The WTO has ordered China’s to repeal export limits on rare earths and metals vital for a host of technology applications.
China produces more than 90 per cent of the world's rare earth metals, a set of seventeen chemical elements that are key raw materials in defence industry components and modern technology from iPhones and disk drives to wind turbines and energy-efficient lighting.
But it imposed strict export quotas in 2010 saying it was trying to curtail pollution and preserve resources, causing prices of the commodities to soar by hundreds of per cent and prompting the the USA, EU and Japan to complain that the export restrictions gave Chinese companies an unfair competitive edge.
"Today's ruling by the WTO on rare earth shows that no one country can hoard its raw materials from the global market place at the expense of its other WTO partners," said EU Trade Commissioner Karel De Gucht.
While relatively plentiful in the Earth's crust, due to their geochemical properties rare earth metals are typically widely dispersed and not often found concentrated in economically exploitable ore deposits.
China said limits on exports of rare earths, as well as the metals tungsten and molybdenum, were needed to prevent over-mining, but the US said the export limits allowed China to artificially increase world prices for raw materials, while artificially lowering prices for Chinese producers.
"China's decision to promote its own industry and discriminate against US companies has caused US manufacturers to pay as much as three times more than what their Chinese competitors pay for the exact same rare earths," US Trade Representative Michael Fromansaid in a statement.
Demand for rare earths comes from a variety of industries. General Electric uses rare earths in wind turbines. Toyota and Nissan use them for their hybrid and electric cars, while Blackberry and Apple need them for smartphones and tablet computers.
China had been widely expected to lose the case, after a successful challenge two years ago to China's export restraints on a different set of raw materials used in the steel, aluminium, and chemicals industries, including bauxite and magnesium.
Any of the parties in the case can appeal within 60 days.
China's Ministry of Commerce said the head of its treaty and law department welcomed the WTO's recognition of its efforts to conserve resources and protect the environment, but regretted that the panel found China's export duties, quotas, and quota administration breached WTO rules.
"China believes that these regulatory measures are perfectly consistent with the objective of sustainable development promoted by the WTO," it said in a statement, adding that China was currently assessing the WTO report.
The European Commission said no-one disputed China's right to put in place environmental and conservation policies.
"However, as unequivocally confirmed by the WTO panel, the sovereign right of a country over its natural resources does not allow it to control international markets or the global distribution of raw materials," the Commission said.