By Josh Chaffin in Brussels and Alan Beattie in Washington

The World Trade Organisation on Tuesday ruled against China?s practice of limiting its exports of raw materials, handing a victory to the US and the European Union in a closely watched trade dispute.

The edict from a WTO judicial panel, responding to a complaint from the EU, US and Mexico, said China?s imposition of export duties and quotas on a variety of metal ores and other materials were illegal under WTO rules. By setting a precedent, the decision also strengthens the hand of the EU and US in their related campaign to prevent Beijing restricting the exports of rare earth materials, which are vital components in a number of high-tech products and are produced almost exclusively in China.

Karel de Gucht, Europe?s trade commissioner, said the verdict would help to create a more level playing field for raw materials. ?I expect that China will now bring its export regime in line with international rules. Furthermore, in the light of this result China should ensure free and fair access to rare earth supplies,? Mr De Gucht said.

Export quotas and taxes have the effect of diverting the supply of raw materials to the producer?s domestic economy, thus handing their manufacturers a competitive advantage in sourcing inputs.

A recent report from the WTO warned against the rising trend of official curbs on exports, which have increased as agricultural and other commodities prices have risen. The imposition of export bans during the food price increase of 2007-08 created a vicious circle that drove commodity prices higher.

Ron Kirk, US trade representative, said on Tuesday: ?China?s policies provide substantial competitive advantages for downstream Chinese industries.? The export restrictions ?have also caused massive distortions and harmful disruptions in supply chains throughout the global marketplace?, he said.

A statement from the Chinese mission to the WTO criticised the decision, saying that the curbs were imposed for environmental reasons to constrain the production of resource-intensive raw materials. The US and EU have complained that there are no such restrictions on domestic Chinese use.

?China will adopt scientific administration on resource products in accordance with the WTO rules, so as to maintain fair competition and promote sustainable development,? the statement said. Beijing has the right to appeal against the decision. The materials in Tuesday?s ruling are largely used to make basic industrial products including steel and chemicals, but rare earths are essential to manufacturing a variety of high-tech products – from mobile phones to wind turbines.

To the concern of both the EU and the US, China has over the past three years increasingly tightened its export supplies. About 97 per cent of rare earths mine production came from China in 2008, according to the US Geological Survey. China also has half the world?s reserves of rare earths on land. EU and US officials declined to comment on whether they would now launch a separate case involving such materials, although EU officials expressed confidence that the WTO had strengthened their hand.

More broadly, EU officials have said there was more interest in co-ordinating with the US when possible as they sought to grapple with an increasingly powerful China on trade matters.

The EU is particularly dependent on imported raw materials to supply its factories. They account for about 10 per cent, or 1,300bn euros ($1,181bn) of the bloc?s non-energy imports.

For some of the nine materials at issue in the case, the restrictions imposed by Beijing meant their prices on world markets were 100 per cent or more of those paid by China?s domestic manufacturers, according to EU officials. Those differentials ultimately filter through to distort competition in a huge range of finished products – from aircraft and ironing boards to detergent, refrigerators and steel pipes, they said.

? The Financial Times Limited 2011