WTO Rules Against China's Auto Parts Tariffs

Posted by: Frederik Balfour on December 16, 2008

Chinese auto industry pride was high on December 15 when upstart car maker BYD Auto stole the march on GM, Toyota and Nissan by launching the first mass produced plug-in hybrid car. But that euphoria was short lasted: late in the day news broke that the World Trade Organization had ruled against China, upholding a decision that it had illegally imposed discriminatory tariffs on imported auto parts. Currently China charges 25% tariffs on imported auto parts used in cars which do not source 40% of their components locally. China must no apply the standard 10% tariff to all parts, regardless of what portion of the final product they comprise. The ruling should prove a boost for the likes of foreign luxury car makers such as BMW, Audi and Mercedes Benz which don’t sell enough cars in China to make it worthwhile for suppliers to produce for them. It will also help foreign carmakers to introduce more models into the China market if they can source parts from outside the country that are already made for other markets.

The ruling comes at a particularly difficult time for China’s domestic auto industry. Vehicle sales dropped 9% year on year in November, and dealers are hunkering down for a long winter as Chinese car buyers keep their wallets shut. In recent week’s China’s near term economic prospects have turned decidedly worse. Exports and imports fell in November, housing is in a slump and on Monday the IMF warned that China’s economic growth could half next year.

A bigger fear is that China could seek other ways to protect its domestic industries through subsidies and other administrative controls. US steelmakers are fearful that China might try to dump steel at below market prices to contend with a glut back home. That could lead to a tit-for-tat anti dumping action by the U.S., which is the last thing the world needs as global trade flounders. It’s always more tempting for lawmakers to adopt a mercantilist mindset during a recession, but as any student of economic history will tell you, in the long run, nobody wins from protectionism.