China's latest rare earth move disappoints EU, U.S.

BEIJING/SHANGHAI Thu Jul 14, 2011 4:20pm EDT

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BEIJING/SHANGHAI (Reuters) - China eased export curbs for rare earth elements on Thursday, restoring them to near-2010 levels in a bid to appease trading partners, but the European Union said the move did not ensure stable supplies and the United States said the Chinese were heading the wrong way.

China accounts for around 97 percent of the world's output of the 17 rare earth metals, which are crucial for global electronics production and the defense and renewable-energy industries. They are used in a wide range of consumer products, from iPhones to electric car motors.

This year's second set of export quotas on the minerals made up for previous cuts and it came just a week after the World Trade Organization ruled against China's curbs on a different mix of raw materials, which some trade partners say could set a precedent.

The EU and the United States were not satisfied.

"This is highly disappointing and the EU continues to encourage the Chinese authorities to revisit their export restrictions policy to ensure there is full, fair, predictable and nondiscriminatory access to rare earth supplies as well as other raw materials for EU industries," EU trade spokesman John Clancy said in an e-mailed statement.

In Washington, the U.S. Trade Representative's (USTR) office said China was moving in the wrong direction because Beijing's latest move expands the scope of products covered by the quota, which for 2011 represented a 40 percent decrease from 2009.

"We continue to be deeply troubled by China's use of market-distorting export restrictions on raw materials including rare earths," USTR spokeswoman Nkenge Harmon said.

"This is not the direction that China should be headed in. We will continue our efforts to engage China in the most constructive ways possible, through both bilateral and multilateral mechanisms, to address its continued use of raw materials export restrictions," Harmon said.

China has set the second batch of quotas at 15,738 tonnes, bringing the full year total to 30,184 tonnes. The allocation has almost doubled from last year's second batch of export caps of 7,976 tonnes. However, it is down a notch from 2010, when China limited exports of the 17 minerals to 30,258 tonnes.

China produced 118,900 tonnes of rare earths in 2010.

'NO NOTICEABLE CHANGE'

China's policies on rare earths are closely tracked by companies and policy makers around the world, especially as suspicions have grown that Beijing was using quotas to give unfair advantages to its own producers.

"A first analysis of China's rare earth quota announced today shows that there is no noticeable change in the annual amount of rare earth China will allow to be exported to the EU," Clancy said.

The issue became a flash point last year after China halted rare earth shipments to Japan during a diplomatic dispute, a move that worried its trade partners and underscored that Beijing was ready to use its monopoly as a political tool.

China slashed rare earth export quotas by 35 percent for the first half of 2011, choking off global supplies and causing prices to soar.

The announcement of the quotas coincided with China-EU trade talks in Beijing and came just a week after the WTO ruled against China's export curbs on eight raw materials, such as bauxite, coke and magnesium.

Some have argued that ruling set a precedent on the legality of export curbs and led Europe and the United States to say China should also be forced to increase exports of rare earths.

At a briefing on Thursday, Chinese Commerce Minister Chen Deming did not mention the new quotas but sounded a note of confidence, telling reporters he was not concerned about any possible WTO challenge to Beijing's rare earths restrictions.

"The rare earth issue has not entered the WTO stage," Chen said during a joint briefing in Beijing with the visiting EU trade commissioner, Karel De Gucht.

"I am not worried because we have already had some negotiation (with the EU)," Chen said without elaborating.

At a later briefing, De Gucht said he was confident a negotiated solution could be achieved, but said China should publish such quotas further in advance of when they are imposed.

"The level of the quota is very important and also the predictability," he said. "What the industry needs is predictability."

Following the WTO's earlier ruling, De Gucht had said the EU, the United States and Mexico could consider legal action if China fails to cooperate.

'WE WANT THE SAME RULES'

"On rare earths, what we have been saying is that we want to see applied to rare earth materials the principles that have guided the WTO panel when making the judgment on the raw materials case. We want the same rules to be applied," De Gucht told reporters after he and Chen read separate statements on the morning's trade negotiations.

China expressed its intention to appeal the WTO raw materials decision, De Gucht said, adding that the rules on trade in raw materials would be clear by year-end.

In its raw materials ruling, the WTO panel said China's domestic policies fell short of demonstrating that its export duties on the materials were to curtail pollution or conserve exhaustible natural resources.

China has taken steps to consolidate and rein in its polluting rare earths industry, which may bolster its case if the raw materials ruling is used as a precedent in a similar challenge.

Beijing has said claims by countries that its export curbs on rare earths threatened their economic and national security were "groundless," and that its quotas fell within WTO regulations.

(Additional reporting by Aileen Wang in Beijing, Polly Yam in Hong Kong, Yuko Inoue in Tokyo and Doug Palmer in Washington; Writing by Jason Subler and Fayen Wong; Editing by Will Dunham)

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