Analysis: China unlikely to yield on rare earths despite WTO

China will probably not yield to demands to ease export restrictions on rare earths, unlike its flexibility in some previous trade disputes, even after the World Trade Organization ruled against it in a related case.

The WTO ruled last week that China breached trade law by curbing exports of eight raw materials including bauxite and zinc. Europe and the United States said the judgment meant China should also be forced to increase exports of 17 rare earths as the almost exclusive supplier of these minerals crucial to global electronics, defense and renewable energy industries.

EU negotiators head to China this Thursday to pressure Beijing into relenting on rare earths. The meeting will be watched keenly by governments and businesses concerned about an increasing trend among resource-rich countries to curb exports of scarce minerals and raw materials, which the WTO has warned could trigger shortages and price shocks.

Beijing has said it is willing to discuss rare earths with Europe. But while it has backed down on several high-profile rows since joining the WTO in 2002, China is expected to take a hard line in this dispute -- appealing last week's WTO ruling and standing up to pressure over rare earths.

China risks multiple similar challenges if it were to back down on this precedent-setting row, which the government says affects its power to control resources and protect the environment.

We are obviously not satisfied with the ruling, with regards specifically to the rare earths, Song Zhe, China's ambassador to the European Union told Reuters.

The fundamental purpose of our policy is to protect the environment because this resource is exhaustible.

Export controls also play a role in China's industrial policy by potentially attracting foreign high-tech goods producers to set up shop in the country to obtain access to key minerals. These companies would bring valuable know-how into joint ventures with domestic firms and boost Chinese ambitions to climb up the industrial value chain.

With such interests at stake, the dispute ultimately could raise questions about China's long-term willingness to abide by WTO rules.

CHINA UNLIKELY TO RELENT

To be sure, Beijing has backed down on several high-profile rows since it joined the WTO, and Chinese diplomats say negotiations over rare earths are ongoing.

When Europe closed its ports in 2005 to shipments of Chinese-made clothing that were threatening Europe's textile industry, Beijing limited its exports.

More recently, China eased rules on foreign public procurement bids and reduced wind power subsidies after pressure from the United States and other governments.

But other disputes that had a potentially wider effect on China's long-term industrial policy are better indicators of how it will respond in the current row.

It took the United States to court over China's right to hand out subsidies to growth industries, for example, and has taken on European trade barriers to Chinese goods that it feared would spawn similar measures.

The issue of whether China can legitimately hold on to its resources or whether it will be forced in the future to keep exporting them is surely an argument that China would want to win, said a person familiar with the case.

The WTO ruled against China in part because it failed to prove that raw materials were also being curtailed for domestic users - a crucial element for backing up the claim that it wants to conserve resources, say EU officials.

China is likely to provide stronger evidence when it comes to defending its right to restrict rare earths, say trade analysts and officials.

If China files an appeal, a final ruling come by the end of the year.

But WTO rules leave space for an indefinite number of counter-appeals, which could delay China's compliance on raw materials and any other export curbs by many years.

Such a prospect is dangerous, particularly at a time when the WTO's credibility is in trouble thanks to the recent high-profile failure of global trade talks.

This may be a test of China's willingness to abide by and respect the findings of the WTO, said Joseph Francois, a senior fellow and trade expert at the London-based Center for Economic Policy Research.

CREEPING PRECEDENT

In theory, China need not worry that Tuesday's ruling could have wider implications for other cases. The founding treaty of the WTO includes no mention of the Anglo-American legal concept of precedent, whereby past rulings shape the result of subsequent claims.

But in reality, legal experts refer to WTO decisions as having a quasi-binding effect on future cases.

You cannot ignore previous panel or Appellate Body rulings. The WTO's dispute settlement system overall and the Appellate Body in particular aims at ensuring consistency in its case law. They are not operating in a vacuum, said Vasiliki Avgoustidi, associate director at international law firm Berwin Leighton Paisner.

Precedent matters in this case in particular, because it is the first time the WTO has ruled on the murky issue of the right of nations to control exports of their resources. It could prompt similar challenges not just against China but against other states that curb exports.

This ruling will create leverage to challenge export curbs by China, India and Russia on other raw materials - such as iron ore, scrap metal and alloys, said Karl Tachelet, director of international affairs at European steel lobby Eurofer.

(Reporting by Juliane von Reppert-Bismarck; Editing by Jane Baird)