China's rise to become the dominant global producer of rare earth minerals has caused severe environmental damage and rapid depletion of its natural resources.To rectify these problems and achieve sustainable development of the industry, the Chinese government has adopted a policy of export restrictions which has led to conflict with its trade partners.A World Trade Organization (WTO) panel has judged China's policy to be in violation of its trade obligations which has been upheld in appeal. This article presents a broad analysis of sustainable development relating to the rare earth industry. In recognizing growing global demand for these minerals, which provide essential inputs for the new green technologies, it explores how a more complementary relationship between economic development and conservation of natural capital can be achieved. Improving resource efficiency throughout the whole production chain is of key importance for resource conservation. The use of adequate environmental technologies and effective environmental policies are key to minimizing the risks for environmental damage and human health. The new initiative for liberalization of Environmental Goods and Services (EGS) in the WTO can make leading environmental technologies available at a lower cost for China. But green trade liberalization alone cannot achieve sustainable development. A new form of international cooperation in the form of networked governance must operate alongside the WTO to combine governance of global economic and ecological integration. Since the publication of the Brundtland Report, the concept of sustainable development has been generally understood as the requirement to meet the needs of the current generation without compromising the ability of future generations to meet theirs.1 But this is a vague concept which has proved difficult to implement in practice. There is no internationally agreed method for measuring sustainable development and no internationally accepted indicators to monitor its progress in practice.2 In particular, there is no satisfactory indicator for 'natural capital' which is central to achieving sustainable development. Natural capital is defined as the stock of natural resources or environmental assets that yields a flow of useful goods and services into the future.3 This concept creates a new synthesis integrating two previously opposing world views. On the one hand, man-made capital which comprises physical, financial and human capital, has well-established roots in economic theory. On the other hand, natural capital, comprising natural resources and the environment has been developed more recently by ecological economics. Whereas, man-made capital has been traditionally treated as a scarce good which is priced accordingly in the market, natural capital has for long been considered as part of the 'global commons' and so largely treated as a free good.4 But this dichotomy is no longer tenable today. The financial sector now acknowledges that natural capital has a real monetary value, estimating that ecosystem goods and services from natural capital are worth trillions of US Dollars every year which constitute essentials such as food, fibre, water, health, energy etc. At the Rio+20 Earth Summit (2012) financial institutions endorsed 'The Natural Capital Declaration' which commits them to integrating natural capital considerations into financial products and services for the twenty-first century. To support this goal, they called upon governments and the private sector to move beyond financial accounting and to incorporate natural capital into their accounts in order to recognize the true cost of economic growth. The declaration aims to provide 'the roadmap to a green economy'.5 Rare earth minerals are a crucially important part of global natural capital. Because of their unique properties, they provide essential components for high technology applications in industry, defence and civilian sectors. But they will be even more important in the future because of their use in the new green technologies such as renewable energy, hybrid electric vehicles, energy efficient lighting and so forth. This begs the question how to ensure a sustainable supply of rare earths that is produced in a way that will minimize the negative impact on the environment. China has now become the dominant global power in the rare earth industry as it has gradually overtaken the US to become the global leader since the 1980s. Up to then, the US supplied 100% of its domestic demand and 30% of global demand. But since the active mining operations of Mountain Pass mine in California ceased in 2002, China has risen to a position of global dominance. Although rare earths are spread over the earth's crust, China has the most concentrated reserves, accounting for some 30% of total global reserves; it currently produces over 90% of the world's rare earth minerals and consumes some 60% of those raw materials in its downstream processing industries.6 In recent years, China has demonstrated its ability to use its dominant economic power by progressively restricting exports of rare earth minerals thereby distorting international markets. As China's industry expanded rapidly from 1985 to 2005, China supplied an abundance of rare earths to the rest of the world at extremely low prices. Since 2006, however, the Chinese government has imposed increasingly restrictive export measures. The year 2010 was a major turning point when export quotas were cut back significantly -- by up to 40%, resulting in a major imbalance between global supply and demand and fear of shortages in the importing countries. As the demand for rare earths in coming years is predicted to grow faster than global production, this has turned rare earths into an issue of global importance for the global economy and, especially, for the emergence of a global green economy. The Chinese government vigorously defends its policy of export restrictions on the grounds of its commitment to sustainable development. In 2011, the State Council published a high level policy plan for comprehensive regulation of the industry emphasizing sustainable development.7 This was followed by an operational White Paper in 2012 and on the occasion of its publication the Vice-Minister of Industry and Information Technology told a press conference that China's imposition of export quotas and tougher regulations for the rare earth sector are aimed at protecting the environment and public health.8 These official publications indicate that China places primary importance on sustainable development in its current restructuring of the industry. Few would dispute that China's successful economic development has come at a high price for the environment. That is true, in particular, for the rare earth sector where the last forty years of development has left a legacy of serious environmental damage. It is in this context that the WTO has recently handed down a severe judgment on China's rare earth policy, in response to the formal complaint launched by the US, the European Union (EU) and Japan. The Dispute Settlement Body (DSB) concluded that China's export restrictions were designed more for industrial policy than for conservation of natural resources and the environment. While the WTO allows its member countries to take measures for conservation and environment but it does not allow any member to control the international market for a natural resource, which is what China has actually done. Moreover, the Chinese measures have served to encourage domestic production and secure preferential use of those materials by Chinese manufacturers.9 How does this judgment fit with the international community's commitment to sustainable development? Since its foundation in 1994, the WTO has espoused sustainable development as a general principle and has constantly affirmed the positive relationship between its work of trade liberalization and the broader efforts of the United Nations (UN) to achieve sustainable development. But the breakdown of the Doha Round negotiations has led to institutional stalemate with the result that there is no robust mechanism for sustainable development in the WTO. This is a major obstacle because it prevents the kind of global governance necessary for management of economic and ecological interdependence that is indispensable for the achievement of sustainable development.10 This article addresses the broader issues of sustainable development in the rare earth industry and explores what can be done within and without the WTO --- irrespective of the judgment handed down on China's policy. Section one reviews the contribution of economic analysis to sustainable development. Section two provides a diagnostic profile of China's economic development of the industry and its environmental impact. Section three discusses the new initiative for the liberalization of EGS in the WTO and how this needs to be supported by new forms of international policy cooperation outside of the WTO. The final section presents our conclusion. [ABSTRACT FROM AUTHOR]