molybdenum products, are not consistent

with China's WTO-commitments.

QUESTION 12

(All Parties) With respect to the claims regarding prior export performance and minimum registered capital requirements, complainants have made claims under Paragraphs 83 and 84 of China's Working Party Report (incorporated by reference via Paragraph 1.2 of China's Accession Protocol), as well as Paragraph 5.1 of China's Accession Protocol. What is the proper order of analysis with respect to the claims under these provisions? If the Panel found a violation of Paragraphs 83 and 84, would it be necessary to make additional findings under Paragraph 5.1? If the Panel found no violation of Paragraphs 83 and 84, would it follow that there could be no violation of Paragraph 5.1 either?

16. As explained in greater detail in our response to Questions 8, 12 and 11, the European

Union disagrees with the conclusions that China draws from the Appellate Body report

in China – Audiovisual.

QUESTION 13

(China) Please comment on the written submission of Colombia. It states that "China alleges that two types of volume controlling measures have been implemented: (i) restrictions on domestic production and (ii) restrictions on domestic consumption". In this respect, Colombia highlights that "… the data presented by China is performing the opposite of what it is intended to show". Colombia observes that "Although measures have been taken to limit the domestic production, they have not had any material effect in the achievement of their goal. The production caps have been ineffective to control domestic production, since actual production surpasses the established quotas for 2010 and 2011." Colombia also says that with regards to the restrictions on domestic consumption, "the same situation with regards to the restrictions on domestic production is happening in this case". If the export quota was fully used in 2010 and 2011, this would mean that the available quota for domestic production would be 62'000 and 66'400 respectively, a figure below the actual domestic consumption in those years.

17. The European Union will provide more detailed comments on the data provided by

China in its second written submission. At this point we will limit ourselves to the

following preliminary comments:

18. In addition, the European Union would like to refer to its reply to Question 31 and its

comments on China’s reply to questions 32, in repeating that China has not any

specific restrictions on domestic consumption in place.



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19. As regards the comments provided by China on "Restrictions on domestic

consumption,"16 China claims that the consumption of rare earths is not all from “new

production” but also included existing unsold stocks, recycled products as well as

unknown levels of illegal extractions and production. The European Union notes that

what China alleges has not been proven with any evidence or any quantification. What

has been established is, that the export quota has not been filled in 2011 and 2012 and

therefore, as China itself admits,17 domestic consumers had recourse to the material

eligible for exports.

20. As regards the assertion that China makes about the effect of the resource tax on rare

earth products on domestic consumption,18 the European Union would like to first note

that the cost increase triggered by the resource tax applies to both domestic and

foreign consumers of these materials. Moreover, one cannot reasonably assume that

the hike in prices that occurred between January and July 2011 of the materials needed

for producing NdFeB magnets (i.e. neodymium, dysprosium, and praseodymium

metals – of respectively around +400%, +700% and +100%)19 can be attributed solely

to the Chinese resource tax.

21. Lastly, China notes that the rate of the increase in China’s consumption of rare earths

has declined since China increased enforcement of domestic production targets in

2011. This argument is unpersuasive, especially as it does not seem to take account of

the overall stagnation of the global economy in the last few years.

16 China's Reply to the Panel Questions after the First Hearing – 14 March 2013, paras.69-75.

17 China's Reply to the Panel Questions after the First Hearing – 14 March 2013, para.173,

18 China's Reply to the Panel Questions after the First Hearing – 14 March 2013, para.75, 3rd bullet point.

19 From data from on the graphs submitted by China in its reply to the Panel’s Question 42.



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QUESTION 18

(China) When did China start to impose export quotas on rare earths, tungsten and molybdenum; and since then, what level of export quotas has been imposed on those natural resources?

22. The comment on this question also refers to the comment on China's Reply to

Question 28.

23. The European Union would need more time to verify the data provided by China in

Exhibits CHN-137, CHN-138 and CHN-139. However, already based on a first review

the data provided raises some immediate questions. For example, if the export quota

on rare earths has been in place since 1999 and for tungsten since 2000, why did China

provide the figures only as of 2002? Why are there different production targets for rare

earths issued by MLR and MIIT from 2006-2010?

24. Furthermore, how does China explain that for the years 2008 and 2009, the amount of

the quota which was the same for both years when expressed in REO Tonnes, (that is

34,000 REO Tonnes), was expressed differently in gross weight, knowing that all

these amounts have been fixed at the moment of the adoption of the export quota

amounts allocation, i.e. before the actual exportation activity has taken place, and

hence before it was known what products and with what exact equivalent of REO will

be exported in the period concerned? In gross weight, the amount cited by China for

2008 is 47,449 Tonnes and for 2009 it is 50,145 Tonnes.20 This can also be noted for

the data provided by China for the years 2010, 2011 and 2012, which also had the

same export quota of 24,000 REO Tonnes. However, in gross weight the amounts are

all different: i.e. 30,258 Tonnes for 2010, 30,184 Tonnes for 2011 and 30,996 Tonnes

for 2012.

25. The European Union would also like to know why, for the years 2002 to 2004, the

amount of the export quota for rare earths was only expressed in gross weight, but not

in REO Tonnes. The European Union believes that the reason for this lies in the fact

that quotas amounts have simply been set in gross weight from the outset, without any

consideration of the exported rare earths content.

20 Exhibit CHN-137.



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QUESTION 19

(All parties and third parties) In paragraph 88 of its first written submission and paragraph 17 of its oral statement at the first substantive meeting, China refers to paragraph 7.375 of the Panel Report in China – Raw Materials. Could the parties comment on paragraphs 7.375 and paragraphs 7.384-7.386 of the Panel Report?

Paragraph 7.375 provides that:

"Thus, a proper reading of Article XX(g) in the context of the GATT 1994 should take into account the challenge of using and managing resources in a sustainable manner that ensures the protection and conservation of the environment while promoting economic development. As the Appellate Body explained, to do so may require 'a comprehensive policy comprising a multiplicity of interacting measures.'" (footnote omitted)

Paragraphs 7.384 to 7.386 provide that:

"The Panel refers now, as part of the immediate context of Article XX(g), to the provisions of paragraph (i) of Article XX, which deal with situations where the exports of domestic materials can be restricted to assist the affected domestic industry. Even in such a situation where a Member is explicitly protecting its downstream industry, Article XX(i) ensures consideration of the interests of foreign producers.

…

Article XX(i) provides explicitly that any export restrictions on domestic materials cannot be imposed to increase the protection of the domestic industry. Hence the restrictions remain subject to the core GATT principles of non-discrimination. In the Panel's view, Article XX(g), which provides an exception with respect to 'conservation', cannot be interpreted in such a way as to contradict the provisions of Article XX(i), i.e., to allow a Member, with respect to raw materials, to do indirectly what paragraph (i) prohibits directly. In other words, WTO Members cannot rely on Article XX(g) to excuse export restrictions adopted in aid of economic development if they operate to increase protection of the domestic industry."

26. In view of the fact that the arguments raised by China in response to this question,

have largely been addressed by the European Union in its response to Question 19 and

Question 56, the European Union refers to those responses.



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QUESTION 20

(China) In its first written submission, China estimates that "at current levels of demand, medium/heavy rare earths deposits in Southern China will only last for another 15 years".21 (emphasis added) Could China provide information on the situation regarding light rare earths deposits?

27. The European Union notes that China does not provide a reply to the Panel’s question.

It only refers to the alleged past depletion of resources in one main area of light rare

earth mining, but it does not provide any quantification nor information on what such

quantification would mean in terms of life-span and in terms of China’s quantitative

conservation objectives. In reference to this, the European Union would like to refer to

Exhibit CHN-140, which are extracts from the "Roskill Report" on Rare Earths and

Yttrium. According to this Report:22 "The US Geological Survey Mineral

Commodities Summary of January 2011 estimated Chinese reserves of rare earths as

55Mt of REO, representing around 50% of the world's total reserves, as identified by

the USGS (Section 3.3.1). China's own estimate of the reserves of rare earths, dating

from 2005, is 67.80Mt of REO."

28. If one takes as an average an annual extraction rate of 90,000 REO Tonnes, which is a

similar level to the current level set by China as an extraction quota, the European

Union concludes that, on this basis, Chinese reserves of rare-earths would last for

another 600 years. Moreover, this certainly does not take into account the fact that new

fields are being discovered (and can also potentially be discovered in the future),

further to exploratory mining activities by Chinese companies who would like to

further exploit these resources, as is in fact being reported in the Chinese media.23

29. The European Union would also like to note that China has so far not provided any

sound scientific explanation as to the reason why medium/heavy rare earths deposits

are being evaluated at 15 years of lifespan, as compared to the several centuries of

possible use of its rare earths deposits in general.


22 Exhibit CHN-140, page 72, the 1st paragraph in Section 6.6.1 entitled "Reserves".

23 Exhibit JE-122- People’s Daily, Another large rare earth mine found in Hubei’s Shiyan of the 9 October, 2010. Exhibit JE-123- Article from news.xinhuanet.com : "China MinMetals takes steps to help rare earth industry consolidate" of the 16 June 2011.



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QUESTION 24

(China) Other than Exhibit CHN-63 and CHN-13, could China provide evidence of official documents or legal instruments indicating the process for setting the amount of export quotas in 2012? How is the goal of conservation taken into account in the process of setting export quotas?

30. As the European Union noted already in its opening oral statement at the first meeting

of the Panel with the Parties, CHN-63 and indeed China's policy in general, when it

comes to export quotas, seems far more related to the ways in which to ensure the

satisfaction of demand by Chinese consumers of rare earths, than to the conservation

of rare earth resources.

31. The process for setting up export quotas suffers from a fundamental lack of

transparency. Until late 2011 (for the 2012 export quotas), China provided no insight

into how the quota levels were determined. When it finally did, it did so by means of

an ex post declaration by a Chinese official.

32. In the view of the European Union, China's response does not provide an answer to the

Panel's question on how the process of setting the export quota takes into account the

conservation objective. The decision on the level of the quota seems to have been

influenced more by demand and consumption patterns than any long-term goals

related to conservation. China's policy statements are based on what seems to be

unverifiable assertions about the remaining reserves24 and do not provide any specific

explanation of China's conservation objective in quantitative terms (e.g. how much of

the raw materials it wants to conserve, medium and long-term goals of expanded life-

span and how the production quotas and export quotas relate to it). In its reply to

Question 43 China actually acknowledges that it does not have an overarching

medium to long-term conservation objective which is then broken down into annual

production quotas. Conservation is by definition a long-term goal and China should

explain what it wants to achieve. The last sentence of paragraph 205 seems to be again

more concerned about demand and supply than conservation.

24 See European Union's Opening oral statement at the first meeting of the Panel with the Parties, para.

31.



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QUESTION 27

(China) Could China comment on the assertion of the United States that "according to the deputy director of China's General Administration of Customs anti-smuggling bureau, China's export restrictions on rare earths are one of the 'main reasons' behind smuggling"?25

33. The European Union refers to China's allegation in its reply26 that "the most important

cause of illegal mining and production of rare earths is the very strong demand from

foreign traders and buyers actively seeking out cheap smuggled rare earths from

China." In this regard, the European Union firstly refers to its reply to Question 26

from the Panel.

34. In addition, the European Union submits that China has not proven that the smuggled

goods come from illegal mining and production. Therefore, China’s allegation that

through smuggling foreign consumers want to avoid all the increased environmental

and conservation costs is also nothing more than a pure allegation.

35. In its reply, China also alleges that there is no "legal outlet" for illegally mined

products within China, as "Chinese law prohibits illegally produced products from

being purchased and sold." The European Union assumes that Chinese law equally

prohibits the export of illegally produced products. In which case these would be a

matter of enforcement, where in certain cases different treatment can be justified for

placing on the market domestically and exporting. However, where there is a justified

need of taking measures to ensure enforcement of legal mining and/or production with

respect to exports other instruments, far less trade distortive than quotas can be relied

upon to achieve that aim. Moreover, it seems that China wants to assert that

controlling illegal production and consumption is easier with regard to domestic

purchases. However, this seems to be already contradicted by China’s reply to

Question 13 (paragraph 72) where China claims that one reason for the higher

domestic consumption are “unknown levels of illegal extraction and production”.

25 United States' oral statement, first substantive meeting, para. 43.

26 China`s reply to the Panel`s Questions after the First Hearing – 14 March 2013, Para.128.



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36. China also refers27 to what it terms as the “persistent illegal actions of foreign

downstream users of rare earths” as if they were the origin of the problem of the

smuggling of rare earths from China. In response to this allegation, the European

Union would like to contest the fact that only “foreign downstream users” are

responsible for illegal exports. As explained in our reply to Question 26 and noted

above, the European Union would like to reiterate that it is the Chinese export

restrictions which are at the origin of illegal exporting activities. In addition, the

European Union would like to note that any illegal exporting activities would not be

successful if Chinese production companies and traders were not offering and

exporting goods illegally in the first place.

QUESTION 28

(China) Could China extend Table 128 and Table 229 in its first written submission by providing data on production levels and quotas; extraction levels and quotas; export levels and quotas; export duties; and actual domestic consumption levels for each of the 17 rare earths at issue, as well as for tungsten and molybdenum, from 1999 to 2012?

37. Please refer to the comments made by the European Union to China's reply to

Question 18.

QUESTION 30

(China) Is there any non-border and non-discriminatory measure (such as measures on domestic consumption) that could serve to enforce the production restrictions/quotas?

38. In its reply China provides explanations about its domestic enforcement actions on the

"cracking down on illegal mining and production"30 and on its "improving

enforcement of the volume restrictions" and states that these actions do not take place

at the border but throughout China's territory. However, these are measures controlling

the "production" side of these materials and not its consumption.

27 China`s Reply to the Panel`s Questions after the First Hearing – 14 March 2013, Para.133.

28 China’s first written submission, p. 60.

29 China’s first written submission, p. 62.

30 China's Reply to the Panel Questions after the First Hearing – 14 March 2013, para. 143.



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39. The European Union notes that in its reply China does not mention or provide any

reference to any measures that would control domestic consumption in China on the

"consumer" side as the export quotas do for foreign consumers.

QUESTION 32

(China) In paragraph 105 of its first written submission China refers to paragraph II(7) of Several Opinions that provides that domestic conservation actions must be simultaneously combined with export restrictions. In particular, China cites "Restricting measures on mining, production, consumption and exports shall be implemented simultaneously". Has China adopted any measures that specifically and explicitly limit domestic downstream industries' consumptions of the products subject to the challenged quota?

40. China's reply to this Question (which it links to the reply it gave to Question 13) in fact

proves that China has not adopted any domestic measures that "specifically and

explicitly limit domestic consumption", as the Panel had asked. China's main argument

is its assertion that "by subtracting the export quota from the production quota for

newly produced rare earth products and providing incentives to exporters to fill their

export quota, China restricts the share of the total production quota available to

Chinese downstream industry consumers."31

41. In the opinion of the European Union this is neither factually correct nor legally

convincing. As explained in the European Union’s reply to Question 31, the

combination of the production quota with the export quota does not necessarily lead to

a restriction of domestic consumption. To the contrary, the export quotas operate to

restrict foreign consumption and can therefore have the effect of shielding domestic

consumption from the limiting effects of the production quotas.

42. China also refers to Paragraph 75 (which forms part of the reply given to Question 13

from the Panel). According to China this provides "evidence of the restricting effect of

China's domestic restrictions on consumption by the downstream industry."32 This

paragraph in turn refers to information given to the Panel in China's Oral Statement of

the 26 February in which it claims that it has provided evidence that the rate of





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domestic consumption of rare earths in China in 2013 has declined compared to 2011,

that the domestic price of these materials has increased in China, and that the resource

tax it has imposed in 2011, "had a demand-softening effect on Chinese downstream

consumers of rare earth products".33

43. In the opinion of the European Union, all these assertions – some of which are flawed

in themselves – are not providing any evidence that China has implemented any

"measures that specifically and explicitly limit domestic downstream industries'

consumption" which is what the Panel had asked for. The fact that domestic

consumption has slightly decreased from 2011 to 2012, (according to the figures

presented by China in Exhibit CHN-137) does not prove that this is linked to any

restrictive measures put in place by China (and does not take into account the effects

of the general economic downturn in these years). When one examines the figures

provided by China, one notices that there has been an even more significant decrease

between 2007 and 2008 without the domestic measures that China is referring to now

in place.

44. Moreover, the “evidence” produced in paragraph 75 of China's reply does not

demonstrate any specific and explicit restriction of domestic consumption. To the

contrary, all the restrictive measures mentioned affect domestic and foreign consumers

alike (for example the resource tax). Also the evidence provided by China in Exhibit

CHN-132 does not refer to domestic downstream production specifically, but to

downstream consumption in general, including foreign consumption. Furthermore,

foreign users have been suffering even higher prices due to the export duties and

higher export prices, so effects on foreign downstream users have been the same (as

shown by the unused quota).

45. Finally, the European Union would like to point out that nothing in the evidence

provided proves the link between the reduced downstream demand and the resource

33 China's Reply to the Panel Questions after the First Hearing – 14 March 2013, para. 75, third bullet-

point.



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tax34. In addition, Exhibit CHN-132 also refers to reduced downstream demand

because downstream users have been using stocks purchased in previous time periods.

QUESTION 34

(all parties and third parties) Do the parties agree with the test of "even-handedness" proposed in paragraph 7.465 of the Panel Report in China – Raw Materials, i.e. "in order to show even-handedness, China would need to show that the impact of the export duty or export quota on foreign users is somehow balanced with some measure imposing restrictions on domestic users and consumers".

46. The European Union has already given its reply to this question in the answers it

submitted to the Panel on the 14 March 2013.

47. However, it would like to point out that it strongly disagrees with China's allegation35

that: "the panel's statement in Paragraph 7.465 of the Panel report in China-Raw

Materials cannot be read as meaning to insert new conditions into Article XX(g),

based on a word - "even-handedness" – that is not used in the text of Article XX(g) at

all."

48. The "even-handedness" test contained in the text of Article XX(g) had been originally

devised by the Appellate Body in the US-Gasoline36 dispute in 1996, and has been

interpreted further by the panels and Appellate Body in the US-Shrimp and China-Raw

Materials disputes, and now forms part of established WTO jurisprudence. Thus, the

European Union is of the opinion that China's remark about the panel in China-Raw

Materials, "inserting new conditions" into the text of GATT Article XX (g) is highly

misguided.

49. The European Union notes that China explicitly agreed in its reply to this question

with the European Union’s assertion that "even-handedness" requires that a “certain

quantitative balance of the restrictive effect imposed on the domestic side and on the

34 Exhibit CHN-132. The 4th paragraph only refers very generally to “As the State is adjusting its rare

earth policies, the price of rare earths …has been surging,”


36 Appellate Body report, US-Gasoline, Para. 20.



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export side has to be respected”37. It flows from this “quantitative balance” that “China

[…] need[s] to show that the impact of the export duty or export quota on foreign

users is somehow balanced with some measure imposing restrictions on domestic

users and consumers” as the panel in China – Raw Materials found in paragraph 7.465

of its panel report. All domestic restrictions that China refers to are equally affecting

domestic and foreign users. In addition, the export quotas (and duties) affect foreign

consumers only. This additional restriction is not only not balanced with any

restriction specifically and explicitly on domestic consumption, it can also have the

effect of even shielding domestic consumers from the limiting effects of the

production quota38.

50. The European Union also strongly contests the repeated allegations by China that: (i)

the production quota in combination with the export quota have a limiting effect on

domestic consumption39 and (ii) that foreign consumers did not experience any

restrictions on rare earth exports in 2012 because the export quota has not been filled40

and (3) that Chinese domestic consumers have experienced restrictive effects that

foreign consumers have not experienced41. The European Union does not want to

repeat its arguments here but refers to its previous arguments made elsewhere.

QUESTION 35

(all parties and third parties) Could the differences between the foreign and domestic prices of the products at issue be relevant for assessing "even-handedness"?

51. The European Union would like to make some preliminary remarks about China's

reply to this question, and will elaborate further on this issue in the second written

submission.

37 China's Reply to the Panel Questions after the First Hearing – 14 March 2013, para.160.

38 See the European Union’s reply to Panel Question 31 of 14 March 2013.

39 See the European Union’s reply to Panel Question 31 of the 14 March 2013.

40 China’s Oral Statement at the First Panel Hearing, para 45; China's Reply to the Panel Questions after the First Hearing – 14 March 2013, para. 32-33, 161 and 177.

41 China's Reply to the Panel Questions after the First Hearing – 14 March 2013, para.161. See the European Union`s Reply to Question 32, Para. 48.



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52. The European Union disagrees with China's assertion that the: "actual reported foreign

transaction price must be adjusted to exclude export duties because the focus of

China's Article XX(g) defence is on the Complainants' separate claims with respect to

China' 2012 export quota system."42 The deduction of the export duties from the

"foreign transaction price" is a purely hypothetical exercise, as the fact is that the

export duties have been in place for a number of years, are still in place today, and

have always been an added burden on the foreign consumers of these products, while

of course they are not paid by Chinese domestic consumers. The fact that China chose

to defend its export quotas by Article XX(g) of the GATT 1994 and its export duties

on the same products by Article XX(b) of the GATT does not change this reality.

53. In the view of the European Union, China is also wrong when it tries to limit the

assessment of the foreign and domestic prices of these materials to a specific year. The

distorting effects on foreign prices had already taken place before 2012 and foreign

consumers of these products may have had to adjust their demand, which would of

course have had an effect on prices.

54. Moreover, it is absurd for China to claim that prices "must be compared during periods

in which the rare earth markets are not significantly distorted due to unprecedented

market distortions – such as the period during late 2010 to mid-2012"43 This market

distortion and price spikes in 2011 were the result of the extreme tightening of the

Chinese export quota on rare earths in the middle of 2010. The European Union also

provides further comments on this matter in relation to China’s reply to Questions 40,

41, 42.





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QUESTION 36

(China) Could China explain its policy with respect to the unused export quotas? In particular, could China explain paragraph 245 of its first written submission? Could China also comment on paragraph 49 of European Union’s oral statement?

55. The European Union notes that China acknowledged in its response to Question 3644

that unsold export quotas are made available to domestic consumers. This

acknowledgement is of great importance in two respects: (i) it further supports the

argument that Chinese export quotas are industrial policy measures and not

conservation measures, as China alleges; and (ii) it contradicts China’s argument that

the production quotas "in combination with the export quota" works to limit domestic

consumption. The export quotas do not limit domestic consumption. All products

eligible for exports can also be sold domestically instead.45

56. As the European Union has stressed on multiple occasions, the trade distortive effect

of export quotas should not be determined by looking at one year in isolation, but must

take into account the effects that the export quotas had on international trade since

their introduction. One of the undisputed effects with wide ranging repercussions is

business uncertainty for those companies that depend on China's annual policy

decisions on the level of available export quotas. Through the restrictive and distortive

effects of export quotas, China therefore can influence foreign demand to create

advantages for its domestic industry at the expense of other WTO Members. Indeed, it

seems that China's export quotas are the cause of the very effects that China claims to

want to safeguard its own industry from.46

57. However, regardless of the reason behind the existence of unused quotas, the European

Union submits that it is difficult to reconcile the objective of conservation with China's

laxity on domestic consumption caps; in particular but not limited to the use of unused

export quotas. The European Union certainly does not suggest that China should put

back in the ground materials which were already extracted. However, contrary to what

44 See para. 173.

45 See European Union's response to Panel's Question 31.

46 China's opening oral statement at the first meeting of the Panel with the Parties, para. 25.



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China asserts in its Oral statement of 26 February 2013, China could control domestic

consumption by enforcing not only export restrictions but also domestic consumption

restrictions. If China were serious about conservation, China would not make unused

export quotas available to domestic consumers. Rather than doing away with

restrictions on domestic consumption, China would make sure that any unused

quantities are saved and thereby reduce extraction (i.e. conserve more) in the following

year47.

58. This admission by China concerning the availability of unused export quotas to

domestic consumers further confirms why it is of utmost importance to also carefully

examine the compatibility of China's quota administration measures with its WTO-

obligations. Through an unnecessarily restrictive, rigid and non-transparent quota

administration system, China can further exacerbate the negative effects on

international trade of (i) the existence of its export quotas; and (ii) the arbitrary and

non-transparent system of setting the yearly available amounts for export quotas.

59. The European Union also disagrees with the statement made by China in paragraph

171; that in practice foreign users have priority over domestic consumers because

there are strong incentives for using the export quotas. There is no evidence of this

alleged advantageous treatments and indeed the unfilled quota for exports seems to

rather prove the contrary. Furthermore, if – what China claims in its reply to other

questions, domestic and export prices are not different – it is unclear what would be

the incentive for producers to engage in export rather then sell on the domestic market.

47 China suggests that the quota setting mechanism has the same effect. Yet this is not the case as once

unused export quotas have been fully or even just partly used by domestic consumers, the quota setting mechanism - which allegedly takes into account domestic and foreign consumption – would only seem to lead to an increase in the quota for domestic consumption and further restrictions on foreign consumption, but would not appear to lead to an overall reduction of the volume of extracted material.



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QUESTION 37

(China) In paragraph 144 of your first written submission you refer to recycling actions generally encouraged by governments including China. Could China provide more details on the recycling actions it is undertaking to reduce environmental damage and increase conservation?

60. In its Oral statement of 26 February 2013, China presented its recycling efforts as one

of the key factors48 in understanding why production quotas should not – according to

China – be considered as ineffective in controlling domestic production and

consumption.

61. The European Union will at this stage limit itself to noting that despite having been

prompted by the Panel, China did not provide evidence showing that the contribution

of recycling can be considered as making a contribution that is anything more than

marginal in satisfying domestic consumption needs beyond domestic consumption and

production caps.

QUESTION 40

(China) Please respond to the United States’ assertion, in paragraph 65 of its oral statement at the first substantive meeting, that there are "vast differences in the domestic versus foreign prices of a number of the products".49

QUESTION 41

(China) Please provide the rationale for deducting an "export duty of 25% and an estimation of other fees […] of 10%"50 from the FOB price for the purpose of Figures 4 and 5?

QUESTION 42

(China) Following the approach used in Figures 451 and 552 of its oral statement at the first substantive meeting, could China provide a similar analysis for each one of all 17

48 In addition to unused export quotas, which the European Union addressed in its comment to Question

36.

49 United States' oral statement, first substantive meeting, para. 65.

50 China's oral statement, first substantive meeting, p. 20.




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rare earths, as well as tungsten and molybdenum? Subject to data availability, could the analysis be extended to a longer period of time, ideally from 1999?

62. In the opinion of the European Union, China's statement in paragraph 183 of its reply

to Panel's Questions 40 – 42 is misleading in more ways than one.

63. The graphs produced by China in this reply do show price differences, and even if one

is to take the years 2012-2013 as a reference period (which the EU does not agree

with) specific effects on price gaps are also visible in that period (e.g. for yttrium,

europium, and terbium products). These effects are visible even after the dubious

adjustments made by China, which also do not seem completely reliable, as China

itself claims the methodology needs further modifications.

64. The European Union finds it surprising, and indeed quite extraordinary that China,

after drawing conclusions (in paragraph 50 of its Opening Oral Statement) based on

pricing patterns citing the "Metal Pages" as a source, is now stating53 that pricing by

the "Metal Pages" is not reliable, and that it "cannot reliably reflect actual prices"54,

thus undermining the value of its own argumentation.

65. As regards the 10% deduction that China refers to in paragraph 190 which is supposed

to reflect export-related costs, the European Union still waits for further explanations

by China in its second written submission as indicated by China in its Reply.

66. The European Union also contests China’s assertion that the differences between

exports and domestic price trends may originate in different quality grades of products.

The fact that prices for higher purity products are much higher than those of a lower

purity (such as the example of the higher price of lanthanum oxide of 99.999% purity

which China itself cites55) should have the same effect on Chinese domestic and export

prices for the same product of the same purity. In that respect, China’s hypothetical


53 China's Reply to the Panel Questions after the First Hearing – 14 March 2013, paras 188-189 and para. 194.


55 China's Reply to the Panel Questions after the First Hearing – 14 March 2013, para.191, and footnote 186 referring to Exhibit CHN-144.



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references to unknown industry sources, and to citations stating that "China may

produce high purity oxides for specific exports" have absolutely no value in assessing

current price divergences, unless relevant and concrete domestic and export pricing

data for the same product of the same purity are presented by China for a complete

range of products at issue.

67. The European Union also notes that China provides no data on tungsten and

molybdenum prices.

QUESTION 46

(China) Could China respond to the arguments set forth in paragraph 17 of the United States' oral statement at the first substantive meeting, paragraph 69 of Japan's oral statement at the first substantive meeting, and paragraph 78 of the European Union's oral statement at the first substantive meeting?

68. In the opinion of the European Union, China has not replied to the Panel's Questions

44 and 46 in its response.

69. Since China has chosen to defend its export duties by invoking Article XX(b) of the

GATT 1994, the European Union would like to note that it is up to China to prove

before this Panel that these export duties are "necessary," and that they are making a

"material contribution" to the protection of health, and of the environment, as it is

claiming they do. The European Union continues to contest the mere assertion that

China has put forward that export duties will reduce foreign consumption and that this

in turn will reduce production, and with it, pollution.

QUESTION 47

(China) Complainants argue that discrimination between "countries" within the chapeau of Article XX of the GATT 1994 includes not only MFN-type discrimination, but also NT-type discrimination (see e.g. paragraph 54 of the European Union's oral statement at the first substantive meeting). Does China agree?

70. Firstly, the European Union notes that the chapeau of Article XX prohibits not only

arbitrary but also unjustifiable discrimination between countries where the same

conditions prevail. China's response to Question 47 is therefore (except for a reference

in paragraph 211) wrongly limited to arbitrary discrimination only.



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71. Secondly, as explained in greater detail in our Opening Oral statement and in response

to Questions 33 and 38, the European Union strongly disagrees with China's premise

that the quantitative effect of export quotas is the only effect captured by the

prohibition under Article XI:1 GATT 1994 and hence the only effect that China needs

to justify under Article XX.

72. In its response, notably paragraphs 210 and 211, China seems to suggest that the

export quota had no limiting effect on consumption outside China while domestic

consumers suffered from higher prices. The European Union notes that Exhibit CHN-

132 that China submitted in support of this allegation applies to both domestic and

foreign consumers. Both domestic and foreign consumers have suffered. Indeed, the

European Union submits that foreign users have suffered more than domestic

consumers. First, because they had an additional export duty to pay, but also because

of the higher export prices (these are – even after China's adaptations – still higher

than domestic prices).

73. China further argues that higher prices have led to reduced demand of domestic

downstream users who are using up stocks or looking for substitute products.

Interestingly, however, China denies that higher prices had the same effects with

respect to foreign consumers and that these effects at least in part explain the quota

utilization rate in 2011.

74. The European Union reserves its right to provide further comments with respect to the

assertions China makes in paragraph 210 in its second written submission.

QUESTION 50

(China) What do export duties add to export quotas and production quotas in contributing to the policy goals pursued by China?

75. The European Union will comment on China’s reply to Question 50 in more detail in

its second written submission. However, at this point the European Union would like

to note that China fails to explain, let alone quantify, the effects of the export quotas

and export duties with regard to their alleged objectives as well as with regard to each

other. China does not relate the effects of the duties to the effects of the quota and vice

versa.



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76. However, in practice, not only do both types of export restrictions have a similar

effect56 but they also reinforce each other. Foreign consumers are not only affected by

the quantitative restrictions to the supply of these important materials (with all the

negative effects such uncertainty necessarily imposes on downstream businesses),

those who manage to import these goods from China will do so at an even higher cost

as they are faced with the export duty. Depending on the elasticity of demand for the

product in question this can have an additional important impact on demand.

Therefore, during periods of sharp economic slowdown and subdued demand in

downstream sectors in import markets, the export duty will contribute to dampen

demand from the rest of the world even further. This may be one of the factors leading

to the export quotas not having been filled in recent years. As already indicated in our

comments to China’s reply to Questions 40-42, both restrictions cannot be analyzed in

complete isolation.

77. The European Union would also like to comment on the “safeguard function” of the

export quotas (as repeated by China several times in its Opening statement and replies

to Panel’s questions57). China claims that the export quotas provide “a safeguard

against unexpected speculative or pre-emptive demand surges.” In paragraph 25 of its

Oral Statement of 26 February 2013, China elaborates more on the severe risk of

market distortion and supply disruption. China then argues (in paragraph 228 of its

reply to Question 50), that “by means of the export quotas, a certain supply of rare

earth products is guaranteed to domestic and foreign users, providing certainty to

market participants and thus stability to the market.” However, China seems to

completely ignore the fact that it has been these same export quotas that have had

exactly these effects on foreign consumers, i.e. they have gravely distorted the market

and cut foreign consumers off their necessary supplies.

56 As acknowledged by China in its first written submission of 20 December 2012, Para. 433.

57 China’s Opening Oral Statement of 26 February 2012, para. 25, China’s; China's Reply to the Panel Questions after the First Hearing – 14 March 2013, para. 228.



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QUESTION 53

(all parties and third parties) Please comment on paragraph II.1.10 of Exhibit CHN-107-B, Public Notice of Application Conditions and Application Procedures for the 2012 Export Quotas of Indium, Molybdenum, Tin. Please also comment on paragraph I.5 (second paragraph) of Exhibit CHN-100-B, Public Notice of the Qualification Standards and Application Procedures of the 2012 Tungsten, Antimony, Silver State Trading Export Enterprises and Tungsten, Antimony, Export Supply Enterprises.

78. The European Union refers to its response to Panel's Question 53.

79. The European Union further notes that China's explicit recognition that export

performance standards can be lowered for certain companies, directly contradicts

China's line of defence with respect to the European Union's claim under paragraph

84(b) of the Working Party Report with respect to the 2012 Molybdenum Export

Quota Application Procedures58 In that context China alleged that a mere showing of

export performance at any level is sufficient to be considered eligible for an export

quota. If this was indeed the case, there would logically be no need to "lower" the

standard for certain companies, since any - even a marginally low - level would have

been sufficient already.

QUESTION 54

(China) In paragraphs 26-29 of its substantive defense of its export duties on rare earths, tungsten and molybdenum, China refers to relevant part of press releases by China's Ministry Finance:

(2009) " … Meanwhile, to further restrict the exports of 'high-polluting, high-energy-consuming and resource-dependent' products, China will continue with the practice of imposing temporary taxes on the exports of coals, crude oil, metallic mineral ores, ferroalloys, steel billets, etc."59 (2010)60 "In 2009, China will continue with the practice of imposing temporary taxes on the exports of petroleum, rare earths, wood pulp, steel billet, etc. …"61

58 Exhibit JE-63 and CHN-107.

59 China's substantive defense of its export duties on rare earths, tungsten and molybdenum, para. 26, referring to Exhibit CHN-118 (emphasis added).

60 The Panel understands that the reference to "2009" in the English translation of the relevant press release in Exhibit CHN-119-B, and reproduced above, should instead read "2010".



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(2011) "In 2011, China will continue with the practice of imposing temporary taxes on the exports of 'high-polluting, high-energy-consuming and resource-dependent' products, including coals, crude oil, fertilizers, non-ferrous metals, etc. In order to discipline rare earth exports …, export duties for certain rare earth products have been raised."62 (2012) " To promote sustainable development and to contribute to the efforts of building a resource-conserving and environment-friendly society, China will continue with the practice of imposing temporary taxes on the exports of 'high-polluting, high-energy-consuming and resource-dependent' products, including coals, crude oil, fertilizers, ferroalloys, etc."63 Could China explain why, with respect to the continuing export duty measures, it seems that only the press release in Exhibit CHN-121, for export tariffs in 2012, refers to "sustainable development" and "conservation"?

80. In the opinion of the European Union, the reply that China gave to this question does

not explain why, (or provide any further reasoning or motivation), the Press Release

issued in 2012 by China's Ministry of Finance – regarding the export duties China

imposes - refers to the conservation of resources and sustainable development, while

other Press Releases issued in previous years do not.

81. Accordingly, if the export duties which were imposed by China in 2012 (as well as in

previous years) really had a conservation-related objective, they should also have

formed part of China's purported "comprehensive conservation policy" which China is

using in order to justify its export quotas on these same materials, by invoking Article

XX(g) of the GATT 1994. However when explaining its "comprehensive conservation

policy"64 for rare earths, and its "conservation policies" for tungsten65 and

61 China's substantive defense of its export duties on rare earths, tungsten and molybdenum, para 27,

referring to Exhibit CHN-119 (emphasis added).

62 China's substantive defense of its export duties on rare earths, tungsten and molybdenum, para 28, referring to Exhibit CHN-120 (emphasis added).

63 China's substantive defense of its export duties on rare earths, tungsten and molybdenum, para 29, referring to Exhibit CHN-121 (emphasis added).

64 China's first written submission of the 20 December 2012, Section II.

65 China's first written submission of the 20 December 2012, Section III.



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molybdenum66 in large detail, surprisingly China does not mention is export duties at

all.

QUESTION 56

(all parties and third parties) In its first written submission, China advances the following definition of "conservation" in Article XX(g): "[i]n sum, 'conservation' does not aim solely at preserving, in absolute terms, the limited supply of a natural resource. It aims also at managing that supply over time, with a view to ensuring sustainable use and development of the resource-endowed country".67 Is this definition of the term "conservation" consistent with the Appellate Body's statement, at paragraph 355 of its report in China – Raw Materials, that "[t]he word 'conservation' … means 'the preservation of the environment, especially of natural resources"?68

82. In the opinion of the European Union, in its reply to this Panel question, China has

once again engaged in selective quoting from the panel report in the China-Raw

Materials dispute.

83. Whilst stating that a "holistic interpretative exercise"69 was undertaken by the panel in

China-Raw Materials, it failed to even mention the definitive meaning of the term

"conservation" which the panel provided. In fact, after listing various dictionary

definitions, the panel stated as follows:70 "In sum, dictionary definitions define

"conservation" as the act of maintaining the existing state of something, in this case

"natural resources" covered by Article XX (g)." An accompanying footnote71 to this

sentence states as follows: "Other definitions of the term "conservation" are reflected

in international agreements and conventions which tend to define the term

"conservation" in light of the scope of the agreement or in relation to other obligations,

meaning the act of preserving and maintaining the existing state of something, in this

case "natural resources."

66 China's first written submission of the 20 December 2012, Section IV.


68 Appellate Body report, China – Raw Materials, para. 355.


70 Panel report – China-Raw Materials, para. 7.372.

71 Panel report, China-Raw Materials, Footnote 594.



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84. Moreover, the quotation that China cited in paragraph 254 of its Reply to this panel

question, that is paragraph 7.404 of the panel report in China-Raw Materials, was

taken from the part of the panel report dealing with its reasoning on the "requirement

of even-handedness"72, and not with the part dealing with the meaning and context of

the term "relating to conservation."

QUESTION 58

(all parties and third parties) Please explain whether your respective interpretations of GATT Article XX(g) are supported by the preparatory work (GATT/CP.4/33) of that provision and by the GATT report of the 1950 Working Party "D" on Quantitative Restrictions, in particular, the discussions in paragraphs 8-13.73

85. The European Union agrees with China that the objective of any given export

restriction would have to be determined "on the basis of the facts in each individual

case" as is stated in paragraph 12 of the 1950 Working Party "D" on Quantitative

Restrictions.

86. However, the co-complainants have already74 and will continue to show throughout

these proceedings that China's export restrictions at issue are in their essence

protectionist measures which aim at promoting China’s domestic manufacturing

industry at the expense of industries located elsewhere. The export restrictions

constitute a reflection of China's industrial policy rather than a genuine effort to

conserve exhaustible natural resources or to protect the environment. As such they

clash - both in their design and in the effects of their application - with the core

objectives of the multilateral trading system.

***

72 Panel report, China-Raw Materials, paras 7.402 – 7.410.

73 See Japan’s first written submission, para. 147; Japan’s oral statement for the first substantive meeting, para. 30, referring to Japan’s first written submission and Turkey’s third party submission.

74 US First Written Submission of 30 October 2012, paras 26-36; US Opening Oral Statement of 26 February 2013, paras 32-35; EU Opening Oral Statement of 26 February 2013, paras 24-39.

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