China should take cues from rare-earth ruling

Time for all parties to reconsider industry policies

The World Trade Organization (WTO) upheld its decision Thursday that China's export quotas and other supply management practices related to rare earths were inconsistent with the organization's rules. Such restrictions were first imposed back in 2010, with officials at the time saying they were intended to safeguard the country's environment and oversee the flow of these scarce commodities. Such measures were subsequently ruled illegal by WTO authorities in 2014.

China's Ministry of Commerce (MOFCOM) responded to this ruling with a statement saying that it regretted the WTO's reaffirmation of its earlier ruling, according to the Xinhua News Agency. The MOFCOM also reportedly vowed to study the decision and adopt measures which are in accordance with the WTO rules in the future.

As alluded to above, the quota quarrel goes back to March 2012, when representatives from the European Union, Japan and the US jointly called on the WTO to look into Chinese efforts to manage rare-earth exports. At the time, these claimants argued that caps which limit access to these minerals were unfair and violated WTO rules designed to promote fair competition.

In March, officials with the WTO sided against China's export restrictions, a decision which local authorities appealed in April. After the final judgment was handed down, experts were divided on how local groups should face the ruling. Some contended that China could maintain its earlier quotas but subsidize overseas buyers. This proposed solution is clearly unfair to China, not to mention impractical over the long run.

While this latest turn of events is expected to weigh on the rare-earth industry's short-term prospects, officials, miners and rare-earth traders can nevertheless draw some important conclusions from this case.

As a WTO member, China is obliged to follow the decisions of the organization and abide by its rules - even those which local parties may not agree with. More importantly, authorities must realize they can no longer lean on administrative measures to manage exports. Over the coming years, market forces should provide the basis for rare-earth commodity sales. Indeed, such an outcome would be consistent with the central government's broader push to give the market more sway over the Chinese economy.

More immediately, it might be wise for policymakers to cancel quota restrictions and increase resource taxes on rare-earth sales. This would provide the market with a greater voice and create a financial buffer which could be used to encourage local companies to make better use of the country's rare-earth resources.

Actually, the Chinese government has already raised resource taxes on rare earths as a way to bolster prices. In 2011, authorities upped the tax from the original 3 yuan ($0.49) per ton to at least 30 yuan, depending on the element. It might be time for authorities to consider another hike to further increase extraction costs and prevent rare earths from being exported at unreasonably low prices.

China is responsible for about 90 percent of the world's rare-earth output and feeding international demand for these elements has come at a tremendous price to the country's own natural environment. Several countries have already scaled back rare-earth production due to concerns about pollution and contamination. For instance, the US, home to some of the largest rare-earth reserves in the world after China, has reportedly boarded up many of its local rare-earth mines out of such considerations.

Right now, worldwide demand for rare earths has never been higher. As many know, these resources are used to manufacture a host of high-tech products, including wind turbines, mobile phones and hybrid cars. Unfortunately China still lacks the core technologies to capitalize on its own rare-earth resources. In order to break away from its more passive position as an exporter, domestic enterprises have to focus on technological research and development.

At the same time, Chinese authorities must also do more to restrict the illicit rare-earth trade, which only further disrupts normal market order. Tougher supervision and stiffer punishments are needed to clamp down on such illegal behavior.

Lastly, officials should accelerate the reorientation of upstream rare-earth industries around six State-owned groups, a process which is already underway. This will promote unified oversight of the rare-earth production chain and strengthen the long-term development of the industry. This will also lead to the shuttering of small-scale, inefficient mines which are often the worst offenders in terms of disobeying environmental regulations and market discipline.