UPDATE 2-China loses appeal of WTO ruling on rare earth exports

Thu Aug 7, 2014 1:04pm EDT

(Adds details, reaction from EU, U.S. trade officials)

GENEVA Aug 7 (Reuters) - China lost an appeal at the World Trade Organization in a case brought by the United States, the European Union and Japan to challenge China's restrictions on exports of rare earths, according to a WTO Appellate Body ruling published on Thursday.

"China has not demonstrated that the export quotas that China applies to various forms of rare earths, tungsten and molybdenum by virtue of the series of measures at issue are justified," the document's conclusion said.

China produces more than 90 percent of the world's rare earth minerals or metals, which are key elements in defense industry components and modern technology from iPhones and disk drives to wind turbines. It imposed strict export quotas in 2010, saying it was trying to curtail pollution and preserve resources.

Prices soared by hundreds of percent, leading the United States, European Union and Japan to complain that the restrictions gave Chinese companies a competitive edge in such products as hybrid car batteries, wind turbines and energy-efficient lighting.

China's defeat at the WTO was widely expected after it lost a similar case over exports of other commodities. It will now be obliged to cancel its export quotas to abide by the WTO ruling.

U.S. Trade Representative Michael Froman said the ruling marked the "end of the line" for the dispute.

EU Trade Commissioner Karel de Gucht said he looked forward to China's swift compliance. "This ruling sends a clear signal that export restrictions cannot be used to protect or promote domestic industries at the expense of foreign competitors," he said in a statement.

The ruling could benefit rare earths producers outside of China like Molycorp Inc, whose shares were up 4.4 percent on Thursday, though the stock rose before the ruling was released, following news the company announced a long-awaited financing commitment.

Demand for rare earths comes from a variety of industries. General Electric uses rare earths in wind turbines. Toyota and Nissan use them for their hybrid and electric cars, while Blackberry and Apple Inc need them for smartphones and tablet computers.

China had argued that limits on exports of rare earths, as well as the metals tungsten and molybdenum, were needed to prevent over-mining and defended its policy as an essential part of China's sustainable development.

"China will carefully assess this ruling, continue to improve its management on resource-consuming products in a WTO-consistent manner, facilitate the protection of natural resources, and maintain fair competition with the objective of achieving sustainable development," China's Ministry of Commerce said in a statement.

The United States had also appealed against the ruling by the panel of three arbitrators who ruled against China in March this year.

However, the U.S. appeal, which challenged the panel's rejection of certain evidence, was conditional and one of the conditions was not met, so the Appellate Body did not rule on it. (Reporting by Tom Miles; additional reporting by Krista Hughes in Washington, Barbara Lewis in Brussels and Allison Martell in Toronto; editing by Sonya Hepinstall, G Crosse)