China Likely to Back Off in Export Fight

Beijing has no real grounds for defending its restrictions on exports of raw materials.

By Andrew C. Schneider, Associate Editor, The Kiplinger Letter

July 1, 2009

The U.S. and the European Union have a strong World Trade Organization case against China. Beijing’s restrictions on raw material exports violate Article XI of the 1947 General Agreement on Tariffs and Trade -- the founding document of what is now the World Trade Organization -- as well as the terms of China’s own membership agreement with the WTO.

“This will be a very well-documented complaint, and I would not envy having to defend this,” says Clayton Yeutter, U.S. trade representative under President Reagan and now a senior adviser to the law firm Hogan & Hartson.

History suggests China will settle rather than risk a negative decision. It has a track record of retreating and repealing barriers when challenged and when the law is clearly against it, starting with a 2004 tax dispute over integrated circuits.

But backing down will be hard for Beijing and therefore is far from a certainty. China has a great deal at stake, having spent years locking up raw material supplies critical to its manufacturing. Few countries have such a dominant position that applying such restrictions would give them an economic advantage over their competitors. That’s one of the reasons disputes over export tariffs and quotas are so rare.

China is one of the exceptions. Its supplies of the nine raw materials -- bauxite, coke, magnesium, manganese, silicon carbide, silicon metal, yellow phosphorus and zinc -- are so large that Beijing’s restrictions drive up the costs on world markets while holding them down domestically. The result is a subsidy of sorts for Chinese manufacturers, letting them charge less for finished goods than foreign firms pay for raw materials.

A Chinese retreat would benefit a wide range of U.S. and EU manufacturers. The restricted minerals are key inputs for making steel, aluminum and chemicals. “Given that [those] are pretty fundamental to our economy, it wouldn’t surprise me that this accounts for much of our trade deficit,” says Frank Vargo, vice president for international affairs at the National Association of Manufacturers. Lifting China’s export restrictions would lower the cost of making those basic goods, as well as products that use them. Those range from beverage cans on the low-tech end to prescription drugs, building materials, cars, solar cells, microprocessors, major appliances and more.

That’s why Beijing may fight to keep its edge as long as it can. In the end, though, it’s likely to realize that it can’t win.

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