GENEVA/WASHINGTON (Reuters) - An unprecedented legal attack on Chinese trade policy may fall short of its immediate goal of increasing rare earth supplies, but it is just one of several battles in a bigger campaign: defense of the old economic order against China.
The complaint brought by the European Union, the United States and Japan - that China is illegally choking off exports of rare earth metals - is the first coordinated litigation at the World Trade Organization by three of the four top trading powers against the fourth.
Long an unloved constituent of specialist commodity markets, rare earths have burst into prominence as irreplaceable inputs for a range of hi-tech products, from iPads to wind turbines, hybrid car batteries and precision-guided weapons.
The fact that China's exports plummeted just as demand took off cannot be a coincidence, its accusers say, and they are confident they have a watertight and well-documented case.
"We met at least a half a dozen times with the other countries that joined us. And I'm not talking about ?howdy dowdy' kind of meetings. These were three and four day-long sessions of going through legal issues," one U.S. official said.
"Literally thousands of pages of Chinese language documents needed to be found, translated and analyzed."
But others see China as a convenient target for politicians.
"I think that in this electoral season (in France and the United States), China-bashing is on the rise. Hence the action," said Jonathan Fenby, head of China research at Trusted Sources.
"China is an obvious easy candidate and it is interesting that in the U.S. the Republicans, normally free traders, have gone for China."
But he said there was a danger that China might retaliate.
"If China hits back, how important is the Chinese market to Western firms, and what is the impact on foreign companies that rely on China for assembly such as Apple?"
Retaliation is a real danger. In another trade row, over an EU scheme to levy a carbon charge on flights in and out of Europe, European planemaker Airbus says China has blocked the purchase of aircraft worth $12 billion.
"UNEQUIVOCAL"
The rare earths case gathered steam after the WTO ruled in January on Chinese export restrictions on other, less sensitive raw materials. That decision largely went against China.
U.S. Trade Representative Ron Kirk told Reuters that the January ruling was so "unequivocal" that he hoped China would back down on rare earths and take steps to resolve both cases before the rare earths suit comes before a WTO dispute panel.
But the January judgment may have left China enough room to restrict exports in other ways. It also left the door open on China's argument that its efforts to clean up the environment are to blame for its dwindling rare earths exports.
Complainants in WTO cases almost always manage to land some punches on their opponents, so China's rare earth policies are unlikely to emerge unscathed.
But even an apparent knock-out blow may take years to put an end to the offending trade practice, so even if China loses, rare earths could remain scarce for a while, giving China more time to capitalize on its position as the dominant supplier.
And dominance in rare earths may just be a route to building companies that lead the most advanced industries. That would suit Chinese politicians who want China to earn a bigger cut from the goods it makes.
"Beijing uses export controls and its monopolistic position as producer of 96 percent of all rare earth minerals as the basis of a strategy to build world-class companies that create jobs," said David Abraham, an independent resource analyst based in Jakarta.
"In a sense Beijing is modeling domestic firms after companies like Hitachi, once a mining company but now a massive electronics and infrastructure conglomerate," he said.
CHINA'S SMALL VALUE
Although it is a trading superpower, when China manufactures a product like Apple's iPhone for export, it often receives very little of the revenue.
"In fact China adds a small fraction of value to such a product - as reflected in the final price - usually at the assembly stage. China's share is well below 10 percent," WTO chief Pascal Lamy said in a speech in Japan last Friday.
While China is determined to get more of the value-added work, Kirk says China must compete on a level playing field. One U.S. initiative aims to tackle unfair competition from state-owned enterprises, he told Reuters in Geneva in December.
"Our businesses, as a general rule, really do believe, and maybe it's that American spirit, let me go compete in the global market and I'll accept that if (my friend) has got a better idea she wins and sometimes I'll win. But you've got to promise me that the deck's not going to be stacked," Kirk said.
U.S. companies cannot compete against rivals whose governments provide them with buildings and land and underwrite their risks and insurance, he said.
"I'm not saying you can't have state-owned enterprises. But how do we determine to give my businesses and competitors the sense that they truly are operating as independent market-driven entities?"
"YELL AND SCREAM"
The U.S. effort to stop China subsidizing its companies got a boost last week from an unexpected quarter - the WTO's appeal ruling against U.S. subsidies for planemaker Boeing.
Hidden within the 600 page ruling was a section where the judges laid down the law on subsidies, a cloud with silver lining for Washington.
The bad news was that the United States should not have hidden behind assertions that information was classified or secret in the Boeing case. The good news was that in the future, if any country refuses to provide information on their subsidies when challenged to do so in a trade case, the judges will assume the worst and "draw negative inferences".
"The U.S. will probably yell and scream about this in this case but against China they will be very happy about it," one Geneva-based lawyer said.
WTO members are supposed to notify the trade body regularly of their subsidies, but U.S. and EU officials say China has not filed any notifications in over five years, making it hard to gather enough information to challenge unfair competition.
"This is a very important win for us," said an EU trade official. "Normally you should have transparency that allows you to act through litigation. But now it's in reverse."
The Boeing case and the related case against Airbus together represent the biggest trade dispute in WTO history and are a reminder that the arguments are not always about China.
But despite being at loggerheads over aircraft subsidies, their teaming up with Japan to challenge China - just one day after the WTO published its Boeing ruling - suggests Washington and Brussels are not so estranged.
Moreover, many trade experts expect a political settlement will eventually end the aircraft dispute and that could lead to the two jointly raising a complaint about subsidies paid to the aircraft industry in their fastest-growing rival: China.
(Additional reporting by Barbara Lewis in Brussels, David Stanway in Beijing; editing by Elizabeth Piper)
Source: http://news.yahoo.com/grow-rules-rare-earth-rivals-tell-china-104530432.html
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