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1. The written research assignment is, "Are trade sanctions effective at achieving their purpose?"

a. Write your response with the Background, Issues, and Conclusion.

b. Write a case analysis on this question, "Should U.S. Imports of Prescription Drugs from Canada be Widened?.

CHAPTER 7 Governmental Influence on Trade CASE Charity begins at home. English proverb Trade Disputes and Protectionist Measures for Strategic Materials: The Case of REEs1 Stefania Paladini The cautionary tale of rare earth elements (REEs) is in many ways emblematic of the way protectionism measures can lead to disputes and even to trade wars. It also offers an example of the recourses that states can expect from the World Trade Organization (WTO) in the event of such disputes. REEs suddenly came under the spotlight when, in 2009, the worlds industries realized that more than 90 percent of the global production (that is, mining and processing) of these elements was and still is, to a certain extentvirtually monopolized by China. Moreover, since 2005, China had quietly started to impose an export quota in an attempt to retain a substantial part of the production in the domestic market, causing a spike in the spot and future prices of the minerals. To make the situation even more difficult, in October 2010 a Chinese fishing vessel was intercepted by the Japanese coast guard in the territorial waters of the disputed Sengaku Islands (which the Chinese call Daioyu), and its crew was arrested. China retaliated by blocking exports of REEs to Japan, causing an outcry at the international level and eventually leading to a request for a WTO intervention in the matter of the whole REE business. Rare earth elements being loaded on cargo ship in China. Source: Thomas Baker/Alamy Stock Photo M07_DANI3274_17_GE_C07.indd 221 04/06/21 7:06 PM 222 PART 3 Theories and Institutions: Trade and Investment The term rare earths defines 17 elements (scandium, yttrium, and 15 lanthanides) that, in reality, are not so rare or precious. In fact, some of them are as common in the Earths crust as zinc and copper, and the scarcity is true of only a few of them. The term derives from the fact that the extraction of these elements is usually complicated, expensive, and often environmentally taxing because of their low concentration in the minerals containing them. The first rare earth mineral was discovered as late as the end of the eighteenth century in Sweden, the rest over the course of the nineteenth century. The use and relative importance of REEs have been on the rise in recent decades thanks to the special properties that characterize them; they are essential components in magnets and are indispensable for hybrid vehicles, computer screens, smartphones, and turbines for wind farms, to say nothing of military uses. THE CHINESE MARKET DOMINANCE AND PROTECTIONISM China has become, particularly since the 1990s, the worlds leading producer of rare earths, stepping up production from an initial 27 percent of all production to a whopping 97 percent in 2009. As already stated, the country has also been imposing a growing export quota on some of the less abundant REEs, a measure that has caused their price to explode, fueled fears of shortage, and even provoked a significant amount of smuggling (as in the case of illegal exports to Japan). A lot has been written about the motivations behind Chinese export quotas on REEs that eventually led to a fullfledged lawsuit at the WTO that lasted years and only ended in 2015. From the Chinese side, the explanations for the quotas are generally twofold. The first is linked to economic reasons. Chinas industries require huge amounts of raw materials that they are generally forced to import, with some exceptions, like REEs, that nevertheless need to be secured for domestic producers, especially now that the extraction is concentrated in China. Another reason is the high environmental costs that the extraction of REEs involve, toward which China has become sensitive over the last decade. The quotas resulted in a sharp rise in prices that had previously fallen in the 1990s as a result of overproduction in China. The quotas therefore represent an environmental tax that China imposes on the rest of the world, or so the authorities want them to be seen as Quotas have not been the only attempts from China to control the global output of REEs. China has tried, since the beginning of the new century, to acquire the only two existing major producers of REEs outside its territory. In the first instance, as part of China National Offshore Oil Corporations (CNOOC) famous and unsuccessful bid to acquire the U.S. oil producer UNOCAL Corporation in 2005, the Chinese tried to acquire the Mountain Pass mine in California, which had been at the center of REE production before China started its race. This move heightened Sino-American tensions and was eventually abandoned by the CNOOC. Later, the Chinese company once again tried to persuade Chevron, who had won the takeover, to sell it to them, but without success. The Mountain Pass mine was finally reopened in 2008 by another American company, Molycorp Minerals. The second effort by China illustrates how the attitudes of the developed countries have become increasingly strict, leaving shrinking room for Chinese expansion. In October 2009, the Australian government, on grounds of national security, rejected China Nonferrous Metal Mining Groups $210 million bid to get a controlling stake in the Australian Lynas Corporation. TRADE DISPUTE SETTLEMENT: THE OPPOSITION After the interruption of shipments to Japan in October 2010, there was an escalation in complaints about the quota from the main importers, with the EU taking the lead in seeking multilateral sanctions against China. In fact, this was not the first time the European Union had clashed with China regarding the restriction on export of raw materials. In 2009, along with the United States and Mexico, the Commission had requested an investigation against China in the WTO with regard to ten minerals (including fluorite, zinc, magnesium, bauxite, manganese, silicon carbide, and yellow phosphorus), which, although not classified as rare, are certainly strategic. But in 2010, the European Union went even further. A statement from the Commission in January 2011 warned that the EU could unilaterally suspend the implementation of the generalized preference system (GSP) for countries that implement unjustified restrictions on exports of strategic materials, therefore directly threatening Chinese exports. In July 2012, a formal case involving REEs as well as molybdenum and tungsten was lodged at the WTO Dispute Settlement Board (DSB) to examine the whole issue. It is interesting to follow how the investigation was carried out, because it is a good illustration of the way the WTO works. Many countries (Brazil, Canada, Colombia, India, South Korea, Norway, Vietnam, Argentina, and Australia among them) registered their interest in joining the case. The United States, the European Union, and Japan gained approval from the WTO to constitute an inquiry panel and prepare their evidence by November 2013. The complainants argued that the measures China had imposed were at odds with Chinas WTO obligations because, in its own Accession Protocol, China had pledged to eliminate all export-limitation measures except for a series of products included in Annex 6. Of the three categories of products included in the case filed, only tungsten ores were actually included in that list, while REEs were not mentioned. Therefore, China was not to be allowed to impose any kind of restrictive measures on them, be it quotas, export duties, or any kind of trade barrier. The panel issued its report in March 2014, recognizing the allegations as valid and denying any mitigating circumstances or exceptions (still previewed by the WTO in a few instances) as applicable to the specific case. The WTO also decided that Chinas export quotas were not designed to preserve Chinas natural resources and environment, as claimed by China, but were directed instead to meet precise industrial policy goals. As a result, the WTO condemned Chinas restrictive measures. China did not appeal against the final decision as a whole but, in April 2014, to limited aspects of the panels conclusions. This appeal was rejected. The DSB recommended that China put an end to the restrictive measures and set a deadline for implementing the removal, which was achieved the following year. On 20 May 2015, China informed the WTO that REE quotas and the other measures affecting the other two minerals had been removed in compliance with the DSBs recommendations. Since then, the price of REEs has returned to lower levels, even though they remain higher than they were before the imposition of the quotas. THE FUTURE However, the REE-powered dispute looks far from over and so does the retaliatory use of scarce minerals in commercial disputes. As recently as in October 2019, China declared that it had not ruled out using REEs in its trade war against the United States and announcing a new round of export quotas and other restrictions on the elements and the magnets produced from them. Those restrictions have so far not materialized. But it is not wise to rule them out in the near future. QUESTIONS 7-1 Using the data provided by the case and the resource Critical Materials Rare Earths Supply Chain: A Situational White Paper, available at www.energy.gov, draw an REE supply chain diagram and explain the possible bottlenecks. 7-2 In 2019, China threatened the United States with the use of REEs (again) as a retaliatory action in the ongoing trade war. Why does it still matter, considering that the REE prices are far lower than they were in