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2008-12-16 | All chapters

WTO confirms China's breach of trade law in car parts case
EU Delegation, 15th December 2008

The WTO has today circulated the Appellate Body report in the case brought by the EU, US and Canada against China's taxes on imported car parts.   The Appellate Body confirms the Panel's conclusions that China breached its WTO obligations by creating a system of registration and taxation of imported car parts that promoted the use of domestic components over imported car parts. Under this system, car manufacturers in China have to pay an additional tax of 15%, on top of the 10% customs duty normally levied on imported auto parts, when they do not use a sufficient quantity of parts made in China. 

EU Trade Commissioner Catherine Ashton said:  "We welcome this Appellate Body ruling.  China should now put an end to the discrimination and ensure a level playing field in its automotive sector."

The system questioned is part of China’s "New Automobile Policy", which was adopted in 2004.  If imported parts assembled in a specific model exceed a certain threshold, an additional charge of 15% is imposed on top of the normal 10% customs duty. The additional charge is easily triggered, either by a specific combination of even a few imported parts or if the imported parts represent 60% or more of the price of the final vehicle (see attached schematic).

A WTO Panel decided in July 2008 that China's rules were contrary to both WTO rules and China's WTO commitments.  The system was found to be in breach of GATT Article III, which do not allow internal fiscal and regulatory measures to discriminate against imported products in favour of domestic products. The Panel also concluded that, even if the charges were to be classified as customs measures rather than internal measures, they would still breach GATT Article II by imposing a customs duty higher than the one agreed to by China when it joined the WTO. 

China appealed the Panel's conclusion before the WTO Appellate Body in September 2008, and the Appellate Body has now rendered a final report which largely confirms the Panel's conclusions. This is the first dispute brought by the EC against China, and the first time a dispute with China reaches the stage of Panel and Appellate Body reports.

China now has a reasonable period of time to bring its measures into compliance with WTO law. This period of time will be negotiated or determined by arbitration. After which, if China has not remedied the breach of WTO law, the EC may adopt trade sanctions.

Background
In 2007, EU exports of car parts to China exceeded 3 billion euros.  Total trade in goods between the EU and China was in excess of 300 billion euros in 2007. 

The EU requested WTO consultations with China on this issue in March 2006, after repeatedly having expressed its interest in a negotiated settlement. The US and Canada joined the EU as co-complainants. The WTO panel was established in October 2006, and it issued its final report in July 2008. China appealed the Panel report to the Appellate Body in September 2008. The Panel report, as modified by the Appellate Body will now be adopted by the WTO Dispute Settlement Body, and China will have to bring its laws into compliance with its WTO obligations.

For schematics on the combination of car parts that would trigger the additional charges see the attached fact sheet.

For more details on the procedure see:
http://ec.europa.eu:8082/trade/issues/respectrules/dispute/pr150906_pp_en.htm

For all EC submissions in this case to the WTO Panel and Appellate Body see:
http://trade.ec.europa.eu/wtodispute/show.cfm?id=290&code=1

For more information on EU-China trade, see
http://ec.europa.eu/trade/issues/bilateral/countries/china/index_en.htm  
 
Document(s):
China car parts schematics 15122008.pdf

Source: http://www.delchn.ec.europa.eu/index.php?item=news_view&nid=383