Opinion / Commentary

China becomes victim of trade protectionism
By Mei Xinyu (China Daily)
Updated: 2006-04-10 05:42

The dispute between China, the United States and the European Union (EU) on auto trade has now reached a turning point.

On March 30, Brussels and Washington filed a joint complaint to the World Trade Organization (WTO) concerning China's auto policy, accusing the country of charging unfair taxes on imports of car parts.

The trade row surfaced more than half a year after China published a regulation on imports of auto parts with the characteristics of the "complete vehicle."

In recent years, the country's auto market has witnessed an explosive growth because of continued economic expansion.

However, the majority of powerful car makers belong to joint ventures with foreign companies.

To form manufacturing capability and capture the market share as early as possible, the foreign partners often import bulk car parts almost equivalent to the finished vehicles.

In doing so, they minimize technological transfers to China, while maintaining technological advantages and dominance over their Chinese partners.

As a result, there is only a simple assembling process in China, which has been referred to as "putting four wheels on."

Thus, only a very small portion of the value of the vehicle has been realized in China, while evading a high duty charged on the complete imported vehicle.

However, such a manufacturing model often conforms with the short-sighted goals of some local governments and officials, often receiving plenty of support and encouragement.

But such a "simple assembling workplace" status seriously hampers the country's efforts to improve its auto manufacturing ability and promote the technological improvement of domestic automakers.

Under this context, it is urgent to put forward the concept of the "finished vehicle." China needs to promulgate a regulation on imports of auto parts in an attempt to prompt foreign partners to produce core auto parts in China, thus reducing the country's dependence on imported components.

The accusations lodged by the US and EU concerning the country's policy on imports of auto parts is unreasonable.

China is by no means willing to adopt and implement any subsidy and preferential policies for domestic automakers that contravenes WTO rules.

However, the United States and the European Union should keep in mind that liberalization is not a basic goal of the WTO and its predecessor GATT (the General Agreement on Tariffs and Trade), but a means to push for the realization of basic targets of the global multilateral trading system. One of GATT and WTO's basic targets is to promote economic and social progress in developing countries.

The global multilateral trading mechanisms also endow their member states with a series of policy tools that they can adopt and apply.

In the latest trade row with its American and European trading partners, China's relevant regulations are not in breach of WTO requirements.

According to the prevailing world practice, added value of a product usually decides its manufacturing origin. A car, which is assembled in China, with almost all parts imported from foreign countries, is therefore not regarded as "China-made."

In other words, it is completely reasonable to levy duty upon the car parts with finished vehicle characteristics according to the taxation standard applied to the finished car.

In accordance with WTO clauses, its member states should not demand foreign-funded corporations based in their territory to purchase or use home-made products in an obligatory manner.

Neither China's policies on the auto industry nor its regulation on the import of car parts has violated the above-mentioned principle.

According to the WTO dispute settlement mechanism, there is a 60-day consultation phase for China, the US and the EU to negotiate a solution since filing the complaint.

Should that fail, the US and EU may ask the multilateral trading body to arbitrate and rule.

The US and the EU have expressed their hopes to seek a solution to the trade friction through consultations before the formal launching of the WTO procedure.

The final result of the trade row will certainly be decided through the parties' relevant economic and political capacities, alongside their mastering of WTO rules and negotiation

However, the dispute comes just months after the creation of China's car policy regulation. Furthermore, the 2003-2004 trading quarrels with the United States, which concerned duty on semiconductors, caused the US Government to file a formal complaint to the WTO. This demonstrates the potential risk of trade rows that China's policy on industrial development may face.

The reactions from a nation's trading partners usually decide to a large extent the viability of domestic economic policies.

Thus, while making any policies on its industrial development, a country should take into full consideration their influence upon trading partners and their possible responses.

China currently advocates and attaches high importance to self-innovation and to developing an advanced manufacturing sector. At the same time, trading disputes have a tendency to escalate.

It is not an overstatement to claim that the country has become the world's largest victim of trade protectionism.

As trade frictions with foreign nations begin escalating, the disputes begin to affect the economic structure.

It is expected that China's trade disputes with foreign nations will remain long-standing.

This is due to the country's high rate of saving and low consumption, which cannot be reversed in the short term. This is coupled with a trade surplus over the US and EU, which exert the largest influences upon global trading systems and rules.

As regards to its industrial development policy, China has encountered the largest conflict of interests with the US, the EU and other developed trading partners.

This suggests that China's policy on industrial development is likely to become the target of US and EU condemnation.

The country's policy on industrial development will inevitably exert a substantial influence upon the world's economy.

While trying to pursue the best development policy for domestic industries, the country's choices will always fall under the restraints of international factors.

The nation should make in-depth research into the viability of all its policies on industrial development in advance, and consider possible causes of conflicts with foreign countries. Only through this will China maintain a stable relationship with external factors and ensure the development of a prosperous domestic sector.

The author is an associate research fellow at the Institute of International Trade and Economic Co-operation under the Ministry of Commerce

(China Daily 04/10/2006 page4)