In a ruling that could have major ramifications for global trade, a dispute settlement panel of the World Trade Organization (WTO) has ruled against China’s policies of imposing export restrictions on a range of raw materials, including certain forms of bauxite, coke, fluorspar, magnesium, manganese, silicon carbide, silicon metal, yellow phosphorus and zinc. The dispute, which was brought before WTO’s Dispute Settlement Body by the US, the European Union and Mexico in 2009, attracted attention since 13 WTO members joined the dispute as third parties. Among them were some of the key global players, India, Brazil, Japan and Korea.

The contention of the complainants was that China had imposed export restraints on raw materials in violation of their WTO obligations that included export duties, export quotas, export licensing and minimum export price requirements. Their arguments were that China was promoting its domestic industry by imposing these restrictions, thus discriminating against its trading partners. Through these arguments the complainants to this dispute challenged the pattern of trade that China has promoted in the past couple of decades wherein it encourages imports of raw materials and intermediates from its trading partners while promoting exports of finished products.

Since the beginning of the last decade, which coincides with its accession to WTO, China has pushed for importing raw materials from the rest of the world, while its exports of raw materials have drastically declined. In 2002, China’s imports of raw materials were 11% of its total imports, which, by 2010 had increased to over 26%. During the same period, its raw materials’ exports had declined from 4.5% to a mere 2%. Since 2002, share of raw materials in its total imports from Organisation for Economic Co-operation and Development countries has doubled, while its share of exports of these products has halved. What is more, China’s trade with most of the emerging economies bears strong resemblance with the “colonial pattern” of trade. More than 84% of China’s imports from Brazil in 2010 comprised raw materials (up from 61% in 2002), while its exports of raw materials to the latter had decreased to a mere 1.4% (from 8.2% in 2002). In case of India, the shift in favour of raw materials is even more drastic. From just over one-third in 2002, the share of raw materials in China’s total imports from India was nearly 70% in 2010. It is, therefore, no surprise that this dispute has so many backers.

Although Chinese policymakers have been adopting well-coordinated strategies to promote the country as the “factory of the world”, they have avoided explicit admission of this reality. However, in this dispute, China’s defence of its policies of export restrictions on raw materials has brought forth its intent of promoting domestic industries quite clearly. China has justified the use of export restrictions using the provisions of the General Agreement on Tariffs and Trade (GATT), the predecessor of WTO, which allows developing countries to avoid excessive dependence on the export of primary products thereby facilitating diversification of the structure of their economies. The use of this justification may sound somewhat strange particularly because these provisions were introduced nearly five decades back explicitly to encourage commodity-exporting developing countries to move up the value chain. Nonetheless, China argued that it is “entitled to use and conserve its natural resources for itself with a view to diversifying its own economy”. China argued further that the customary norm in international law of sovereignty over natural resources was developed in recognition of the “essential” role that natural resources play in the development of countries that possess those resources. However, much to the relief of the complainants to the dispute, the dispute settlement panel could find no justification in China’s argument that it has the exclusive right to use its natural resources like refractory-grade bauxite and fluorspar to diversify its industries; since what was happening in effect was further development of aluminium and steel where China is already a global leader.

China’s defence hinged on two other important provisions of the GATT: one supports use of trade restrictions when exhaustible natural resources are involved, and the other allows temporary use of export prohibitions or restrictions to prevent or relieve critical shortages of foodstuffs or other products essential to the exporting countries. While the former set of provisions have been used in several WTO disputes involving the use of environmental measures, the latter provisions had not been used in any of the GATT or WTO disputes till date.

That the provisions regarding the use of export restrictions to obviate problems relating to food shortages and other essential products should come under intense scrutiny by the dispute settlement panel does not augur well for the future use of these measures. Dispute settlement panels have often provided narrow interpretations of GATT/WTO provisions, thus circumscribing their use, and it appears that the panel adjudicating this dispute is also headed in this direction as regards the interpretation of the provisions on export restrictions.

India has frequently used export restrictions to prevent domestic prices in cereals and vegetables from boiling over. Over the past several months, such restrictions have been used on cotton. Whether the reverberations of the ruling against China’s export restrictions are felt by India would be watched with interest.