A WTO panel on Monday said Beijing violated global trading rules by restricting exports of raw materials like bauxite, coke, magnesium, manganese and zinc, which inflated prices and gave domestic Chinese firms an unfair competitive advantage.

Many countries later accused China of choking off global supplies of rare earth metals, causing prices to rocket.

Although rare earth metals were not part of Monday's ruling, a number of U.S. lawmakers urged the United States to use the decision to launch a new case to force Beijing to lift its rare earth export restrictions.

"The decision of the appellate body is a huge victory for the United States," said Michael Silver, chief executive of American Elements, a U.S.-based rare earth processor. "It confirms the existence of the two-tiered price structure that has caused so much concern."

EU Trade Commissioner Karel De Gucht said the decision would force China to drop export restrictions for the materials mentioned in the case and for rare earths.

But while China might be forced to tweak some of its export policies, analysts said Beijing's strategy to restrict rare earth supplies and control prices would likely remain unchanged.

"It is still too early to say what the impact will be but I can't see it having a big impact on prices -- the main issue will still be supply and demand," said Vivian Pang, an analyst with the Asian Metal consultancy in Beijing.

China controls 95 percent of global rare earth supplies -- a group of 17 elements used in new industries like renewables and hybrid cars -- and its dominance means that it is in a strong position to disregard WTO rulings if it so wishes.

The United States, European Union and Mexico had all launched WTO legal cases in 2009, challenging China's right to restrict raw material exports.

"The question is whether China will actually stop or at least reduce export taxes," said Silver. "I expect they will, so they remain WTO members in good standing."

China's Ministry of Commerce said on Monday that it "deeply regrets" the ruling but would comply.

Tu Xinquan, associate director of the China Institute of WTO Studies, said Beijing was likely to have to adjust its policies in order to comply -- but its overall strategy need not change.

"There are other ways it can meet its objectives," he said.

NO ENVIRONMENTAL GROUNDS

WTO provisions allow a country to limit trade on health and environmental grounds, but it said on Monday that China had so far been "unable to demonstrate" that its restrictions helped conserve resources, cut pollution or improve public health.

Beijing has said that unregulated rare earth exploitation had caused untold damage in big producing regions like Inner Mongolia. It has also said it should not have to bear so much of the global output burden, especially as domestic demand grows.

The idea is to continue to play up the environmental impact -- the issue is whether it can convince the WTO that its policies are applied equally to foreign and domestic firms, hence the emphasis on the domestic output cap.

China deployed similar arguments in 2004 when imposing quotas on coking coal exports. Despite the threat of WTO action, exports have dwindled from 10 million tonnes a decade ago to 3.6 million tonnes last year, and it is now a huge net importer.

In the last few years, Beijing has banned dozens of unlicensed rare earth miners and raised entry thresholds. It has also imposed strict export limits and cracked down on smuggling.

It issued export quotas amounting to 30,184 tonnes in 2011, and said the figure for 2012 would remain unchanged in order to "guarantee international demand." Exporters used just 56 percent of their allocations last year.

China has rejected claims that local firms have gained an unfair advantage, saying nationwide output caps -- which are compliant with WTO rules -- have also raised domestic prices and forced local users to scale back operations.

The question for the WTO is whether or not Chinese firms gain an unfair advantage, but there is nothing it can do to stop domestic rare earth producers from selling to domestic consumers at a cheaper price, said Tu of the Institute of WTO Studies.

"I don't know if domestic firms get cheaper supplies but if it is just enterprises setting prices, rather than the government, there is nothing anyone can say about it."

(Reporting by David Stanway; Editing by Nick Macfie)

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