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U.S. vs. China – DS 342 Measures Affecting Import of Automobile Parts

U.S. vs. China – DS 342 Measures Affecting Import of Automobile Parts. Pavel Hanek Austin Helm Bryan Egan. Background I. The automobile industry is one of the main “pillar” industries. Accounts for between 2-4 percent of China’s total industrial output.

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U.S. vs. China – DS 342 Measures Affecting Import of Automobile Parts

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  1. U.S. vs. China – DS 342Measures Affecting Import of Automobile Parts Pavel Hanek Austin Helm Bryan Egan

  2. Background I • The automobile industry is one of the main “pillar” industries. • Accounts for between 2-4 percent of China’s total industrial output. • Vehicle production estimated to grow to 8 million vehicles by 2010

  3. US Imports to China 2004 • Red: Parts and access for motor vehicles: 61.4% • Green: Motor cars and vehicles for transporting people: 18.9% • Yellow: Special purpose motor vehicles: 4.4% • Pink: Others: 10.9% • Blue: Trailers etc; Other vehicles, not mech propelled: 4.4% Source: Foreign Trade Division, U.S. Census Bureau

  4. US Auto Imports to China 2005 • Red: Motor cars and vehicles for transporting people : 43% • Green: Parts and access for motor vehicles: 39.4% • Yellow: Special purpose motor vehicles: 4.4 • Pink: Others: 8.5% • Blue: Trailers etc; Other vehicles, not mech propelled: 4.7% Source: Foreign Trade Division, U.S. Census Bureau

  5. Canadian Auto Imports to China: 2002-2006 Imports of auto parts 2002-2007 Imports of motor vehicles 2002-2007

  6. EU Auto Imports to China 2004 • Total imports of machinery: 30,801.3 million Euro • 2410 – 4,419.4 million Euro – 14.35% • 2420 – 6,942.1 million Euro – 22.5% • 2430 – 18,978 million Euro – 61.61% Source: http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_113366.pdf

  7. EU Auto Imports to China 2006 • Total imports of machinery: 37,818.1 million Euro • 2410 – 4,784.5 million Euro – 12.65% • 2420 – 10,978 million Euro – 29.03% • 2430 – 21,369.3 million Euro – 56.51% Source: http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_113366.pdf

  8. Background II • In 2005 China’s Ministry of Finance and the Ministry of Commerce issued Measures for the Administration of Importation of Automotive Parts and Components for Complete Vehicles. • Followed by Rules for Determining Whether Imported Automotive Parts and Components Constitute Complete Vehicle. • These two articles came to the conclusion that it was not in China’s best interest to import completely knocked down kits or semi knocked down kits.

  9. Background IV • The EU and the United States repeatedly criticized the policy. • Main issue for American companies focused on the >60% parts aspect. • Car companies noted that manufacturing at least 40% of the car parts in China was more expensive and lower quality.

  10. Historical Context • First time China was brought to Panel proceedings as an unwilling respondent. • Before 2007 China had two minor encounters with the WTO as a potential respondent. • First in 2004 due to a complaint by the United States in regards to tariffs on semiconductors. • Resolved during the consultation phase. • Second in 2005 from a complaint by the United States in regards to antidumping duties on Kraft linerboard. • Resolved on the day the US was going to initiate a dispute.

  11. Timeline • September 15, 2006: After failed consultations, the US, EC and Canada requested the establishment of a panel • October 26, 2006: DSB established a single panel pursuant to Article 9.1 of DSU. • The case’s complexity delayed the final decision. • July 16, 2007: Chairman of the Panel announces that it can’t complete the work within six months. • January 24, 2008: Chairman of the Panel announces again that it won’t have final report until the end of March 2008. • July 28, 2008: Final report released to members. Almost 18 months after the Panel was formed.

  12. 2004 Chinese Automobile Policy

  13. The Contested Chinese Policies I • Policy on Development of the Automotive Industry • Order number 8 of the National Development and Reform Commission (05/21/2004) • Establishes the legal basis for Decree 125 and Announcement 4 • Customs General Administration (CGA) works with Ministries of Commerce and Finance, the National Development and Reform Commission (NDRC), and the Verification Centre to formulate specific rules regarding imports of autos and auto parts. • Measures for the Administration of Importation of Automotive Parts and Components for Complete Vehicles • Decree no. 125 (04/01/2005) • Implements rules of Policy 8 : dealt with the supervision and administration of parts that are imported and subsequently assembled into certain models of cars • sets the criteria to characterize whether imported auto parts should be treated as a complete vehicle

  14. The Contested Chinese Policies II • Rules for Determining whether Imported Automotive Parts Constitute the Complete Vehicles • General Administration of Customs Public Announcement no. 4 (04/01/2005) • further details on the procedures and criteria set out in Order 8. • Volume Threshold – designed combination of imported major parts consisting 60% of the whole • Value Threshold – total price of imported parts in a vehicle that account for 60% or more of the total price of that vehicle • Threshold implication specified by the policy = 25% charge on imported auto parts • Tariffs levied after the parts imported

  15. Position of the Main Parties I • US/EC/Canada • Domestic auto manufacturers discouraged from using imported parts • Foreign auto part manufacturers penalized /Domestic subsidized • Inconsistent Tariff Bindings in the Schedule of Concessions • “National Treatment” for fiscal and non-fiscal measures violated • Domestic content requirement /Quantitative Restrictions • FDI distortion: lost jobs at home • Lost Revenue to home industry

  16. Position of the Main Parties II • China • Tax evasion – tariff circumvention prevention • Ordinary Custom Duty within II:1(b) rather than Internal Charge • WCO Doctrine of the Entireties – GRI 2(a) • Reliant on Article XX(d) of GATT 1994 • 2nd largest automobile and auto parts producer – auto industry engine of Chinese economic development • Aim to win 10% of global auto market share by 2016 • Protectionist measures to maintain jobs and export driven economy, CCP policy for relative stability • Consumer protection

  17. Position of the Main Parties III • Source: Chinese University of Political Science http://www.cuplfil.com/english/show.php?ArticleID=11

  18. Main WTO Provisions in Question • Article II (paragraph 1a,b) of the GATT 1994 Agreement • Article III (paragraphs 2, 4, and 5) of the GATT 1994 Agreement • Article XI ( paragraph 1) of the GATT 1994 • Article 3 (including paragraphs 1 and 2) of the SCM agreement • Article 2 of TRIMs agreement

  19. Main WTO Provisions in question II • The protocol of Accession of the People’s Republic of China (WT/L/432) (including parts I.1.2 and I.7.3 and paragraphs 93 and 203 of the Working Party Report

  20. Consistency of Chinese Policies with WTO Obligations • 2004 Automotive Policy China inconsistent with The Golden Rule of International trade – “National Treatment” (A III:2) • Imposition of charges inconsistent with China’s Schedule of Concessions drafted upon its accession to WTO (A II) • Administrative burdens: non-fiscal National Treatment inconsistency (AIII:4)

  21. Decision of the Panel A three-member WTO panel issued a preliminary ruling that China: • Treats imported auto parts less favorably than those made in the People’s Republic. • Burden auto part imports with an internal charge higher than what is applied to Chinese-made products.

  22. Appeal I • On September 18 2008 China appealed certain issues of law and legal interpretations by the Panel • On December 15 2008 the Appellate Body(AB) reports released to members • AB upheld panel’s finding that the charge imposed under the measures at issue is an internal charge within the meaning of Article III:2 of the GATT 1994 and not an obligatory customs duty within the meaning of Article II:2(b). • AB upheld panel’s findings that with respect to imported auto parts in general, the measures at issue are inconsistent with Article III:2, first sentence , of the GATT 1994 in that they subject imported auto parts to an internal charge that is not applied to like domestic parts.

  23. Appeal II • AB upheld Panel’s finding that with respect to imported parts in general, the measures at issue are inconsistent with Article III:4 of the GATT 1994 in that they accord imported auto parts less favorable treatment than like domestic auto parts • AB found unnecessary to rule on Panel’s alternative finding that with respect to imported auto parts in general, the measures at issue are inconsistent with Article II:1(a) and (b) of the GATT 1994 • AB found that the Panel erred in construing the measures at issue as imposing a charge on CKD and SKD kits imported under Article 2(2) of Decree 125, and consequently reversed the Panel’s finding that, with respect to treatment of imports of CKD and SKD kits, the measures at issue are inconsistent with the commitment in paragraph 93 of China’s Accession Working Party Report.

  24. Implementation and Enforcement • Major loss for China at the WTO – first time as an unwilling respondent • Chinese Government Removed Tariff benefiting: • Auto parts exporters to China • Consumers of automobiles in China (lower costs sans tariffs). • Producers in China, primarily those who require use of over 60% domestic parts, and even more so for those using CKD’s • Government who gains credibility within WTO Community for cooperating with other countries and the formal process of adjudication….

  25. Resolution/Concluding Proposal I • As of 1 September, 2009, China reduces tariff on imported auto parts. • Same tariff rate applied to all imported auto parts regardless of content of final manufactured product (10%) • Foreign producers primary winners – particularly German/European manufacturers.

  26. Resolution/Concluding Proposal II • Demonstrates “honeymoon” with China as new WTO member is over. • Welcomed as an example of “rule of law” in international trade, as it applies to new WTO members. • Allows for future use of precedent for adjudication among WTO trading community • Does not mean rule of law is failing as much as more countries have trust/rely on system • Most cars produced in China, except for a few luxury vehicles like Lexus…use over 60% domestic parts. Foreign producers gain, domestic lose. • Thoughts?

  27. Sources consulted: • http://www.chinalawandpractice.com/Article/1692671/Automotive-Industry-Development-Policy.html • http://www.ustr.gov • http://www.tradelawdevelopment.com/index.php/tld/article/view/1(1)%20TL&D%201%20(2009)/6#_ftn7 • http:// ictsd.org • http://www.thefreelibrary.com/WTO+Panel+Rules+Against+Chinese+Tariff+On+Imported+Auto+Parts-a0192062129 • http://www.businessweek.com/globalbiz/blog/eyeonasia/archives/2008/12/wto_rules_again.html • http://ictsd.org/i/news/bridgesweekly/36490/ • http://business.globaltimes.cn/china-economy/2009-08/462431.html

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