China lost an appeal at the World Trade Organization in a case brought by the United States, the European Union and Japan to challenge China's restrictions on exports of rare earths, according to a WTO Appellate Body ruling published on Thursday.
"... China has not demonstrated that the export quotas that China applies to various forms of rare earths, tungsten and molybdenum by virtue of the series of measures at issue are justified ... " the document's conclusion said.
China produces more than 90 percent of the world's rare earths, which are key elements in defence industry components and modern technology from iPhones and disk drives to wind turbines. It imposed strict export quotas in 2010, saying it was trying to curtail pollution and preserve resources.
Prices soared by hundreds of percent, and the United States, European Union and Japan complained that the restrictions gave Chinese companies a competitive edge in products like hybrid car batteries, wind turbines and energy-efficient lighting.
China's defeat at the WTO was widely expected after it lost a similar case over exports of other commodities. It will now be obliged to cancel its export quotas to abide by the WTO ruling.
China had argued that limits on exports of rare earths, as well as the metals tungsten and molybdenum, were needed to prevent over-mining and defended its policy as an essential part of China's sustainable development.
"China will carefully assess this ruling, continue to improve its management on resource-consuming products in a WTO-consistent manner, facilitate the protection of natural resources, and maintain fair competition with the objective of achieving sustainable development," China's Ministry of Commerce said in a statement.
The United States had also appealed against the ruling by the panel of three arbitrators who ruled against China in March this year.
However, the U.S. appeal, which challenged the panel's rejection of certain evidence, was conditional and one of the conditions was not met, so the Appellate Body did not rule on it.
(Reporting by Tom Miles; Editing by Sonya Hepinstall)