The World Trade Organization issued a panel report on Wednesday saying China's export restrictions on rare earth elements as well as the minor metals of molybdenum and tungsten are incompatible with WTO rules.

The ruling marks a second successful challenge to China's use of export quotas and tariffs as an industrial policy tool. In 2011, the United States, the European Union and Mexico won a WTO case against China's use of export quotas on nine industrial raw materials, paving the road for the challenge against its rare earths policy.

China is by far the world's largest producer of the 17 metals known collectively as "rare earth", which are used to manufacture a range of crucial technologies including missile-defense systems and smartphones. China accounts for more than 90 percent of the world's rare earth production, while its reserve of the minerals is about 23 percent of the world's total.

On March 13, 2012, the US, the EU and Japan initiated a complaint to the WTO regarding China's export restrictions of the minerals. A panel was formally established on July 23, 2012, to look into the dispute after consultations failed to reach a resolution.

Yang Guohua, deputy director general of the Department of Treaty and Law at the Ministry of Commerce, said China is evaluating the panel report and has 60 days to decide whether to appeal to the WTO Dispute Settlement Body.