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Rare-Earths Spat With China Could Be 'Slam Dunk' for U.S. Firms

Stocks in this article: AAPL TM BA MCP

The rare-earth elements dispute is very similar to a raw-materials dispute settlement the WTO's Appellate Body passed in a January decision to bring China's export duty and quota measures "into conformity with its WTO obligations."

The body found China's raw materials practice inconsistent with Article XI of the General Agreement on Tariffs and Trade, which states, simply, that a party may not introduce quotas on exports. (It also found China at odds with Article VIII about fees and Article X about transparency.)

In the raw-materials case, the United States alleged China had imposed restraints on exports of materials like bauxite, magnesium and zinc, which created scarcity and caused higher prices in the global market.

Like the current U.S., E.U. and Japan complaints against China's rare earth export practices, the raw materials complaint highlighted their disadvantages to China for technology production.

"Specifically with the rare-earths case, I think that should be a slam dunk for the U.S. and the E.U. and Japan, because we've just had the raw materials export case come out in the U.S.'s favor," said Lewis.

There is one GATT rule that China could use to craft in defense of its rare-earth exports: Article XVIII, which is also known for its "infant industry" language.

This article states that developing countries can, under certain circumstances, apply quantitative restrictions and grant tariff protection in order to help establish a specific industry in economic development.

An interesting twist China argued in the earlier July 2011 WTO Panel on the raw-materials decision was for Article XXXVI of GATT. Simply, Article XXXVI defends developing countries' ability to gain an increasing share of world export activity.

You might be wondering how China's export quota practice would increase its share of world exports.

Well, China argued in the July Panel decision that by imposing an export quota it would be able to retain more of its own raw materials to be used for production by Chinese companies. The finished products made using the raw materials would then increase China's share of exports in the world market.

It is likely that China could use this same argument against the rare-earth elements dispute by the United States, European Union and Japan.

In short, Lewis said the Chinese have tried to justify derogations from the language of Article XI's general prohibition on quota restrictions.

Molycorp (MCP) shares rose sharply Tuesday after the president issued his remarks. Molycorp owns the largest rare-earth elements mine in the United States at Mountain Pass, Calif.; however, the mine ceased operation in 2002 due to environmental concerns and increased competition from the company's low-cost rivals in China.

The Mountain Pass mine once supplied a majority of the world's rare-earth elements, according to Molycorp's Web site.

U.S. Trade Representative Ron Kirk said in January that the WTO Appellate Body's Jan. 30 raw materials decision was a victory for U.S. manufacturers and workers.

Should the rare-earth elements dispute be upheld or force a Chinese settlement, American industries that sell everything from cars and wind turbines to televisions, cameras and advanced batteries could be poised for another cheer. But China will certainly claim a legitimate argument.

-- Written by Joe Deaux in New York.

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