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
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
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
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
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
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
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
As regards to its industrial development policy, China has encountered the
largest conflict of interests with the US, the EU and other developed trading
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
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
The author is an associate research fellow at the Institute of
International Trade and Economic Co-operation under the Ministry of
(China Daily 04/10/2006 page4)