WTO Challenges China on Tariffs

China launched a new system of auto parts duties in April 2005.
China launched a new system of auto parts duties in April 2005. (By Bernardo De Niz -- Bloomberg News)
By Mark Drajem
Bloomberg News
Saturday, July 19, 2008

China violates global trade rules by requiring automakers operating there to buy most components from local suppliers or face higher tariffs, the World Trade Organization ruled.

The decision, issued yesterday in Geneva on a complaint brought by the European Union, the United States and Canada, marks the first time China has lost a case since it joined the global trade body in 2001.

China compels Ford Motor, Volkswagen, Renault and other automakers to buy more than half of their auto parts from local suppliers, or the imported components face more than twice the standard duty. The United States, E.U. and Canada contended that the system violates trade rules, and the WTO sided with them.

The ruling "leaves no doubt that China's discriminatory treatment of U.S. auto parts has no place in the WTO system," U.S. Trade Representative Susan Schwab said in a statement.

China can now change its policy or appeal the decision. If the WTO upholds the ruling on appeal, China may face retaliatory tariffs on its exports.

The case was filed in March 2006, as the richest nations began ramping up their criticism of China's trade policies. U.S. 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 the Asian nation's record trade surplus.

China passed Canada to become the largest source of imports into the United States last year, and it has run up record trade deficits with the United States each of the past six years.

The case also reflects China's increasing importance as an export market. Overseas carmakers including General Motors and Toyota Motor have invested more than $20 billion in Asia's biggest auto market, seeking to offset slumping sales in the United States, Europe and Japan.

In April 2005, China began a system of levying tariffs on auto parts based on the number of imports in the 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 percent tariff that applies to complete vehicles instead of the 10 percent tariff applied to parts.

That difference in duty rates is an unfair discrimination against foreign parts, a violation of global trade rules, the United States, E.U. and Canada argued. The WTO judges sided in large part against China yesterday. It did not rule on all the complaints brought by the nations.

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