US, EU take China to WTO on auto parts



Asia Times April 1, 2006

US, EU take China to WTO on auto parts

By David M Lenard

HUA HIN, Thailand - On Thursday, in an unusual joint action, the United States and the European Union filed a complaint against China with the World Trade Organization (WTO) regarding Chinese tariff policies intended to promote the local production of auto parts.

The action came hot on the heels of significant tension on both sides of the Atlantic over China trade. In the US, it followed within hours of comments in China by Commerce Secretary Carlos

[pic]Gutierrez suggesting a change in emphasis of US trade policy toward China, and the postponement on Tuesday of a congressional vote on the Schumer-Graham bill, which would have applied steep tariffs on Chinese exports to the US. In Europe, a decision last week to apply protective tariffs on certain classes of Chinese shoes was scheduled to go into effect in early April.

The complaint surprised some observers inasmuch as it could be seen as darkening the atmosphere for a visit to Washington in mid-April by Chinese President Hu Jintao. In addition, the cooperation between the US and EU in the case was somewhat unusual, since the two have been more often opposed in the more than 330 WTO cases brought so far, of which the auto-parts complaint is the most recent.

The auto-parts action is only the second taken against China since the country joined the WTO in 2001. The first example was a US-initiated case in 2004 regarding China's tax treatment of domestic and imported semiconductors, with the US alleging that China had a preferential tax policy favoring domestic manufacturers; the US was ultimately upheld in that case, with China ending the policy in question.

Another dispute, involving China's anti-dumping duties on kraft linerboard (a type of strong paper used in packaging and other applications), was resolved on the day the United States was to initiate the action, after China was notified that the US intended to file a case with the WTO.

It appears that a scenario similar to the eleventh-hour resolution of the linerboard tiff almost occurred in the auto-parts case. According to US Trade Representative (USTR) Robert Portman, the US had negotiated with China on the issue for more than a year, including last-minute talks with the Chinese ambassador to the US immediately prior to Thursday's announcement.

In an official press release announcing the case, Portman said, "As a mature trading partner, China should be held accountable for its actions and be required to live up to its responsibilities. China's regulations on imported auto parts appear to violate its WTO obligations. While the US has raised this issue repeatedly and sought repeal of these measures, the problem has not yet been resolved. We hope the filing of our request for consultations will lead to a speedy resolution of this issue.

"As noted in our top-to-bottom review of US-China trade policy, we will not hesitate to pursue our legal options when negotiations are not productive. As also indicated in the review, we seek to enhance cooperation with our trading partners in promoting China's accountability and reform. Today's actions are consistent with these commitments." Portman further noted that the US would be joined in the action by the EU and pledged continued "close coordination" with the EU in seeking to resolve the dispute.

Asked about the timing of the action, he said: "The timing of [the WTO action] ought not to be dictated by political concerns ... We do not think this is something aggressive but appropriate ... The issue has become ripe."

European Trade Commissioner Peter Mandelson stressed his desire for a negotiated settlement to the dispute: "Consultations will allow us to clarify the legal issues ... it remains my strong preference and intention to seek an amicable solution to this issue." The EU decision in the case recalled previous challenges by the trade bloc of similar "local content'' rules adopted by India, Canada and Indonesia.

The complaint

The case concerns China's import tariffs for auto parts, which vary depending on what percentage of the value of a completed vehicle is taken up by the parts. The basic rate for importing auto parts into China is 10-14%, while the completed-vehicles tariff is far higher, at 28% (lowered from a much higher rate in previous years). The original intention of this differential was to encourage foreign companies to build cars in China.

Although the measure could certainly be called a success, given skyrocketing auto-production figures in China, the variable taxation had an unintended side-effect: it caused foreign auto makers to import parts kits, to obtain the lowered tariff rate, which could then be quickly assembled into a vehicle. Indirectly, this discouraged the development of parts manufacturing in China, which has been seen by the Chinese government as a key goal in the development of the country's auto industry.

This led directly to the regulations now under dispute, which require importers of car parts to supply complete lists of all the parts being imported and their value. If China determines that the parts make up more than 60% of the completed vehicle's value, then the whole-vehicle tariff is applied to the lot. This will, in turn, force auto makers operating in China to source more parts locally.

The problem is, of course, that regulations intended to promote local sourcing violate WTO rules. The US says the measures impose a tax on US auto parts, resulting in discrimination against them in sourcing arrangements, and argues that they are inconsistent with Articles II and III of the General Agreement on Tariffs and Trade 1994 and Article 2 of the Agreement on Trade-Related Investment Measures, in addition to specific commitments made by China when it signed its WTO accession agreement with the US.

The background

The dispute is significant because of the explosive growth in China's auto industry, which has become almost the only bright spot in a critical manufacturing industry that, globally, is characterized by commoditization, overcapacity and weak profits or outright losses.

The desperate situation of US auto makers Ford and General Motors - commentators are even whispering the once-unthinkable B-word (bankruptcy) about GM - are typical of the industry as a whole, with EU auto makers in not much better condition. The urgent need to do well in China, for auto makers and their parts suppliers alike, is pushing the US and EU to take stronger action on auto parts.

Potentially, the dollar amounts involved are large. In spite of local-content tariffs, the United States exported US$558 million worth of auto parts to China last year, a 13% rise from the previous year, while completed-vehicle imports more than doubled to 12,966 units, according to China's Ministry of Commerce. EU export statistics show that the 25-nation bloc shipped 1.6 billion euros' ($1.9 billion) worth of vehicle parts - including buses and tractors - to China in 2004.

Irrespective of the dispute, the presence of Western auto-parts firms in China has been growing. Delphi Corp, a spinoff from GM in 1999 and the largest US auto-parts maker, and Valeo SA, Europe's No 3 auto-parts maker, said last year that they planned to boost operations and raw-material purchases in China as they expand in the country. Delphi (which continues to operate despite the US parent entering Chapter 11 bankruptcy last October) said it plans to increase procurement in China to $1 billion, and Valeo said its purchases would rise to 450 million euros.

In addition, Robert Bosch GmbH, the world's No 1 auto-parts maker, said in November it intended to increase its China revenues to $3 billion by 2007 and hire more employees to meet growing demand. The Stuttgart, Germany-based company plans to invest about 650 million euros in China by 2007; it has already doubled its number of factories there to 20.

The reaction

One might have expected an ecstatic reaction by the US and EU auto-parts industries to the initiation of the WTO action, but this was not particularly evident in press reports, possibly because of the industry's deepening involvement in the domestic Chinese parts sector.

"It's important to have the rules right," Brian Duggan, director of trade and commercial policy at the Motor and Equipment Manufacturers Association, told the New York Times. "China is a hugely important current and future market. We want [the US trade authorities] to proceed with the case."

Beyond the industry, the complaint was seen as having a symbolic impact. Franklin Vargo, vice president for international economic affairs at the National Association of Manufacturers, told the Times: "This is a wonderful thing ... it is the first thing the [George W Bush] administration has done to show it really means it when it says [the US has] a new trade policy with China."

On Capitol Hill, a noteworthy comment came from Senator Max Baucus, a Democrat from Montana who has introduced, together with Iowa Republican Charles Grassley, China-trade legislation that aims to provide an alternative to the blunt-instrument Schumer-Graham approach. Baucus said: "I have long urged USTR to take strong enforcement action. Today's action ... is a welcome step in that direction ... we are in a dangerous place in our relationship with China, partly because China does not always play by the rules."

In China, according to news services, the Commerce Ministry said on Friday that it "regretted" the move by the US and EU. In a posting on its website (.cn), the ministry said it was "studying" the decision. (As of midday Friday, no English translation of this announcement had been released on the ministry's English-language site.)

The outlook

In the short term, WTO procedures call for 60 days of "consultations" between China and the US and EU to resolve the dispute. The issue could well be resolved during this period, since both Brussels and Washington have stressed that they hope to reach a solution before formal WTO settlement proceedings. If the consultations do not succeed, the two plaintiffs will most likely request a WTO panel be created to rule on the issue.

Meanwhile, according to several reports, the US is considering filing a separate trade case with the WTO against China over what the USTR describes as "rampant" piracy of intellectual property such as films, music and computer software.

The significance

With respect to the US, the auto-parts flap seems consistent with an overall shift in the emphasis of US trade policy toward China away from a focus on the yuan-dollar exchange rate to a stress on various procedural means of pressuring China.

The Grassley-Baucus bill, and jawboning by Gutierrez in Beijing to the effect that stricter IPR (intellectual-property rights) protection would benefit China as much as the US, are other examples of this apparently changed approach. However, one should not necessarily conclude that these developments were orchestrated, given their origin in widely disparate bodies of the US government and the frequency with which contradictory initiatives are undertaken by various US government agencies.

It is possible that other WTO cases, such as the aforementioned IPR case, could be brought soon. But it should be kept in mind that a recurring pattern has emerged for US-China trade disputes, characterized by long, grueling rounds of negotiation followed by an eventual compromise. Recall, for example, last year's US-China textile agreement, and the move by China last July to revalue the yuan slightly, which followed years of US pressure. In the auto-parts case, it is very likely that a similar scenario will play out. But continued tension over trade can be expected, in light of the US mid-term elections coming in November, and also by the sheer size of the United States' trade deficit with China, which continues to swell.

On the EU side of things, there is a clear trend to more vigorous action toward China on trade disputes, as the outcome of the shoe dispute showed; although the EU remains less hawkish than the US, at least in rhetorical terms. The EU's trade deficit with China remains much smaller than the United States', but that situation may not prevail forever; to some extent, Chinese firms have ramped up exports to the EU precisely because they see it as less likely to adopt protectionist measures than the US. If that trend continues, it will ultimately exacerbate the EU's trade deficit with China and further raise protectionist pressures.

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