1.  U.S.-China Dispute Settlement: Auto Part Imports into China Jay Eric Andrew 1

2. Factors in the U.S.  After the 2006 Congressional elections, which gave control of Congress to the Democrats, the U.S. shifted from dealing with global trade issues from negotiation to litigation through the WTO.  This reflected a general shift away from support of globalization between both Republican and Democrats.  The U.S. auto industry is powerful and employs a lot of workers.  The EU, Canada also had strong interest in this issue. 2

3. Factors in China China  The Communist Party needs job growth to maintain domestic tranquility and thus their power.  China has tariffs on auto imports to allow their domestic industries to grow. After their ascension to the WTO, tariffs were reduced to 25% for complete autos and 10% for auto parts.  China considers auto parts as a complete vehicle if they account for 60% or more of the value of a final vehicle and charges the 25% tariff on them as if it were a complete auto.  Chinese trade officials said the measure is meant to keep "lawbreakers" from exploiting the differences between tariff rates for importing entire automobiles and auto parts, and to protect consumer interests. 3

4. Increasing vehicle production in China 4

5. Auto Industry growth  Most growth in the auto sector will be in developing countries especially India and China.  Therefore China’s tariff scheme for auto parts can dramatically effect global supply chains as companies position themselves to take advantage of this growth.  Auto manufacturers and suppliers in other countries are against this scheme. 5

6. Case Background  March 2006, the U.S. and EU request consultations w/ China, later followed by Canada, concerning what was believed to be an improper tariff schedule on auto parts (CKD & SKD).  This was the first case to be litigated against China in the WTO.  China refuted the Claims, stating that their 25% tariff rate on CKD and SKD auto parts was consistent with their accession protocol.  China claimed CKDs and SKDs represented completed vehicles; this definition is debatable. 6

7. Complaint & Relevant Agreements  GATT ‘94: Art. II, III, IV, & XI  TRIMS: Art. II  SCM: Art. III  China Accession Protocol, Paragraph 93; China appealed these claims National Treatment “… should not be applied to imported or domestic products so as to afford protection to domestic production.” Accession Protocol “ China shall eliminate and cease to enforce trade and foreign exchange balancing requirements, local content and export or performance requirements made effective through laws, regulations or other measures.” 7

8. Panel Findings  July 2008; 1 st DSB ruling against China.  Panel ruled in favor of US, Canada, and the European Community on all complaints.  Cited Judicial Economy regarding Article III: 5, TRIMS & SCM Agreement charges.  Article III:2.  Article III: 4.  Treatment of CKD & SKD kits: Inconsistent with Paragraph 93 of China’s Working Party Report.  Treating as complete vehicles 25% v. 10% tariff. 8

9. Appellate Body Findings  December 2008.  Upheld all Panel rulings except…  Reversed Findings regarding CKD & SKD kits.  Chinese Measures are compliant with paragraph 93 of China’s Accession Working Party Report.  Auto manufactures have, “the option to declare imports of CKD and SKD kits upon importation and remove themselves from the charge.” 9

10. Compliance  Almost 3.5 years later, China came into compliance after ruling against their tariffs.  Showcased China’s willingness to comply with the Dispute Settlement process  This means that there was still pressure being put on non- Chinese part producers to move to China  Finally, the SKD and CKD kits were brought back to the tariff rate of 10% for auto parts, waiting till exact end date to implement. 10

11. Impact on Future U.S.-China Trade (cont)  Disputes are not over.  Recently the Obama administration opened another case against China for tariffs on imported U.S. autos that falls hard on Chrysler and GM models.  U.S. “dumping” American cars onto China?  China says bailout of U.S. automakers GM and Chrysler in 2009 amounts to an unfair advantage in the global marketplace, akin to subsidies that are forbidden by WTO rules.  Some question the timing of the WTO case because the election is so close. 11

12. Observations State wide economic policy  The Communist Party has strong reasons for wanting to create employment and rising standards of living in China.  Encouraging domestic manufacturing through subsidies and tariffs is a means to that end. Auto Sector policy  The tariff rate of 25% on SKD and CKD kits was a deliberate attempt to encourage auto manufacturers to source more parts from China.  This policy was designed to alter global supply chains which would have an impact on non-Chinese suppliers. 12

13.  http://www.nytimes.com/2012/09/18/business/glo bal/us-files-wto-case-against-china-over- cars.html?pagewanted=all&_r=0 http://www.nytimes.com/2012/09/18/business/glo bal/us-files-wto-case-against-china-over- cars.html?pagewanted=all&_r=0  http://sciie.ucsc.edu/14AIEC/Swenson_ChinaCarPar ts_October2011.pdf http://sciie.ucsc.edu/14AIEC/Swenson_ChinaCarPar ts_October2011.pdf  http://abcnews.go.com/blogs/politics/2012/07/oba ma-challenges-china-at-wto-over-auto-tariffs/ 13