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WTO Backs EU And US In Dispute Over Chinese Auto Part Import Tax

by Ulrika Lomas,, Brussels

19 December 2008

A World Trade Organisation (WTO) ruling against China on the issue of taxes that Beijing imposes on the import of vehicle parts has been welcomed by the United States and the European Union.

The WTO Appellate Body confirmed on December 15 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.

“Today the WTO Appellate Body confirmed that China’s discriminatory taxation of US auto parts is fundamentally at odds with core WTO principles,” commented United States Trade Representative Ambassador Susan Schwab upon the ruling's publication.

“Especially in light of the current problems faced by the US auto industry, I expect China to comply promptly with its WTO obligations by removing an unlawful and unfair trade barrier that is harming US workers and manufacturers," she added.

EU Trade Commissioner, Catherine Ashton, concurred with Schwab.

"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," she argued.

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.

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 the General Agreement on Tariffs and Trade (GATT) Article III, which does 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, but the Appellate Body's final report has largely confirmed the Panel's conclusions.

“International trade must be a two-way street. Both the United States and China benefit from our trade relationship, but as this dispute makes clear, when China adopts measures that unfairly restrict US exports, we will not hesitate to use all available tools to ensure that China complies with the rules of the international trading system," continued Schwab.

"Formal dispute resolution ultimately proved necessary in this case because of China’s failure to respond to earlier efforts to resolve this problem through dialogue," she added.

In addition to backing the claims of the EU and US, the Appellate Body also confirmed similar findings in favour of Canada which had brought companion disputes against the Chinese measures.

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

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