Export Restrictions on Critical Raw Materials for the EU

Many high-tech products depend on specific raw material inputs that are very hard to substitute. Access to these raw material inputs is of growing concern to many modern economies including the EU. In a 2010 raw material report, the European Commission has established 14 raw materials that are critical to the EU economy. Six of these materials (rare earths, antimony, tungsten, fluorspar, graphite and magnesium) are largely controlled by China which also imposes export taxes on these six materials. An export tax lowers the domestic price of a good and at the same time raises the world price of that good. Export taxes on raw materials can thus provide a competitive advantage to raw material using high-tech industries in the exporting countries compared to competing industries in importing countries. The focus of this study is on the six critical raw material markets dominated by China. This study is the first to analyse the impact of raw material export taxes on downstream (high-tech) industries in both the exporting country (China) and the importing region (EU). A CGE analysis is used to measure the impact of raw material export taxes on raw material markets, downstream industries and general welfare. For the CGE analysis, the GTAP model and a modified (disaggregated) GTAP database 8 is used. The main finding it that EU downstream industries benefit substantially if the current Chinese export taxes are removed. Especially sectors producing electronical equipment, metal products and transport equipment benefit in terms of higher output (an increase of 2.2 billion, 1.1 billion and 1.3 billion respectively) and higher value added (an increase of 0,09%, 0,09% and 0,1% respectively). Because of China’s great market power, the terms-of-trade effect dominates the trade distortion effect. This causes a decrease in overall welfare for China: GDP decreases by 0,15% and the equivalent variation is -1.3 billion. After removing the export taxes, welfare in EU increases with a small GDP increase (0,02%) and a positive equivalent variation value of 2.2 billion. Raising Chinese export taxes on the six raw materials has reverse effects with welfare increasing in China and decreasing in the EU