China's rise to become the dominant global producer of rare earth minerals has caused severe environmental damage and rapid depletion of its natural resources. To rectify these problems and achieve sustainable development of the industry, the Chinese government has adopted a policy of export restrictions which has led to conflict with its trade partners. A World Trade Organization (WTO) panel has judged China's policy to be in violation of its trade obligations which has been upheld in appeal. This article presents a broad analysis of sustainable development relating to the rare earth industry. In recognizing growing global demand for these minerals, which provide essential inputs for the new green technologies, it explores how a more complementary relationship between economic development and conservation of natural capital can be achieved. Improving resource efficiency throughout the whole production chain is of key importance for resource conservation. The use of adequate environmental technologies and effective environmental policies are key to minimizing the risks for environmental damage and human health. The new initiative for liberalization of Environmental Goods and Services (EGS) in the WTO can make leading environmental technologies available at a lower cost for China. But green trade liberalization alone cannot achieve sustainable development. A new form of international cooperation in the form of networked governance must operate alongside the WTO to combine governance of global economic and ecological integration.
Since the publication of the Brundtland Report, the concept of sustainable development has been generally understood as the requirement to meet the needs of the current generation without compromising the ability of future generations to meet theirs.1 But this is a vague concept which has proved difficult to implement in practice. There is no internationally agreed method for measuring sustainable development and no internationally accepted indicators to monitor its progress in practice.2 In particular, there is no satisfactory indicator for 'natural capital' which is central to achieving sustainable development.
Natural capital is defined as the stock of natural resources or environmental assets that yields a flow of useful goods and services into the future.3 This concept creates a new synthesis integrating two previously opposing world views. On the one hand, man-made capital which comprises physical, financial and human capital, has well-established roots in economic theory. On the other hand, natural capital, comprising natural resources and the environment has been developed more recently by ecological economics. Whereas, man-made capital has been traditionally treated as a scarce good which is priced accordingly in the market, natural capital has for long been considered as part of the 'global commons' and so largely treated as a free good.4 But this dichotomy is no longer tenable today.Journal of World Trade