USTR Requests WTO Consultations on Chinese Wind Subsidy; Action on Rare Earths Still Undecided

The Office of the United States Trade Representative (USTR) announced last week that it has requested World Trade Organization (WTO) dispute settlement consultations regarding one of the Chinese subsidy programs named in the United Steelworkers petition to USTR. According to USTR, these wind industry subsidies seem to be contingent on the use of parts made in China. The United Steelworkers welcomed the action and said that this was part of a larger administration approach to its petition that involves seeking to confirm where Chinese practices were already changing or the Chinese were willing to change, seeking WTO consultations when certain practices continue, and continuing to investigate and evaluate the issue longer term.

In USTR’s announcement it noted that China agreed in the recent Joint Commission on Commerce and Trade (JCCT) to modify its criteria for approval of new wind projects by no longer requiring prior experience as a supplier to projects in China. At the JCCT, China also confirmed that other discriminatory provisions on local content in the wind sector had already been eliminated, as had been agreed at the 2009 JCCT. The annual USTR Reports to Congress, which contain sections on the annual JCCT negotiations, are online (2010 report: http://www.ustr.gov/webfm_send/2460; 2009 report: http://www.ustr.gov/webfm_send/1572). Both reports discuss the wind sector provisions and the 2010 report also discusses the Chinese agreement not to require the use of locally generated intellectual property in any government procurement – an agreement with much broader implications, but clearly important to emerging energy technologies. USTR also noted that the Chinese clarified that two additional subsidy funds named in the Steelworkers petition have already been terminated. The USTR press release stated: “Along with the case being filed today, these steps effectively address a substantial portion of the claims in the USW’s petition.”

With regard to the remaining allegations, such as export restraints or the cumulative total of Chinese subsidies, USTR indicated it would continue to investigate, review the evidence, and work with USW on the issue.

There have been some press reports suggesting the US was adding rare earths to the case, but these appear to have been premature. In fact, when earlier this week the Chinese announced their rare earth export quotas for the first half of 2011, USTR said it had “raised its concerns” with the Chinese about the export restrictions, but did not specify what action it would take.

Rare earths are critical components of a number of renewable technologies (as well as used in other industries, such as IT), and at present China dominates the world’s supply. Rare earths are in fact abundant in the earth’s surface, but are cumbersome to refine for use. The US used to be the major producer and there is an effort underway to increase US production, principally by Molycorp Minerals in Mountain Pass, CA. However, production takes time to ramp up and the Chinese have limited supply in recent years.

While the Chinese have been criticized for controlling exports for competitiveness reasons, they emphasize that their major concern is a desire to limit the environmental damage caused by the traditional extraction and refining methods. However, they have also expressed concern that numerous illegal mines in China have driven down the world price, and given the finite supply from legal mines in China, they have expressed interest in assuring supplies for Chinese domestic customers. The New York Times has an excellent article on the effort to close illegal mines, which are run by crime syndicates with nasty, as well as dirty, practices. The price and environmental concerns are complex and linked, since the illegal mines do not protect the environment and put downward price pressure on the legal mines, making investment in cleaner practices more difficult.

While traditional mining and refining has been a fairly dirty business, the US-based Molycorp is planning to use newer technology that the company states is both environmentally superior and saves money. Australia is another likely source of additional rare earths supply, and share prices of its companies rose after the Chinese quota announcement.

Exactly how much of a cut the Chinese are making in 2011 is a source of considerable dispute. Media outlets, including the Times article on illegal mines, had figures ranging from 10% to 35%, but as metals analyst Gareth Hatch explains on his blog, Technology Metals Research, these figures are all based on questionable comparisons of the half-year quota announcement and last year’s full-year figure or comparisons of Chinese exporter quotas and total global exporter quotas. The issue is so complex that Hatch actually doesn’t make an estimate for the actual year-on-year cut in the quota. We did hear from another knowledgeable source that the actual cut appears to be around 4% for the year. This type of number would be inline with an effort to keep exports to the actual amount produced by the legal mines. The total for 2011 is purely an estimate at this point because we do not know with any certainty what the Chinese will choose to do in the second half of the year. Hatch also explains the environmental concerns in China, and the failure in the rest of the world to prepare earlier for this development in a link to a BBC report on the same blog site.

Photo by Yuek Hahn, courtesy of a Attribution-NonCommercial 2.0 Generic License.