The World Trade Organization (WTO) on Wednesday issued a preliminary ruling in favor of the United States, the European Union and Canada, saying China's tariffs on imported auto parts breaks its commitments to the trade organization.
A WTO panel ruled that China improperly taxed imported car parts at the same rate as finished vehicles.
China has defended its policy saying it aims to prevent tax evasion by companies who import whole cars as spare parts to avoid higher tariff rates.
The dispute began in 2005, when China's new regulation on imported auto parts took effect, changing the local content requirements. The new rules were originally intended to encourage foreign car makers to locally produce car components in China. However, the US and the EU complained.
In March 2006, the US and the EU filed the case to the WTO – Canada followed suit later – complaining that China's taxes on imports of foreign auto parts discouraged Chinese automakers from using them.
China places a 25% tax on imported auto parts, the same tariff rate on finished imported autos, if they account for 60 percent or more of the entire vehicle's value.
"The measure is not only intended to avoid tax evasion, but also to encourage Chinese auto parts makers to increase their own innovation capability and competitiveness,' said Zhou Shijian, standing director of China Society for World Trade Organization Studies.
"It didn't break WTO principles," he added.
However, the three complaining Western partners argued that such commercial practices would prevent foreign car makers from using imported parts for assembly in China; and force them to shift production to China, hurting their own auto parts industry.
Zhang Boshun, secretary-general of the China Auto Industry Association Market Trade Commission, responded to the complaint, saying it would be a short cut for most overseas car makers to use more price-competitive and good quality Chinese-made auto parts as they seek a cushion to maintain profit margin amid declining car prices and furious competition.
Even though China bows to the pressure and makes legislative changes, most analysts agree that increased sourcing from China and leveraging efforts to use more Chinese-made auto parts remains a key trend in the industry, as all automakers battle with heated competition and declining car prices in the world's second largest auto market.
Nevertheless, the case is the first time China has been the subject of a complaint that went all the way to the WTO's Dispute Settlement Body, since joining the organization in 2001. Should China lose an appeal, it would also be China's first loss at the WTO since its accession.
"It could push China to re-examine the rationality of WTO rules," Mei Xinyu, a Ministry of commerce researcher, said.
The Permanent Mission of China to the WTO also states that China can investigate the initial WTO ruling. China respects WTO procedures; but otherwise will not comment before the panel makes its final decision.
The year 2008, the Chinese year of the Rat, has found the auto industry running a maze of wheeling, dealing and regulations.
In 2007, China participated in more intensive economic globalization; enhanced ties; explored more opportunities for mutual benefit with other economies; and held several dialogues with the major economies of the world.
The talks with the major economies are solid proof of China's emergence as a key player in the global economy.
Along with its surging potential for international cooperation, China has seen potential conflict with other economies as well.
As has been pointed out time and again, a rising trade surplus is the primary source of China's conflict with the United States and the Europe Union. In addition, the Chinese government has responded to trade partners who have questioned the quality of Chinese exports.
China inevitably maintains a huge trade surplus due to its position in the global industrial arena—it has a gigantic manufacturing industry.
China, however, is not the only one who benefits: it is not difficult to imagine how many foreign companies, by investing in the country, have enjoyed revenue from this surplus.
Last year, China also had to deal with several domestic economic issues including the continuous appreciation of the RMB yuan against the US dollar, excessive liquidity, and fluctuation in the stock market.
Additionally, pressure from major economic powers was also unprecedented: it put China into a position to open up its tertiary sector, especially the financial field.
Western powers hoped that China would make contributions to global economic balance, which is now under threat primarily from the lack of an effective scheme for settling international trade issues.
The WTO framework, though operational, fails to coordinate international negotiations on energy, finance, environment, and other new issues.
As an emerging economy, and a new member of the WTO, China has been working to safeguard world harmony; enhance communication with its partners on issues of common concern; settle conflicts peacefully; and promote the global economy.
By People's Daily Online
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