http://www.theglobeandmail.com/servlet/story/LAC.20080214.RCHINA14/TPStory/Business
theglobeandmail.com
STEVEN CHASE
With files from AP
February 14, 2008
OTTAWA -- The World Trade Organization has for the first time ruled against China for breaking global trade law in a precedent-setting case over car part imports that is expected to spur further challenges aimed at forcing Beijing to open its markets.
Yesterday's interim decision by the WTO found in favour of Canada, the United States and the European Union, all of which complained that China is raising unfair barriers to imports of foreign car parts.
China only joined the 151-member WTO in 2001 and while the state-heavy economy faces several challenges to its trade behaviour at the global body, yesterday's ruling is the first decision handed down.
International Trade Minister David Emerson cheered the ruling - which is officially secret until March despite being leaked yesterday - saying the decision may help open up a new market for
Canadian auto parts makers.
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"Hopefully it will bring about change in the practices that China's been applying," he said. "With our companies in such tough shape right now, a growing market is critically important to restoring health to our Canadian auto parts industry."
The WTO ruling is only an interim decision but the global referee's adjudicators have never changed their minds in the final version of their rulings. It could take more than a year for the case to conclude, but when it does, China may be forced to alter its behaviour or face trade sanctions from Ottawa, Washington and Brussels.
The WTO reportedly found that China was breaking agreed-upon global trade rules by taxing imports of car parts at the same higher rate levied on foreign-assembled autos.
"It's rendering it uneconomic for Canadian parts suppliers in this market," Mr. Emerson said of China's tax rate.
Toronto trade lawyer Lawrence Herman with Cassels Brock & Blackwell LLP predicts more WTO challenges of Chinese trade barriers.
Mr. Herman noted China's growing importance as an export destination, particularly for U.S. goods. "I think it's the beginning of many more such cases where the U.S. is taking on China, rightly or wrongly, for not complying with WTO rules," he said. "The huge U.S. trade deficit with China can't be ignored."
U.S. exports to China have more than quadrupled between 1996 and 2006, when they hit $55.2-billion (U.S.). That same year, the U.S. trade deficit with China hit $233-billion.
The three trade powers argued at the WTO that China's tariff was discouraging auto makers from using imported car parts for the vehicles they assemble in China. As a result, car parts firms had an incentive to shift production to China, costing Americans, Canadians and Europeans their jobs, they said.
The ruling will be closely watched by makers of batteries and brakes, seats and spark plugs on both sides of the Atlantic, including U.S.-based Delphi Corp. (General Motors' former parts supplier) and Robert Bosch GmbH in Germany.
China, which can appeal the ruling, claims the tariffs are intended to stop whole cars being imported in large chunks, allowing companies to avoid the higher tariff rates for finished cars. It argues all measures are consistent with WTO rules and do not discriminate against foreign auto parts.
But the U.S. and EU say China promised not to treat parts as whole cars when it joined the WTO in 2001.
[This point is significant in light of the prior 1998 WTO case Indonesia – Certain Measures Affecting the Automobile Industry (WT/DS54,55,59 & 64/R). US and EU allege that two sets of Indonesia measures constitute subsidies that cause ‘serious prejudice’ to their interests within the meaning of SCM Art. 5 (c). They alleged that the effect of the ‘subsidies’ was to displace or impede imports of ‘like’ products from the EC and US into the subsidizing Indonesian market. In other words, the prices of 'like' EC and US autos were significantly undercut by the subsidized national car company, and thus discriminated against in the marketplace.
The first set of measures entailed a ‘grant’ of National Car company status to Indonesian car companies that met specified criteria as to ownership of facilities, use of trademarks and technology. The ‘benefits’ provided were exemption from luxury tax on car National Car sales and exemption from import duties. They were maintainable by meeting increasing local content requirements.
The second set of measures provided that National Cars manufactured in a foreign country by Indonesian nationals and that fulfill (20%) local content requirements shall be treated the same as ‘National Cars’ (exemption from luxury tax and import duties). The 20% local content requirement was deemed satisfied if the overseas car manufacturer ‘counter-purchases’ Indonesian parts and components that account for 25% or more of the cost & freight (C&F) value of the imported cars. Indonesia maintained a duty of 200 percent on imports of finished passenger cars. As a result, almost ALL passenger cars imported into Indonesia including the EC and US models in question were imported as ‘completely knocked down’ (CKD) kits and assembled in Indonesia.
The WTO Appellate Body (AB) did not consider that an unassembled product ipso facto was NOT a ‘like’ product to that product assembled. The AB considered that a tariff classification was a useful tool in ‘like’ product analysis. It noted how the Gen’l Rules for Interpreting Harmonized System stated that any reference in a heading to an article shall include a reference to that article incomplete or unfinished, provided, the incomplete or unfinished article has the essential character of the complete or finished article.
The AB believed that a comparable approach to the relation between assembled and unassembled products made good sense in the context of that dispute. Due to the high Indonesian duties, ‘completely built-up, EC and US producers shipped ‘cars in a box’ to Indonesia. Consequently, they could properly be considered to have characteristics closely resembling those of a completed car. In WTO jurisprudence, the AB employed a ‘Big Accordion’ of ‘likeness’.]
"It will be instructive to see how China responds," U.S. Trade Representative Susan Schwab said in a recent interview with Associated Press. "If, as we hope and expect, China will be found in contravention of its WTO obligations, hopefully that will help those forces within China that have been advocating reform."
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