WTO Slams China for Tariffs on Auto Parts

China’s requirement that automakers must build parts there to buy parts there, or face huge tariffs on imported parts, violates global trade rules, the World Trade Organization ruled on Friday.
The decision, issued in Geneva on a complaint brought by the European Union, the United States and Canada, is the first time China has lost a case since it joined the global trade arbiter in 2001. It confirmed an interim judgement issued in February.
China requires automakers operating there to buy a quota of their components from local suppliers or pay more than double the standard import duty on their parts. That violates trade rules, the complaint said.
Responding to the verdict, Peter Power, EU trade spokesman, said: “We hope China will act swiftly to remove discrimination and create a level playing field in the automotive sector in China.”
“The panel report leaves no doubt that China’s discriminatory treatment of U.S. auto parts has no place in the W.T.O. system,” the United States trade representative, Susan C. Schwab, said in a statement.
China is expected to appeal the decision, but if it loses that appeal it will have to remove the tariffs or face penalties.
In April 2005, China began a system of levying tariffs on auto parts based on the amount of imports in the complete vehicle. Automakers must register with Chinese authorities and provide detailed information on the quantity and value of foreign parts used in their vehicles.
If a threshold of foreign parts is reached, those parts are subject to the 25% tariff that applies to complete vehicles instead of the 10% tariff applied to parts.
Canada, the EU, and the U.S. said the surcharge, equivalent to the tariff on imports of complete cars, exceeded China’s permitted tariff ceiling for car parts and broke WTO rules. The duty on complete cars is typically 25%, compared with about 10% for car parts. Beijing claimed the surcharge was necessary to prevent circumvention of the car duty by importing large chunks of vehicles for local assembly.
At issue is the use of complete knock down (CKD) “vehicle kits” and Semi-Knock Down (SKD) partially assembled vehicles that are commonly used by automakers to provide vehicles to markets with prohibitive import tariff structures and/or limited automotive manufacturing or assembly expertise.
However, the U.S., EU and Canada argued it was a protectionist device which was designed to discourage imports, build up China’s domestic motor manufacturing industry and force foreign part-makers to relocate manufacturing to China.
The case was filed in March 2006 as the richest nations began increasing their criticisms of China’s trade policies. American lawmakers have accused China of using a combination of subsidies, tax incentives and an undervalued currency to give an unfair advantage to domestic companies, helping to drive up China’s record trade surplus.
The case also reflects China’s increasing importance as an export market. Overseas carmakers have invested more than $20 billion in Asia’s biggest auto market, seeking to offset slumping sales in the U.S., Europe and Japan.