Resource Sovereignty and WTO Dispute Settlement:

Transcription

1 Manjiao Chi* Resource Sovereignty and WTO Dispute Settlement: Some Comments on China-Raw Materials and China-Rare Earths Abstract The principle of permanent sovereignty over natural resources (PSNR) recognizes that states shall have sovereign rights in exploiting, utilizing and managing natural resources within their territories. This principle has been invoked by China in two recent WTO cases, i.e. China-Raw Materials and China-Rare Earths, to support its argument on Article XX (g) of the GATT The invocation of the principle of PSNR in WTO dispute settlement has profound implications. Technically, it inquires into the relationship between the principle and WTO law and its role in WTO dispute settlement; fundamentally, these cases also show the tension between the conflicting goals of respecting state sovereignty and promoting free trade. It is observed that, although the principle of PSNR has played an important role in assisting interpreting Article XX (g), it only exerted limited impacts in supporting China s position. It is also suggested that a more balanced approach should be adopted in future Article XX (g) cases in reconciling the pursuit of free trade and the maintenance of state sovereignty. Working Paper 2014/03 Universität Siegen FoKoS Weidenauer Straße Siegen

2 I. INTRODUCTION In recent years, two WTO cases against China have attracted wide attention, namely China-Measures Related to the Exportation of Various Raw Materials of 2009 (China-Raw Materials), 1 and China-Measures Related to the Exportation of Rare Earths, Tungsten and Molybdenum of 2012 (China-Rare Earths). 2 In both cases, the complainants submitted that China s several types export restrictive measures imposed on certain types of raw materials and rare earths violated various provisions of the GATT 1994 and China s WTO Accession Protocol (which contains a number of WTO-plus obligations of China). These cases have prompted wide concern and heated discussions not only because they targeted at various types of important and sensitive mineral materials and products, but also because they involved some fundamental legal issues pertinent to the WTO regime, especially the legality of export duties and the relationship between China s WTO Accession Protocol and WTO agreements. 3 Besides the above legal issues, these cases also raised certain issues that are less explored. The issue of resource sovereignty is a typical example of such underexplored issues. In both cases, China argued, among other things, that certain types of export restrictive measures could be justified by the Article XX (g) of the GATT 1994, also known as the environmental exception. To support its argument, China invoked the principle of permanent sovereignty over natural resources (PSNR). Based on various United Nations General Assembly (UNGA) resolutions, the principle of PSNR recognizes that states shall have ownership of natural resources within their territories and shall enjoy freedom in exploiting, utilizing and managing such resources. 4 China s invocation of this principle has multiple implications. It not only touched upon the issues of the role of non-wto law in WTO dispute settlement and the rules of treaty interpretation employed by the panels and the Appellate Body (AB) of the Dispute Settlement Body (DSB), but it also provided an opportunity to observe how DSB panels and the AB reconcile the two seemingly conflicting goals of resource sovereignty and free trade, BA, LL.M, Ph.D in Law, Associate Professor of International Law, Law School, Xiamen University, P.R.C; Fellow, Fokos Center, University of Siegen, Germany. Part of this paper has been presented in the Conference EU-China Economic Relations Especially in the Field of Energy and Natural Resources, held in Hamburg on 4 July Special thanks are due to Prof. Dr. Marc Bungenberg and other panelists of the conference for their insightful comments. This paper is an outcome of the project Study on WTO s Spillover Effects on China, funded by the National Social Science Funding of China (NSSFC) (Grant Number: 12CFX109). The author can be contacted at chimanjiao@xmu.edu.cn. 1 Available at and ( last visited 25 July 2014). 2 Available at and ( last visited 10 August 2014). 3 See, e.g., Bin Gu, Mineral Export Restraints and Sustainable Development Are Rare Earths Testing the WTO s Loopholes?, 14(4) J. INT L ECON. L. 765 (2011); Julia Ya Qin, Reforming WTO Discipline on Export Duties: Sovereignty over Natural Resources, Economic Development and Environmental Protection, 46 (5) J. WORLD TRADE 1147 (2012); Bin Gu, Applicability of GATT Article XX in China-Raw Materials: A Clash Within the WTO Agreement, 15(4) J. INT L ECON. L (2012); Han-Wei Liu & John Maughan, China s Rare Earths Export Quotas: Out of the China-Raw Materials Gate But Past the WTO Finish Line?, 15(4) J. INT L ECON. L. 971 (2012). 4 See, e.g., UNGA Resolution 1803 (Permanent Sovereignty over Natural Resources), adopted on 14 December 1962, at para.3. 1

3 which are respectively embodied in the principle of PSNR and WTO law. While relying chiefly on China-Raw Materials and China-Rare Earths, this paper tries to explore the interaction between the principle of PSNR and WTO law and the role of this principle in WTO dispute settlement. In addition to the Introduction (Part I), this paper is composed of four parts. Part II and Part III briefly discuss several preliminary issues, namely the evolution of the principle of PSNR, the role of non-wto law in WTO dispute settlement and the treaty interpretation rules adopted by DSB panels and the AB in practice. Part IV is the main body of the paper, analyzing the role of the principle of PSNR in WTO dispute settlement and its interaction of GATT Article XX (g). In Part V, this paper concludes that the principle of PSNR has been considered for treaty interpretation in these cases and has thus played a limited role in supporting China s position. These cases also show that WTO dispute settlement cannot effectively address the inherent tension contained in GATT Article XX (g) between respecting state sovereignty and promoting free trade, and further suggest that more balanced approach should be adopted when applying this Article. II. A SKELETAL REVIEW OF THE EVOLUTION OF THE PRINCIPLE OF PSNR The principle of PSNR is not a static legal concept. During the past decades, it has undergone gradual development and has shifted its focus to meet the needs of the changing world. From historical perspective, the evolution of this principle can be roughly divided into the following three major stages. The first stage roughly runs for a decade since the end of World War II. During this time, the principle of PSNR was developed in the course of struggle for the right to self-determination by colonized peoples, including the right of newly-independent countries and other developing countries to freely dispose their natural resources to support their national independence. 5 This period highlighted the political color of this principle, which can be shown by several early UNGA resolutions stressing the North-South conflict between developed countries and newly independent developing countries. For instance, the preamble of Resolution 523 of 1952 clearly stated that underdeveloped countries have the right to determine freely the use of their natural resources. 6 Resolution 626 of 1952 also provided in its preamble that considering that the economic development of the under-developed countries is one of the fundamental requisites for the strengthening of universal peace. 7 While according Resolution 1314 of 1958, the Commission on PSNR was established to survey the right 5 Nico Schrijver, Permanent Sovereignty over Natural Resources, in MAX-PLANCK ENCYCLOPEDIA OF PUBLIC INTERNATIONAL LAW, available at (last visited 10 June 2014). 6 UNGA Resolution 524 (Integrated Economic Development and Commercial Agreements), adopted on 12 January UNGA Resolution 626 (Right to Exploit Freely Natural Resources and Wealth), adopted on 21 December

4 to self-determination. 8 It is in light of such background that N. Schrijver has observed that the original roots of the principle of PSNR addressed two main concerns of the UN, namely the economic development of under-developed countries and the self-determination of colonized peoples. 9 The second stage roughly runs from 1960s to 1990s. In this period, self-determination of the colonial peoples has largely been achieved and many under-developed countries have won political independence. The immediate pressure for these new countries was to develop national economy to defend their state sovereignty and independence. Accordingly, the principle of PSNR shifted its focus from political independence to economic development, aiming at establishing new international economic order (NIEO) to ensure that developing countries can generate sufficient means from exploiting and utilizing their natural resources to support their economic development. The adoption of Resolution 1803 in 1962 is a landmark event in the evolution of the principle of PSNR. This Resolution clearly incorporated various economic aspects of the principle of PSNR, including the right to dispose, use and control natural resources, the right to regulate foreign investment, the duty of international cooperation and the observance of foreign investment agreements in good faith and others. 10 In the following years, various other relevant Resolutions have been adopted. Notably, the Declaration on the Establishment of the New International Economic Order confirmed that states shall enjoy full permanent sovereignty over its natural resources and all economic activities. 11 Similarly, the Charter of Economic Rights and Duties of States provided that every State has and shall freely exercise full permanent sovereignty, including possession, use and disposal, over all its wealth, natural resources and economic activities. 12 These documents kept stressing the economic aspects of the principle of PSNR and furthered the development of this principle. The third stage starts from 1990s and is still ongoing. Since the last decade of the twentieth century, the world has become quite different from it was when the principle of PSNR first came into being. Self-determination of colonial peoples and political independence of former colonies seem no longer the theme of the world. Meanwhile, the pattern of economic development has undergone substantive changes. Since then on, the international community has gradually reached the consensus that mere increase of economic size, often at the price of environmental damages, is no longer desirable. Instead, sustainable development has become the international consensus. Alongside 8 UNGA Resolution 1314 (Recommendations Concerning International Respect for the Rights of Peoples and Nations to Self-Determination), adopted on 12 December Nico Schrijver, SOVEREIGNTY OVER NATURAL RESOURCES: BALANCING RIGHTS AND DUTIES (Cambridge: Cambridge University Press, 1997), at UNGA Resolution 1803, at para UNGA Resolution 3201 (Declaration on the Establishment of the New International Economic Order), adopted on 1 May 1974, at para.4(e). 12 UNGA Resolution 3281 (Charter of Economic Rights and Duties of States), adopted on 12 December 1974, at Chapter II, Article 2(1). 3

5 such change, the principle of PSNR has shifted its focus to sustainable development, imposing obligations on states to protect environment while allowing them to take advantage of their natural resources. It has been suggested that such shift has transformed this principle from a primarily rights-based to a qualified concept encompassing duties as well as rights. 13 Today, it is fair to say that resource sovereignty in its modern context not only guarantees states the freedom and rights in exploiting, utilizing and managing their natural resources, but more importantly, it also imposes on states the duty of exercising such sovereign rights in a sustainable manner. Two major observations can be drawn from the above discussion. First, the principle of PNSR is an evolutionary principle with shifting focuses to address the changing needs of the international community. Such focus shift reflects the changing consensus of the international community on resource sovereignty. Second, from normative perspective, the evolution of this principle is untraditional. As discussed above, different from many other international law principles, the principle of PSNR has been developed through various resolutions originating from a variety of UN organs, rather than conventional methods of international law-making such as evolving state practices or the conclusion of treaties. 14 Although there were doubts over the legal effects of this principle due to the uncertainty of the legal effects of UN resolutions, 15 such doubts appear unnecessary nowadays since the ICJ has recognized of the customary law status of this principle in its judgment in Armed Activities on the Territory of Congo. 16 III. CERTAIN PRELIMINARY ISSUES FOR THE PRINCIPLE OF PSNR TO BE CONSIDERED IN WTO DISPUTE SETTLEMENT According to the Understanding on Rules of Procedures Governing the Dispute Settlement (DSU), the applicable law in WTO dispute settlement should be covered agreements as listed in its Appendix However, the DSU does not completely exclude non-wto law from the realm of WTO dispute settlement. In practice, it is possible for non-wto law to be considered or even applied in WTO dispute settlement depending on the status of such law and the need of the individual case. WTO jurisprudence shows that non-wto laws are often considered by DSB panels and the AB in interpreting WTO agreements. To understand the role of the principle of PSNR in WTO dispute settlement, two preliminary issues should be discussed at the outset, namely the role of non-wto law in WTO legal system and the treaty interpretation rules adopted by DSB panels and the AB in WTO dispute settlement. 13 Nico Schrijver, supra note Nico Schrijver, supra note 6, at See, e.g., Elihu Lauterpacht, International Law and Private Foreign Investment, 4(2) INDIANA J. GLOBAL LEGAL STUDIES 259 (1997), at Armed Activities on the Territory of the Congo (Democratic Republic of the Congo v. Uganda), Judgment, I.C.J. Reports 2005, at DSU, Article 1(1). 4

6 A. The Role of Non-WTO Law in WTO Legal System The issue of the role of non-wto law in WTO legal system includes both normative and operational aspects. Normatively, it inquires into the status of non-wto law in WTO legal system, i.e. the relationship between WTO law and non-wto law (general international law); operationally, it inquires into the role of non-wto law in WTO dispute settlement. These two aspects will be briefly discussed in below. The normative relationship between WTO law and non-wto law (general international law) has been subject to heated discussion in the past decade. This issue is further complicated considering that there lacks a complete coordination between different systems of international law, 18 and that international trade law is heavily fragmented 19. Such relationship does not have a uniform model. A typical classification of the relationship between WTO law and general international law has been proposed by J. Pauwelyn, suggesting the following five types: (1) WTO rules that add previously nonexistent rights or obligations to the corpus of international law; (2) WTO rules that contract out of general international law or deviate from, or even replace, other preexisting norms of international law; (3) WTO rules that confirm preexisting rules of international law, be they of general international law or preexisting treaty law; (4) Non-WTO rules that already existed when the WTO treaty was concluded (on April 15, 1994) and that are (a) relevant to and may have an impact on UTO rules; and (b) have not been contracted out of, deviated from, or replaced by the WTO treaty. These non-mto rules consist mainly of general international law, in particular rules on the law of treaties, state responsibility, and settlement of disputes, but also of other treaty rules that regulate or have an impact on the trade relations between states; and (5) Non-WTO rules that are created subsequently to the MTO treaty (post-april 1994) and (a) are relevant to and may have an impact on UTO rules; (b) either add to or confirm existing UTO rules or contract out of, deviate from, or replace aspects of existing MTO rules; and (c) if the latter is the case, do so in a manner consistent with interplay and conflict rules in the WTO treaty and general international. 20 Although the above categorization may help clarify the normative relationship between WTO law and general international law, it fails to address what role non-wto rules can play in WTO dispute settlement from operational perspective. Although this latter issue has been discussed for several years, 21 no consensus has been reached and scholarly 18 Gabrielle Marceau, WTO Dispute Settlement and Human Rights, 13(4) EUROPEAN J. INT L L. 753 (2002), at See Delimatsis Panagiotis, The Fragmentation of International Trade Law, 45 (1) J. WORLD TRADE 87 (2011), at Joost Pauwelyn, The Role of Public International Law Rules in the WTO: How Far Can We Go, 95 AM. J. INT L L. 535 (2001), at See, e.g., Joost Paulwelyn, CONFLICT OF NORMS IN PUBLIC INTERNATIONAL LAW: HOW WTO LAW RELATES TO OTHER RULES OF INTERNATIONAL LAW (Cambridge: Cambridge University Press, 2003), 5

7 opinions remain split. 22 The following three types of opinions are typical. One group of scholars, such as J. Trachtman, seem to take a traditional approach, arguing that the law applicable in WTO dispute settlement is a limited body and that the DSB panels and the Appellate Body (AB) should only apply WTO law as substantive law and in strict accordance with the DSU, i.e. the covered agreements. 23 Another group of scholars, such as J. Pauwelyn, seem to take a liberal approach, suggesting that the WTO legal system is not a closed legal circuit, and that WTO law is essentially a part of general international law. Thus, in certain respects, the relationship between WTO law and general international law can be perceived as lex specialis vis-à-vis lex generalis. Non-WTO law may be applicable and sometimes even should prevail over WTO rules, for instance, when the responding party successfully invokes a defense drawn from a non-wto law source. 24 A third group of scholars, such as D. Panagiotis, seem to take a middle approach, avoiding providing an affirmative answer, but suggesting that the absence in the DSU of any express reference to other international law other than the one relating to customary rules of treaty interpretation does not necessarily mean that such law does not have a role to play in WTO dispute settlement. 25 Despite splitting scholarly opinions, WTO jurisprudence seems to suggest that non-wto law may play two different roles in WTO dispute settlement. On one hand, certain non-wto law, though limited in number, can be applied as applicable law in WTO dispute settlement. For example, the treaty interpretation rules codified in the Vienna Convention on the Law of Treaties (VCLT) have been consistently and frequently applied in almost all WTO cases. This is impliedly supported by the DSU, which requires WTO covered agreements be clarified in accordance with customary rules of interpretation of public international law. 26 In addition to the VCLT treaty interpretation rules, some other non-wto law may also be applied on a case-by-case basis in WTO dispute settlement. For instance, in US-Wool Shirts and Blouses, when establishing the rule on burden of proof to be applied within WTO proceedings, the AB referred to the practice of other international courts. 27 In Brazil Desiccated Coconut, the AB applied the principle of non-retroactivity of treaties laid down in Article 28 of the VCLT. 28 On the other hand, a more notable and prominent role non-wto law can play in WTO 22 See Delimatsis Panagiotis, supra note 19, at See, e.g., Joel P. Trachtman, The Domain of WTO Dispute Resolution, 40 HARV. INT L L. J. 333 (1999), at ; Joel P. Trachtman, Jurisdiction in WTO Dispute Settlement, in R. Yerxa & B. Wilson (eds.), KEY ISSUES IN WTO DISPUTE SETTLEMENT THE FIRST TEN YEARS (Cambridge: Cambridge University Press, 2009) 132, at See, e.g., Joost Pauwelyn, supra note 21, at 25-40; Joost Pauwelyn, supra note 20, at See, e.g., Delimatsis Panagiotis, supra note 19, at DSU, Article AB Report, United States-Measures Affecting Imports of Woven Wool Shirts and Blouses from India (WT/DS33/AB/R), at AB Report, Brazil-Measures Affecting Desiccated Coconut (WT/DS22/AB/R), at14. 6

8 dispute settlement is to assist interpreting WTO agreements. 29 Such role is particularly important considering that the WTO legal system is non-self-contained in nature. 30 WTO jurisprudence clearly shows that, though without express authorization of the DSU, non-wto laws are often referred to when interpreting WTO agreements. In this regard, a typical example is US-Shrimp. In this case, the AB referred to various international conventions and instruments when interpreting the phrase exhaustible natural resources in GATT Article XX (g), such as the Rio Declaration on Environment and Development, the Law of the Sea Convention, the CITES Convention the Convention on Conservation of Migratory Species and the Convention on Biological Diversity. 31 B. Treaty Interpretation Rules Applied in WTO Dispute Settlement Since non-wto laws typically play a treaty interpretation role in WTO dispute settlement, it is necessary to briefly discuss the treaty interpretation rules routinely employed by DSB panels and the AB in interpreting WTO agreements. It has been established that the rules of treaty interpretation laid down in the VCLT, especially its Articles 31, 32 and 33, have acquired the status of customary international law. 32 Thus, even in absence of clear mentioning in the DSU, these VCLT rules have been consistently followed when interpreting WTO agreements. 33 Furthermore, as the VCLT does not include all treaty interpretation rules, it is also possible for DSB panels and the AB to adopt certain novel rules in interpreting WTO agreements. In general, the VCLT rules of treaty interpretation address both the methods and data for treaty interpretation. 34 With regards to the methods of treaty interpretation, the fundamental method is laid down in Article 31 (1) of the VCLT, which essentially provides that a treaty term shall be interpreted in good faith, in accordance with the ordinary meaning, in context, and with respect to its object and purpose. 35 As held by the Permanent Court of International 29 See generally Joost Pauwelyn, supra note See, e.g., Joost Paulwelyn, supra note 21, at 35-40; James Cameron & Kevin R. Gray, Principles of International Law in the WTO Dispute Settlement Body, 50 INT L & COMP. L. QUARTERLY 248 (2001), at AB Report, United States-Import Prohibition of Certain Shrimp and Shrimp Products (WT/DS58/AB/R), at See, e.g., AB Report, United States-Standards for Reformulated and Conventional Gasoline (WT/DS2/AB/R); AB Report, Japan-Taxes on Alcoholic Beverages (WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R); Territorial Dispute (Lib v. Cha.), 1994 I.C.J. 6, (Feb. 3); Maritime Delimitation and Territorial Questions (Qat. v. Bah.), 1995 I.C.J. 6, 18 (Feb. 15); Oil Platforms (Ira. v. U.S.), 1996 I.C.J. 803, 812 (Dec. 12); Kasikili/Sedudu Island (Bots. v. Namib.), 1999 I.C.J. 1045, 1059 (Dec. 13); Sovereignty over Pulau Litigan and Pulau Sipadan (Indon. v. Malay.), 2002 I.C.J. 625, 23 (Dec. 17). For comments, refer to Evan Criddle, The Vienna Convention on the Law of Treaties in U.S. Treaty Interpretation, 44 VA. J. INT L L. 431 (2004), at 437; Bryan Mercurio & Mitali Tyagi, Treaty Interpretation in WTO Dispute Settlement: The Outstanding Question of the Legality of Local Working Requirements, 19(2) MINNESOTA J. INT L L. 275 (2010), at See, e.g., CD Ehlermann, Six Years on the Bench of the World Trade Court: Some Personal Experience as Member of the Appellate Body of the World Trade Organization, 36(4) J. WORLD TRADE 605 (2002), at 617; I. Van Damme, Treaty Interpretation by the WTO Appellate Body, 21(3) EUROPEAN J. INT L L. 605 (2010), at See Ulf Linderfalk, INTERPRETATION OF TREATIES: THE MODERN INTERNATIONAL LAW AS EXPRESSED IN THE 1969 VIENNA CONVENTION ON THE LAW OF TREATIES (The Netherlands: Springer, 2007), at Ibid. 7

9 Justice (PCIJ), ordinary meaning means that words must be interpreted in the sense which they would normally have in their context. 36 According to the ICJ, seeking the ordinary meaning of a treaty term in its context should be the first duty of a tribunal in treaty interpretation. 37 Therefore, although the VCLT in theory recognizes three basic types of methods, namely the subjective, the textual, and the teleological methods, 38 by emphasizing ordinary meaning, it actually opts for a textual approach. 39 With regards to the data for treaty interpretation, various types of data may be needed in order to decipher the ordinary meaning of a treaty term. The sources of data include, inter alia, the context, the subsequent practice of parties to the treaty, the practices of certain organizations, particularly the ICJ, and the preparatory work of the treaty. 40 On this issue, Article 31 (2) of the VCLT provides a non-exhaustive list of materials as context to consult for treaty interpretation purpose, such as the text, preamble, annexes, agreement, or instrument relating to the treaty. These contexts should be considered in an integrated manner and must not be construed as to have laid down a legal hierarchy of norms in the interpretation of treaties. 41 Article 31 (3) then provides other types of data for treaty interpretation, namely subsequent agreement, practice, or relevant rules of international law relating to the treaty or the application of the treaty. Article 32 further provides for supplementary means of interpretation to confirm the ordinary meaning of treaty terms, which essentially refer to the preparatory work of the treaty and the circumstances of its conclusion. Finally, however, as the VCLT does not provide all treaty interpretation methods, some other novel rules may also be applied in WTO dispute settlement for treaty interpretation, such as the principle of effective interpretation, the principle in dubio mitius, the presumption of consistency interpretation and the evolutionary interpretation method. 42 WTO jurisprudence shows that these rules have been applied in WTO dispute settlement. For instance, in Japan-Beverages, although the AB did not clearly rule whether expansive interpretation of WTO rules should be allowed, it nonetheless ruled that WTO rules are not so rigid or so inflexible as not to leave room for reasoned judgements in confronting the endless and ever-changing ebb and flow of real 36 Polish Postal Service in Danzig, Advisory Opinion, 1925 P.C.I.J. (ser. B) No. 11, p Competence of the General Assembly for the Admission of a State to the United Nations, Advisory Opinion, 1950 I.C.J See G. G. Fitzmaurice, The Law and Procedure of the International Court of Justice: Treaty Interpretation and Certain Other Treaty Points, 1951 BRIT. Y.B. INT L L. 1 (1951), at See Report of the International Law Commission to the General Assembly, 21 U.N. GAOR Supp. No. 9, at 1, U.N. Doc. A/6309/Rev.l (1966); Oliver Dorr & Kirsten Schmalenbach (eds.), VIENNA CONVENTION ON THE LAW OF TREATIES: A COMMENTARY (Berlin, Heidelberg: Springer, 2012), at See Ian Brownlie, PRINCIPLES OF PUBLIC INTERNATIONAL LAW (7th ed.)(oxford: Oxford University Press, 2008), at Oliver Dorr & Kirsten Schmalenbach (eds.), VIENNA CONVENTION ON THE LAW OF TREATIES: A COMMENTARY, (Berlin Heidelberg: Springer, 2012), at See, e.g., Lukasz Gruszczynski, Customary Rules of Interpretation in the Practice of WTO Dispute Settlement Bodies, in A. Nollkaemper & O. K. Fauchald (eds.), THE PRACTICE OF INTERNATIONAL AND NATIONAL COURTS AND (DE)FRAGMENTATION OF INTERNATIONAL LAW (Oxford: Hart Publishing, 2012),at 38. 8

10 facts in real cases in the real world. 43 In US-Shrimp, when interpreting the term exhaustible natural resources of GATT Article XX (g), the AB made clear that since this term was crafted more than fifty years ago, it must be read by a treaty interpreter in the light of contemporary concerns of the community of nations about the protection and conservation of the environment. 44 Consequently, by employing such evolutionary method of treaty interpretation, 45 the AB ruled that living beings (sea turtles under dispute) could constitute an exhaustible natural resource within the meaning of Article XX (g). 46 In a sense, the above novel rules are a deviation from the textual approach embodied in the VCLT rules and may lead to expansive interpretation of WTO agreements, thus it is open to question whether these rules are truly compatible with the VCLT. However, from a realistic perspective, these rules are needed to help keep the WTO dispute settlement mechanism operative and effective to confront the changing needs of the world. 47 The justification of these rules can be further enhanced by the fact that the DSB is often called upon to address new challenges related with legitimacy, democracy and environmental protection, 48 which are often deemed falling outside the reach of WTO agreements. IV. THE PRINCIPLE OF PSNR IN CHINA-RAW MATERIALS AND CHINA-RARE EARTHS As mentioned, up to present, for the first time in the history of WTO dispute settlement, the principle of PSNR has been invoked in China-Raw Materials and China-Rare Earths. Thus, these cases provide an opportunity to observe the role this principle in WTO dispute settlement and the implications of the application of GATT Article XX (g). A. The Principle of PSNR in China-Raw Materials China-Raw Materials is the very first WTO case in which the principle of PSNR was invoked in support of China s arguments on Article XX (g) exception. In this case, the complainants (US, EU and Mexico) claimed that China s various types of export restrictions imposed on several raw materials, namely export duties, export quotas, minimum export price requirement and export licensing requirement, violated GATT Article VIII (Fees and Formalities Connected with Importation and Exportation), Article X (Publication and Administration of Trade Regulations) and Article XI (General Elimination of Quantitative Restrictions) and various paragraphs of China s Accession 43 AB Report, Japan-Taxes on Alcoholic Beverages (WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R), at AB Report, US-Shrimp (WT/DS58/AB/R), at Delimatsis Panagiotis, supra note 19, at AB Report, US-Shrimp (WT/DS58/AB/R), at Manjiao Chi, Trade-Plus Effects of WTO Dispute Settlement on China: An Ideal or Illusion?, 47(6) J. WORLD TRADE 1349 (2013), at See Kati Kulovesi, THE WTO DISPUTE SETTLEMENT SYSTEM: CHALLENGES OF THE ENVIRONMENT, LEGITIMACY AND FRAGMENTATION (The Netherlands: Kluwer Law International, 2011), at 4. 9

11 Protocol, particularly Paragraph China argued, among other things, that certain types of export restrictions could be justified by the exception under Article XX (g). To rule on this issue, the panel had to consider, first, whether the exception is available to China, considering that China has agreed to eliminate all taxes and charges applied to exports in its Accession Protocol; and second, assuming such exception is available, whether the requirements laid down in the chapeau of Article XX and paragraph (g) could be satisfied. While the first issue appears more general and systematic, the second issue bears direct link with the principle of PSNR. The first issue essentially explores the relationship between China s Accession Protocol and WTO agreements (the GATT in question). As Paragraph 11.3 of China s Accession Protocol expressly provides that China shall eliminate all taxes and charges applied to exports unless specifically provided for in Annex 6 of this Protocol or applied in conformity with the provisions of Article VIII of the GATT 1994, 49 it is necessary to discuss, at the outset, whether Paragraph 11.3 imposes an overall ban on China from invoking the general exception under GATT Article XX to justify its export duties. On this issue, the panel first focused on the interpretation of the term shall eliminate of Paragraph 11.3 and found that the ordinary meaning of this term is maintaining export duties. 50 According to the panel, as Paragraph 11.3 does not include any express reference to GATT Article XX, or to GATT provisions more generally, or even an introductory clause which refers generally to without prejudice to China s rights to regulate trade in a manner consistent with the WTO Agreement, 51 the absence of such references leads to the result that Paragraph 11.3 precludes the possibility for China to invoke the defense of GATT Article XX for violations of the obligations contained in Paragraph 11.3 of China s Accession Protocol. 52 As this issue has no direct link with the principle of PSNR, there is no need to further discuss it. The second issue is furtherance of the first issue. On the condition that GATT Article XX is available to China, the panel is requested to examine whether the requirements for invoking Paragraph (g) can be satisfied. As mentioned, Article XX (g) may justify WTO-inconsistent measures if these measures are related to conservation of exhaustible natural resources. In this regard, China argued that its export duties were measures relating to conservation of exhaustible natural resources within the meaning of Article XX (g), but the complainants challenged that China s measures were for purpose other than conservation of raw resources. 53 It is in such context that China invoked the principle of PSNR to enhance its argument on Article XX (g). According to China, as the principle of PSNR grants states (including WTO members) sovereign rights over their natural resources, Article XX (g) must be interpreted in a manner that 49 China s Accession Protocol, Part I, at para Panel Report, China-Raw Materials, at para Id., at para Id., at para Id., at para

12 recognizes such sovereign rights. China s main argument is as the following: China claims that these rights must be exercised in the interests of a Member s own social and economic development, as well as in light of the objective of sustainable development as stated in the Preamble to the WTO Agreement. China posits that sustainable development requires that economic development and conservation be aligned through the effective management of scarce resources, as the term conservation refers to the management of a limited supply of exhaustible natural resources over time. China considers that its export restraints relate to conservation because they are part and parcel of China s measures that manage the limited supply of refractory-grade bauxite and fluorspar, which are exhaustible natural resources. 54 The complainants straightforwardly objected to the reference to the principle of PSNR. According to the complainants, Article XX (g) does not call into question this sovereign right of all WTO Members. Under Article XX (g), what is at issue is whether a Member has satisfied the conditions of that provision when it maintains an otherwise GATT-inconsistent measure affecting trade in its natural resources. 55 China s attempt to incorporate into the term conservation the notion of exercising rights over natural resources in the interests of a Member s own social and economic development seeks to change Article XX (g) into an exception based on a WTO Member s desire to create opportunities for growth for its downstream processing industries. 56 As can be seen, the threshold question before the panel is whether and to what extent the principle of PSNR can be incorporated with the interpretation of the term conservation of Article XX (g). The panel s view on this issue can be roughly understood in two steps. At first, the panel made clear the role of the principle of PSNR in settling the case before it. In the words of the panel, the principle is deemed as relevant rules of international law applicable in the relations between the parties that should be taken into account together with the context in interpreting a treaty, which falls under Article 31 (3) (c) of the VCLT. 57 Next, after clarifying the role of the principle of PSNR, the panel took this principle into account in interpreting the term conservation. The panel s discussion on this principle roughly includes three phases. Firstly, the panel stressed the fundamental nature of the international law principle of state sovereignty. Secondly, while referring to various UNGA resolutions and international treaties, such as Resolution 1803, Resolution 626 and the Convention on Biological Diversity, the panel further recognized that the principle of PSNR constitutes an important element of the principle of sovereignty and 54 Id., at para Id., at para Id., at para Id., at para & para

13 confirmed that this principle allows states to freely use and exploit their natural wealth and resources wherever deemed desirable by them for their own progress and economic development. 58 Thirdly, the panel analyzed the relationship between state sovereignty and WTO obligation. The panel found that the ability to enter into WTO agreements is a quintessential example of the exercise of sovereignty, and in joining the WTO, China not only obtained significant commercial and institutional benefits, including with respect to its natural resources, but also committed to abide by WTO rights and obligations. Therefore, China must exercise its sovereignty over natural resources in a manner consistent with its WTO obligations. 59 In the appeal proceeding of China-Raw Materials, several legal issues were raised to the AB. The AB did not directly deal with the issue of PSNR, but provided lengthy discussions on the issue of the application of GATT Article XX. On this issue, the AB s took a holistic manner in interpreting Paragraph 11.3 of China s Accession Protocol and upheld the panel s findings that China may not seek to justify its export duties on certain types of raw materials by Article XX. 60 China expressed its intention to implement the DSB recommendations and rulings in this case, and the reasonable period of time (RPT) for implementation was fixed on 31 December Although the RPT has expired, there is no information publicly available regarding China s implementation of the rulings. The latest development is the conclusion of the Understanding between China and US regarding procedures under Articles 21 and 22 of the DSU in January At this point of time, it remains to be seen whether China could satisfactorily implement the rulings in this case and whether US would initiate further proceedings against China. B. The Principle of PSNR in China-Rare Earths To a large extent, China s losing of China-Raw Materials paved the way for more WTO cases against China s natural resources governance regime. China-Rare Earth can be deemed as a typical example of such follow-up cases. Although the types of resources and measures involved in these two cases are different, the legal issues raised therein are quite similar. Right after the adoption of the AB report of China-Raw Materials in February 2012, US, EU and Japan initiated China-Rare Earths in March The complainants argued that 58 Id., at para Id., at paras AB Report, China-Raw Materials (WT/DS394/R, WT/DS395/R & WT/DS398/R), at para Status Report Regarding Implementation of the DSB Recommendations and Rulings in the Disputes China Measures Related to the Exportation of Various Raw Materials (WT/DS394/19, WT/DS395/18 & WT/DS398/17), available at (last visited 25 July 2014). 62 China-Measures Related to the Exportation of Various Raw Materials - Understanding between China and the United States regarding procedures under articles 21 and 22 of the DSU (WT/DS394/20). 12

14 China s export restrictions on various forms of rare earths, tungsten and molybdenum, including export duties, export quotas and trading rights restrictions, constituted violation of Article VII (Valuation for Customs Purposes), Article VIII (Fees and Formalities Connected with Importation and Exportation), Article X (Publication and Administration of Trade Regulations) and Article XI (General Elimination of Quantitative Restrictions) of the GATT and various paragraphs of China s Accession Protocol. To justify its export quotas and trading rights restrictions, China invoked GATT Article XX (g), arguing that such restrictions were related to conservation of an exhaustible natural resource. Again, to support its arguments on Article XX (g), China invoked the principle of PSNR. The relevant discussions can be roughly understood in three phases. First and foremost, as mentioned earlier, in China-Raw Materials, both the panel and the AB ruled that GATT Article XX is not available for China to justify its violation of Paragraph 11.3 of China s Accession Protocol. While according to the DSU, an AB report shall be adopted by the DSB and be unconditionally accepted by the parties unless the DSB decides by consensus not to adopt it. 63 Therefore, in order for the panel in China-Rare Earths to have competence to rule on the availability of Article XX, the threshold question is for the panel to decide whether it is necessary to re-examine the legal issues that have already been presented in China-Raw Materials. To convince the panel, China argued that it has introduced new arguments that have not been asserted previously and requesting the panel to undertake its own independent interpretation. 64 In response, the panel held that it would only examine the specific issues presented by China in this particular case and would discern whether these issues had been previously presented. 65 In the second phase, China presented several arguments to convince the panel that GATT Article XX is available. China first accepted the AB s finding in China-Raw Materials that there is no explicit textual link between Paragraph 11.3 of China s Accession Protocol and Article XX, but argued that such textual silence should not be construed as WTO members common intention to exclude Article XX from China, relying on the AB report in US-Carbon Steel. Then, China argued that the systematic relationship between Paragraph 11.3 and Article XX supports the applicability of the Article XX, and that the term nothing in this Agreement in the chapeau of Article XX does not exclude the availability of this Article to defend a violation of Paragraph Finally, China submitted that an appropriate holistic interpretation of Paragraph 11.3 would take into account of the object and purpose of the WTO Agreement and would confirm that China may justify export duties through recourse to Article XX. 66 As a result, the panel found that there are no cogent reasons to depart from the AB s finding in China-Raw Materials and that the obligation in Paragraph 11.3 is not subject to the general 63 See the DSU, at Article Panel Report, China-Rare Earths, at para Id., at para Id., at paras

15 exception in Article XX. 67 It is of special interest to note one of the panelists had separate opinion in China-Rare Earths. 68 This panelist not only found that China has submitted new arguments on the availability of GATT Article XX, 69 but also held that unless China explicitly gave up its right to invoke Article XX of GATT 1994, which it did not, the general exception provisions of the GATT 1994 are available to China to justify a violation of Paragraph 11.3 of its Accession Protocol. 70 As this separate opinion has no link with the principle of PSNR, there is no need to further discuss it. In the third phase and further to the previous phase, China invoked the principle of PSNR in interpreting the term conservation when arguing on the application of GATT Article XX (g). This approach is almost identical to that China has employed in China-Raw Materials. China argued that the policy goal of conservation under Article XX (g) is not limited to preserving exhaustible natural resources in their current state, but also covers the use and management of those resources in line with a Member s sustainable economic development. Yet, the complainants recalled that it has been held in China-Raw Materials that WTO Members must exercise their sovereignty in a manner consistent with their WTO obligations. With regards to the principle of PSNR, the panel first held that this principle is relevant with Article XX (g) in the sense that it may assist the panel in interpret the Article XX (g). 71 Then, the panel confirmed that, pursuant to this principle, a state has sovereign rights to adopt conservation measures at its own discretion, including those managing export of resources. 72 While recognizing such sovereign rights, the panel then stressed that such rights should not be understood to mean a general right to regulate and control a natural resource market for any purpose or a right to control the international markets in which extracted products are bought and sold. 73 Finally, the panel agreed with what has been held in China-Raw Materials that in becoming a WTO member, China has agreed to exercise its sovereign rights in conformity with WTO rules and to respect WTO provisions when developing and implementing policies to conserve exhaustible natural resources. 74 The AB report of China-Rare Earths was issued in early August The AB reached similar conclusions with regards to Article XX in both China-Rare Earths and China-Raw Materials. In the appeal of China-Rare Earths, GATT Article XX (g) is one of the major 67 Id., at para Id., at section Id., at para Id., at para Id., at para Id., at para Id., at para Id., at para

16 legal issues raised by China. The AB recalled the panel s finding that when interpreting the term conservation of Article XX (g), appropriate balance should be stricken between trade liberalization, sovereignty over natural resources and the right to sustainable development. 75 Nevertheless, the AB found that China does not appeal the Panel s findings with respect to the interpretation of conservation or exhaustible natural resources. 76 As such, the AB did not need to discuss the principle of PSNR, but focused on other requirements of Article XX (g). Finally, the AB held that Article XX is not available to China, although it also held that the panel report erred on the even-handedness requirement. 77 By appealing China-Rare Earths, China might have hoped that the AB could change its previous position in China-Raw Materials with regards to the availability of GATT Article XX (g). Yet, the AB s findings seem to suggest that China has met another defeat. To China, the unavailability of Article XX to justify its export duties could raise profound concerns and may exert substantial impacts on China s resource governance regime. At this point of time, it remains to be seen how China will enforce the recommendations and rulings of the AB report, and more importantly, improve its resource governance regime in the future. C. Some Observations and Comments of the Cases As can be seen from the above case study, with special regards to the principle of PSNR, the panel and the AB in China-Raw Materials and the panel in China-Rare Earths have adopted similar approaches and reached similar conclusions. It is true that the issue relating to the principle of PSNR is probably a minor legal point for the parties of these cases, the implications this issue may have should not be neglected. Here, it is of interests to briefly discuss several points. First and foremost, as to the role of the principle of PSNR in WTO dispute settlement, though neither China nor the complainants in these cases have made clear, the panels and the AB took this principle into consideration when interpreting the term conservation in GATT Article XX (g). The panel in China-Rare Earths also elaborated on the necessity of bringing in the principle of PSNR in interpreting the term conservation in Article XX (g). It held that although the negotiators [of GATT Article XX (g)] did not intend to allow conservation measures to be used to protect or promote domestic industries, the principle of PSNR was increasingly articulated in the GATT context since the 1970s. 78 Consequently, the panel held that when interpreting the term conservation in light of the principle of PSNR, the goals of trade liberalization, 75 AB Report, China-Rare Earths, at para Id., at para Id., at para Panel Report, China Rare Earths, at paras