A funny thing happened last week on the way to world government: The U.S. registered a win in the World Trade Organization (WTO) tribunal, which ruled that China's rare earths export policies violate the international trade regime.
Good news for those worried by China's near-total dominance of global supply for these critical metals, essential for high-tech, green-tech and advanced military applications -- right?
Wrong. The WTO win is far more likely to distract U.S. policymakers from the larger challenge of developing a strategic resource policy -- and prolong U.S. resource dependencies to the detriment of our economic strength and national security.
China's WTO loss masks a strong position for Beijing, which has at least three paths forward that will result in no compelled changes whatsoever in China's rare earths export policy.
Put simply, China will win on appeal, case closed. Or it will lose -- and thereupon make modest changes to its rare earths regulatory and export regime, changing the fact-pattern and leaving the U.S. and its fellow complainants Japan and the European Union to bring a new WTO action.
Or China will simply ignore the WTO altogether.
Whether it's Column A, B or C, the user-nations will fail in their attempt to compel China to feed their earths addiction.
To see how even the worst case for China -- a WTO ruling condemning China's resource export policies -- won't help the U.S., consider the OPEC parallel. A two-thirds majority of the OPEC oil cartel's membership -- eight nations -- belongs to the WTO. So why hasn't there been a WTO action against OPEC for oil price collusion? Because it's clear that OPEC would ignore any WTO cease-and-desist order, and there is no WTO enforcement division -- armed with weapons or subpoenas -- that could make OPEC decide otherwise.
For its part, China has more options than simply ignoring the WTO. First, there's the appeals process, which will be the first response to this week's ruling. Then there are the mechanisms within the WTO charter itself that can be used to color any alleged market manipulation with benign and even laudable explanations.
In China's case, the go-to clause would be WTO's Article XX, which allows -- in the inelegant language of the WTO lexicon -- "GATT-inconsistent" policies so long as they are:
"necessary for the protection of human, animal or plant life or health (paragraph (b)) or
relating to the conservation of exhaustible natural resources (paragraph (g))."
In recent years, China has taken care to couch changes in its rare earths production and export policies as driven by the desire to limit adverse environmental effects. As for exhaustible natural resources, the U.S. and its co-complainants are actually making the case for China, in their statements on the critical importance of rare earth elements to economic, technological and even national security applications. So last week's ruling notwithstanding, China is actually walking a well-marked line within the WTO's logic to prevail in the current complaint. And even if they should lose, they can make modifications in their policy -- even minor -- that would change the fact-pattern, and effectively require complainant-countries to bring a new WTO action. That's likely to take the status quo into 2015, when the clock will start all over again.
Meanwhile, outside the WTO tribunal, in the court of public opinion, China has an equally strong case.
