It's now official: the WTO Dispute Settlement Body (DSB) has ruled in favour of the United States in its case against China regarding auto parts (DS 340). In February, I noted that a preliminary ruling was made in favour of the US along with the EU and Canada on discrimination against auto parts originating from the countries mentioned. The ball is back in China's court. It can abide by the decision or challenge the ruling at the DSB. However, if it chooses the latter option, then it will be subject to retaliatory tariffs against its exports should the ruling be upheld.
While news stories like those of Bloomberg and the Financial Times [HT: Trade Diversion] are correct in pointing out that this is the first defeat for China at the DSB, China backed down earlier on a more recent case filed by the US against it before further proceeding. The case in question concerns auto parts exports by the US, EU, and Canada to China for which Chinese authorities levied tariffs equivalent to those for complete automobiles if vehicles manufactured in China were deemed to have more than 60% of their parts coming from abroad. As the tariff rate that is supposed to be applied to auto parts is significantly lower than that for complete vehicles, the complaining countries were not chuffed by this misclassification and the ensuing discrimination. Detroit News hopes that US auto parts makers that have been hurt by the slowdown in US auto production can now find more business in China, the world's fastest growing auto market. Nuff said; here's the USTR's victory blurb, and I will try to get the Chinese response to this ruling if it comes along shortly:
While news stories like those of Bloomberg and the Financial Times [HT: Trade Diversion] are correct in pointing out that this is the first defeat for China at the DSB, China backed down earlier on a more recent case filed by the US against it before further proceeding. The case in question concerns auto parts exports by the US, EU, and Canada to China for which Chinese authorities levied tariffs equivalent to those for complete automobiles if vehicles manufactured in China were deemed to have more than 60% of their parts coming from abroad. As the tariff rate that is supposed to be applied to auto parts is significantly lower than that for complete vehicles, the complaining countries were not chuffed by this misclassification and the ensuing discrimination. Detroit News hopes that US auto parts makers that have been hurt by the slowdown in US auto production can now find more business in China, the world's fastest growing auto market. Nuff said; here's the USTR's victory blurb, and I will try to get the Chinese response to this ruling if it comes along shortly:
U.S. Trade Representative Susan C. Schwab announced today that the first World Trade Organization (WTO) dispute settlement panel to address a dispute against China has issued a report finding that China’s treatment of U.S. and other imported auto parts is inconsistent with China’s WTO obligations.
“I am extremely pleased with the issuance of a very strong report by the WTO panel,” Ambassador Schwab said. “Enforcing trade agreements so that problems are solved – whether through dialogue or, if need be, litigation – is a critical part of the U.S. trade agenda. The panel report leaves no doubt that China’s discriminatory treatment of U.S. auto parts has no place in the WTO system.
“The auto industry is an important part of the U.S. economy, and we will continue our efforts to ensure that U.S. manufacturers and workers in this and other industries enjoy the benefits of open markets and a level playing field,” Schwab said. “Our pursuit of this case makes clear that we will not stand idly by when China or any other country adopts regulations or industrial policies that tilt the playing field against American goods or services.”
The United States was joined by the European Union and Canada, which also pursued dispute settlement proceedings with China on the same matter.
Background
Increasing access to China’s auto market was a key issue in China’s accession to the WTO. China imposes an additional charge on imported auto parts whenever the imported parts are incorporated into a final assembled vehicle that fails to meet certain local content requirements. The WTO panel agreed with the United States that these higher charges unfairly discriminate against the use of imported parts in the assembly process and discourage automobile manufacturers in China from using imported auto parts in the assembly of vehicles. They also put pressure on foreign auto parts producers to relocate manufacturing facilities to China.
In particular, all vehicle manufacturers in China that use imported parts must register with China’s Customs Administration and provide specific information about each vehicle they assemble, including a list of the imported and domestic parts to be used, and the value and supplier of each part. If the number or value of imported parts in the assembled vehicle exceeds specified thresholds, the Chinese authorities assess a 25 percent tax on each of the imported parts.
The United States argued, and the WTO panel agreed, that these regulations impose an internal charge on U.S. auto parts resulting in discrimination against U.S. auto parts, in violation of WTO rules. The panel found that China is acting inconsistently with several WTO provisions, including Articles III:2 and III:4 of the General Agreement on Tariffs and Trade 1994 and specific commitments made by China in its WTO accession agreement.
The United States requested formal WTO consultations with China on March 30, 2006. The WTO established the dispute settlement panel on October 26, 2006, the first such panel against China. China has the opportunity to appeal today’s report.