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Auto Tarriffs Go to WTO

In an unusual (and possibly coordinated) pincer move, both the US and EU are taking China to task at the WTO for the import duties it levies on car parts.

Usually the import tariffs are 10-14 percent for parts, and 28 percent for completed vehicles. The different rates were intended to increase foreign investment and production, but another, unintended effect, was to increase the import of parts and harm the development of the local industry. To counter this, the Chinese government applied a new rule, saying that if 60 percent of the final value of a car was made up of imported parts, then the whole vehicle would be taxed at the 28 percent rate. It is argued that this violates WTO rules as it is intended to promote local sourcing.

The amounts involved are substantial. The US exported US$558 million in parts last year, up 13 percent on 2004, while the EU exported US$1.9 billion of parts in 2004.

This conflict comes amid continuing (if somewhat less aggressive) pressure from the US in relation to the trade imbalance (and ahead of President Hu Jintao’s upcoming visit to the US this month). It also follows recent protectionist action by the EU and US against cheap exports of Chinese products (such as shoes, furniture and textiles). Further disputes on IPR abuses (US) and televisions (EU) are also threatened.

It is noted that some Chinese manufacturers have been paying more attention to the development of the EU market in order to avoid the risk of relying on export business with the US. The more aggressive EU stance may be a result of this trend.

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