American and European Union trade lawyers win their case charging China with breaking a promise to exempt auto parts from Chinese tariffs.

A promise to abide by World Trade Organization (WTO) rules was one of the prerequisites that enabled China to join the WTO in 2001.

Seven years later, the WTO has ruled that China continues to break trade rules by taxing imported auto parts at the same rate as foreign-made cars.

Unfortunately, international trade consultants expect slow progress in resolving this dispute. The WTO often takes years before authorizing retaliatory sanctions to correct unfair trade tariffs in the global trade arena.

Chinese Car Demand

Representing millions of potential car sales, China holds a very strong hand in world automotive industry with a vast cohort of wealthy Chinese buyers.

According to Brian Klapper from the Associated Press, Chinese demand for cars soared 22% to 8.8 million in 2007. Trailing only the United States and Japan, China’s car market is the third largest in the world.

While Chinese consumers buy foreign-made automobiles, at least 40% of car parts in fully assembled vehicles have to be sourced from within China. Otherwise, international car exporters have to pay a significant Chinese import duty.

Car makers from Canada, the U.S. and the EU complain that China imposes tariffs on auto parts at the same rate as on foreign-made finished cars, thus violating WTO trade rules that China agreed to when the People’s Republic joined the WTO. At the same time, unfettered Chinese auto exports are booming.

China contends that all its tariffs meet WTO requirements, and that Chinese trade policies do not discriminate against imported auto parts. Instead, Chinese tariffs on imported auto parts ensure that foreign countries do not export whole cars in piece by piece to avoid finished-car tariffs.

Western Countries' Trade Deficits

Arguing that China’s trade boom comes at the expense of growing Western countries’ trade deficits, European nations and the U.S. teamed up to force a formal WTO investigation into Chinese auto trade practices starting in 2006.

America’s trade deficit with China may well have exceeded US$260 billion last year. Also sobering is the fact that Chinese tariffs like those on U.S. auto parts have led to millions of lost jobs in the North American manufacturing sector.

High Chinese tariffs discourage automakers in China from using imported vehicle parts, and instead force multinational auto-parts companies to move their facilities and production jobs to China.

WTO Trade Judgement Against China

A three-member WTO panel issued a preliminary ruling that China:

• Treats imported auto parts less favourably than those made in the People’s Republic.
• Burden auto part imports with an internal charge higher than what is applied to Chinese-made products.

While an interim ruling, WTO panels have always maintained their interim finding when formulating their final decision. The WTO is expected to require China to remove its discriminatory tariff on auto parts.

After the WTO releases its final judgement, China will be allowed a reasonable time period to enact legislative changes that would remove the auto parts import taxes.

Much is at stake. Manufacturers around the world are watching to see whether the WTO still has power as a governing authority. The question is, can the WTO force one of its fastest growing superstars, China, to comply with international trade rules?

Stay tuned...