Susan Schwab, the US trade representative, was in high spirits following the WTO’s first ruling against China in late July. A panel upheld a complaint filed by the US, Canada and the EU over auto parts tariffs, prompting Schwab to proclaim that the result “leaves no doubt that China’s discriminatory treatment of US auto parts has no place in the WTO system.”
The message: We won. But some within the auto industry downplay the victory.
“I don’t think it will have much influence on the market,” said Yale Zhang, an analyst with CSM Worldwide in Shanghai. “If you want to keep competitive in this market you need to have local sourcing.”
Under the contested regulations, China imposes the same tariff on auto parts as on completed vehicles if more than 60% of the parts for the finished vehicles are imported. Tariffs on completed vehicles are 28%, while tariffs on auto parts range from 10%-14%.
Beijing argued that foreign companies were trying to circumvent the higher tariffs by importing cars in pieces and then assembling them in China. The complainants said Beijing’s tax measures were designed to deter automakers from using imported parts in cars made in China.
These tariffs have, for years, acted as a crutch for China’s fledgling auto industry. But the country has emerged as the world’s second-largest auto market behind the US, and with auto sales reaching 8.79 million units in 2007, compared with 4.39 million in 2003, competition has grown fierce.
Source locally
In order to maintain healthy profit margins, any player selling to the China market has to source its parts locally, said Jack Perkowski, CEO of Chinese auto parts maker ASIMCO Technologies.
“For the vast majority of the passenger cars and commercial trucks and buses, if you’re not sourcing locally in China then you’re just not competitive,” he said. “So [the WTO ruling] is really not an issue for 99% of the vehicle assemblers here.”
US auto parts maker Delphi said it is “monitoring the situation” and that the ruling’s effect on its business remains unclear, as it is still subject to appeal.
German automaker Volkswagen also shrugged its shoulders. In a statement issued to CHINA ECONOMIC REVIEW, the company said that local content accounts for over 80% of its vehicles made in China, rendering both the tariffs and WTO ruling virtually meaningless.
However, high-end automakers are expected to see some benefits.
“I believe that issue came up because of Daimler here in Beijing,” Perkowski said. “They’re making their Mercedes here, which are premium cars that are not going to have the same mass market that the less expensive cars have.”
Daimler’s head of public relations in Beijing, Trevor Hale, told CHINA ECONOMIC REVIEW that the firm was, “hopeful that an amicable solution can be reached among the interested governments” and that Daimler was committed to increasing localization, as “it makes good business sense.”
Ulterior motives
According to Matthew McConkey, managing director of Asian trade at law firm Mayer Brown JSM in Beijing, it was the limited potential market impact that attracted US policymakers to the issue in the first place. They were seeking an opportunity to put China on notice without doing any lasting damage to the trading relationship, and auto parts was the most viable option.
“These cases in the US are politically vetted to the utmost. There have been other cases in the past few years that the US could have legally brought against China with a very good chance of winning. But the decision was made to not do it,” McConkey said. “This was a very small, very discrete issue. The impact [on China] of losing this is small.”
Chinese analysts noted that trade disputes between nations are commonplace, and that the ruling provided yet another learning opportunity for the mainland as it develops its litigation skills in the international arena.
But Song Hong, director of the Department of International Trade at the Chinese Academy of Social Sciences’ Institute of World Economics and Politics, said the issue also highlighted a disconnect between China’s WTO policymakers and the rest of the world.
“Most of our policies regarding the WTO are made by the National Development and Reform Commission, which is not very familiar with WTO rules about foreign trade systems,” he said.
Song and other experts saw no direct connection between the ruling and the subsequent collapse of WTO talks, known as the Doha Round, just over a week later, in which China sided with India against the US over farm imports. But the two events taken in tandem are a sign that the country is finding its voice at the negotiating table.
“I don’t think [the failed Doha Round] is a tit-for-tat response, but I think it’s a maturing of China’s role in the WTO,” McConkey said. “They’re certainly on their way to becoming an active, vocal member of the WTO.”